News focus: Saudi ethane price hike would erode petrochemical competitive advantage

12 April 2013 09:51  [Source: ICB]

Saudi Arabia's petrochemical competitive advantage will be significantly eroded if ethane feedstock prices are increased, said Jamal Malaikah, president and chief operating officer of National Petrochemical Industrial Co (NATPET).

"Any hike would serve a serious blow to Saudi Arabia's primary petrochemical industry, making it less competitive. The industry will be less profitable, attract fewer investments, and growth will slow down," Malaikah said in an interview with ICIS on the sidelines of the Gulf Petrochemicals & Chemicals Association (GPCA) Plastics conference in Dubai.

Saudi Crackers Rex Features

Rex Features 

Saudi Arabia crackers could face higher feedstock costs

The proposed price hike, he said, would ultimately hit the stock market very hard. Petrochemicals and other industries that use gas as feedstock or fuel source, such as cement, ceramics and power, constitute about 40% of the Saudi stock market, he added.

"If feedstock prices go up, this will definitely result in higher raw material prices for the conversion industry as well, making it less competitive. This will have an adverse impact on the government's efforts to increase employment opportunities for the Saudi youth, so that means we are shooting ourselves in the foot," he said.

Ethane crackers in Saudi Arabia had in the past enjoyed the discounted rate of 75 cents/MMBtu, but in the future, Saudi crackers will be more costly than US crackers, he said.

PRICE INCREASES

In February, Leslie McCune, a petrochemical consultant specialising in the Middle East for Chemical Management Resources noted talk of Saudi ethane prices increasing from $0.75/MMBtu, to $2-3/MMBtu.

However, Malaikah said the overall feedstock price for new crackers could be much higher.

He said: "The feedstock cost for new crackers in the kingdom will be around $6/MMBtu as there's not enough ethane availability, so cracker operators will have to use more propane than ethane. This cost will be much higher than the US gas price which is currently at $3.5-4/MMBtu but will be reduced to $2 once there is increased production of shale gas."

Malaikah pointed out that in 2012 the cost of propane in the US was 23% lower than that of discounted Saudi propane.

Jamal Malaikah

Malaikah: ban propane exports

He said Saudi Arabia "had to work very very hard" to have the right to have special feedstock prices for its local petrochemical industry when it joined the World Trade Organization, agreeing to various concessions including reducing import tariffs significantly for several products. All these concessions would be wasted should the feedstock prices go up, he said.

Malaikah also said that propane and naphtha prices should be delinked and that the government should link propane prices in Saudi Arabia to those in the US "with a proper discount."

"In the [1970s] this [pricing system] was okay when crude oil prices were low, but today Saudi petrochemical producers using propane feedstocks will be at a severe disadvantage if it continues to be linked to naphtha, as crude is hovering at very high levels," he said.

Propane pricing in Saudi Arabia is based on prevailing CFR (cost and freight) naphtha prices in Japan minus a discount of around 28%.

Malaikah said exports of propane, currently in short supply in the kingdom, should be banned. "The propane can be put to much better use in the petrochemical industry within Saudi Arabia," he said. "The US petrochemical industry is pushing to ban gas exports and to use the gas as feedstock for the petrochemicals. Saudi Arabia is in dire need of such strategy," said Malaikah. "Our strategy must be built on making Saudi Arabia the petrochemical conversion hub of the world. We have the resources, the experience and the government backing to make this a reality."

In February, Hassan Ahmed, analyst at financial advisory firm Alembic Global Advisors, noted that Saudi Arabia has been running short of natural gas liquids (NGLs) since 2009. Thus it was not surprising that chemical expansions are primarily being based on naphtha.

JOINT VENTURE

Saudi Aramco's $20bn (€15bn) Sadara joint venture with US-based Dow Chemical in Al-Jubail will be based on 70% naphtha feedstock, with ethane, propane and butane comprising the rest.

The second phase of Saudi Aramco and Japan-based Sumitomo Chemical's Petro Rabigh project will involve additional ethane but also use 3m tonnes/year of naphtha as feedstock.

NATPET's Malaikah said he is hopeful that the interests of the Saudi petrochemical industry would be safeguarded. "We have great confidence in our leadership, which has implemented several plans to raise employment, encourage business and upgrade the living standards of the Saudis. I am very sure that this matter will be dealt with the utmost care it deserves," he added.

  • Additional reporting by Prema Viswanathan, John Richardson and Joseph Chang

By: Muhamad Fadhil
+65 6780 4356



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