A-Jubail in Saudi Arabia
Source of picture: www.chemicals-technology.com
By John Richardson
SOME of the privately-owned Saudi Arabian petrochemical producers could well be forced to consolidate as a result of lack of feedstock for expansions, an industry source told the blog yesterday.
The private players in Saudi Arabia are listed on the local stock exchange, but the majority of ownership is in the hands of private individuals or companies as opposed to state-owned SABIC and Saudi Aramco.
"Mergers are on the cards, but don't ask me to guess on the time-scale. What is likely to hold things up is that some of these companies are controlled by very proud owners," said the source.
The dilemma faced by a number of the private players, which by definition are therefore small, is the Kingdom's well-documented shortage of further supplies of stranded or cheap natural-gas feedstock.
The commodity petrochemicals business is all about running faster to stand still - meaning a constant need to improve economies of scale to match similar efforts elsewhere as the volume of demand, particularly in Asia, grows ever-larger.
Absent the raw materials for new capacity and the logic is that companies could be compelled to merge, thereby gaining greater market muscle and synergies.
But cost savings would be fairly minimal, perhaps about 1-2% of the combined companies' overall expenditure, the source added.
"Even if, say, two companies are co-located at Al-Jubail they might still be a considerable distance apart, making it difficult to share utilities. You are therefore left with just a small saving on marketing, sales and distribution.
"Nevertheless, the pressure will be there to merge in order to better-compete with the big producers."
The good news for these small players was that they were likely to continue to generate strong earnings, he added.
"Polyolefin margins are a lot better than people had expected at this stage in the cycle - and there could be a supply shortage post-2011.
"And so these companies are unlikely to be short of cash - making overseas acquisitions another option.
"A third way would be to go downstream into the plastics processing industry. But I see the processing sector as growing very slowly in Saudi Arabia because of poor economics. This is the least attractive route to growth."