Saudi petchem makers brace for price pressures on Iran re-entry

RIYADH (ICIS)–Petrochemical suppliers in Saudi Arabia are bracing for further downward pressure on prices upon Iran’s re-entry into the global market scene, after years of virtual absence forced on Tehran by nuclear-related international sanctions, industry sources said on Wednesday.

Although they might initially resist, Saudi producers may be forced to cut offers or risk losing market share to Iran, which is expected to be back exporting petrochemicals to Europe, the Middle East and Asia at the start of 2016, they said.

“Iran should come back to the market by January next year. That is our estimate,” according to a Saudi-based polymer source.

On 14 July, Iran and six world powers struck a comprehensive deal to ease the crippling financial sanctions imposed on the country in exchange for long-term curbs on Tehran’s nuclear program.

Uncertainties remain over when the actual lifting of the sanctions will be, but “a resurgent Iran, which will not be afraid to compete on prices in Asia and Europe” will keep Saudi producers worried, a Dubai-based source said.

In 2014, Iran is the second largest petrochemical supplier in the Middle East, with domestic production estimated at about 60% of Saudi Arabia’s annual capacity of 91.5m tonnes, according to industry estimates.

Meanwhile, Saudi producers said they are bent on resisting the price-cut route to keep their customers in the petrochemical space.

“We intend to keep our customers happy. But reducing [petrochemical] prices will not be our approach,” according to a source close to a Saudi petrochemical producer.

Lower prices could compromise the quality of petrochemicals produced and competing based on prices will only be a “short-term fix”, a second polymer source close to a separate Saudi producer said.

As the world’s biggest crude exporter, Saudi Arabia has sustained heavy losses from tumbling oil prices that shaved its foreign exchange reserves by 7% in the first four months of the year.

Heavy government spending will help keep the Saudi Arabian economy to post a 3.5% growth this year, unchanged from 2014, with its fiscal deficit expected to account for a fifth of its GDP, according to the International Monetary Fund (IMF).

Saudi Arabia is not prepared to suffer the same heavy losses for downstream petrochemical operations, the second polymer source said.

Over a period of one year, crude has shed about 60% of its value, while price declines of major polymer products such as polypropylene (PP) raffia and high density polyethylene (HDPE) were contained within the 10-20% range, according to ICIS data.

“Petrochemical, in particular, polymer margins are still very high. Producers want to keep their profits intact,” according to a commodity trader selling PP in the Middle East.

Saudi petrochemical producers are hoping that quality and reliability of shipments would allow their cargoes to command some premium in the market.

But this will be difficult to achieve in the current market environment, industry players said.

“We are in a globalised world. Regardless of what is being said, Saudi will need to compete on prices,” a Dubai-based trader said.

Saudi producers will “eventually realise they cannot be removed from global realities of pricing,” a separate Dubai-based energy trader selling to northeast Asia said.

Iranian suppliers may quote offers that are at least $50/tonne below market prices in a bid to win over new customers, Tehran-based sources said.

“Iranian suppliers will do all they can to gain business even if it means lower prices,” a Tehran-based source from an energy company said.

Iranian petrochemical suppliers were eased out of their key Europe market in recent years, and their production curbed, as international sanctions tightened on suspicions that the country is developing a nuclear weapon.

With the landmark deal signed on 14 July, Iran should be able to beef up production and boost its exports in six months’ time, industry sources said.

Iran plans to more than triple its petrochemical capacity to 180m tonnes/year by 2025, from 59m tonnes/year currently, according to the country’s National Petrochemical Company (NPC).

“Iran will be producing so much petchems. So the flood of petrochemicals will surely lead to lower prices,” according to an Asian-based trader with close links to a major Iranian energy producer.

Focus article by Muhamad Fadhil

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections