DUBAI (ICIS)--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 on Tuesday on the sidelines of the Gulf Petrochemicals & Chemicals Association (GPCA) Plastics conference in Dubai, which runs from 7-9 April.
A price hike, he said, would ultimately hit the stock market very hard, considering that petrochemicals and other industries that use gas as feedstock, 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 in the past enjoyed the discounted rate of $0.75/MMBtu (€0.58/MMBtu), but in future, Saudi crackers will be more costly than US crackers, 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,” he said. “This cost will be much higher than the US gas price, which is currently at $3.50-4.00/MMBtu but will be reduced to $2 once there is increased production of shale gas.”
He pointed out that in 2012 the cost of propane in the US was 23% lower than that of discounted Saudi propane.
He said Saudi Arabia “had to work very, very hard” to have the right to special feedstock prices for its local petrochemical industry when it joined the World Trade Organization (WTO), 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 70s 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 & 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 petrochemicals. Saudi Arabia is in dire need of such a strategy. 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,” he said.
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 [with] the utmost care it deserves.”
Additional reporting by Prema Viswanathan
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