Published: Aug 06, 2014
Source: Saudi Gazette


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Saudi petrochem producers’ margins to witness pressures

In the medium-to-long-term, margins for Saudi petrochemical producers are likely to witness pressures, the National Commercial Bank said in its latest Saudi Petrochemical Sector Report released Tuesday.

The report said the pressures are due to four main factors: (1) the narrowing gap between non-associated gas and the average international price of shale gas, (2) recovering and additional capacity from regional economies, and others, including the UAE, Oman, China and the US rendering these petrochemical projects as direct competitors to the Saudi market, (3) feedstock scarcity of ethane, and (4) the increased costs of non-associated gas exploration and development. 

The abundance of feedstock in the US has already seen Saudi companies such as SABIC express interest in entering the US market. This will have an effect on input prices, and consequently, changing feedstock availability will impact future Middle Eastern petrochemical investments, the report noted. This is likely to erode some of the absolute cost advantages that the sector enjoys over their peers in emerging and developed markets. 

The report said several measures should be undertaken to provide both buffers and solutions to these challenges. They include enhanced infrastructure development and continued research and development. 

Moving forward, strategic partnering opportunities for Saudi producers  with global players will accelerate investment and diversification into more sophisticated derivatives production, and enable Saudi petrochemical producers to move further downstream. As Saudi players do not have access to markets of specialized products yet, they will need to leverage market access through distributors in more mature markets like Asia, Europe and the US who will become more attractive for future acquisitions. 

In terms of project finance, the Saudi petrochemical industry has continued to avail sources from commercial banks, Islamic bonds, and export credit agencies. 

Over the years, debt to equity financing structures have varied amongst industry players with debt ranging from 50 percent to 70 percent. The ongoing Sadara Petrochemical complex has been able to successfully close financing from a number of diversified sources including the US Ex-Im Bank, as well as issuing Sukuk. Petrochem recently also completed a SR1.2  billion debut sukuk issue, which has a five year lifespan, priced at six-month Saibor + 1.7 percent. 

While challenges in the sector will affect dynamics in the Saudi petrochemical industry, its fundamentals remain robust over the forecasted period. With strong infrastructure which is further supported by a favorable shift in production capacity to high-value intermediate and derivative products, the Kingdom remains well-positioned as a global petrochemical player. 

The Saudi petrochemical sector is characterized by three main factors. First, the Kingdom has substantial proven feedstock reserves, with 264  billion barrels of crude oil, 279.7 trillion cubic feet (tcf) of natural gas and an estimated 600 tcf of unconventional shale gas. Second, low feedstock and energy costs have, to-date, led to a comparative, and in turn, a competitive advantage for petrochemical producers. Third, the Kingdom has strong industrial and regulatory infrastructure, which have been integrated into specially developed industrial cities. 

According to the Gulf Petrochemical and Chemical Association (GPCA), total GCC petrochemicals capacity reached 127.8mn tons in 2012, recording a 5.5 percent growth from the previous year. Saudi Arabia maintained its leading position as the region’s largest petrochemical producer with 86.4mn tons of capacity, representing 67.6 percent of the total regional capacity. In addition, during the same period, the Kingdom led production with 6mn tons coming on stream. 

The majority of Saudi’s non-oil exports consist of petrochemicals, which include downstream plastic production and building materials. While Saudi’s petrochemical industry achieved a steady growth of 20 percent in the last five years, Saudi’s share of global petrochemical exports is estimated at 17 percent. According to industry insight, Saudi Arabia’s petrochemical industry exports are set to reach 100mn tons by 2016. 

Furthermore, according to GPCA estimates, the GCC’s fertilizer production capacity reached 31.4 million tons in 2012, a 10 percent increase from the previous year, while the global fertilizer industry grew by just 2.2 percent during the same period. Sector growth was supported by easy access to subsidized feedstock of locally sourced oil and gas from GCC governments. 

According to the Saudi Central Department of Statistics and Information (CDSI), in 2012, the Kingdom’s total value of chemical exports reached SR66.64 billion, growing at a 12-year CAGR of 15 percent. For the same year, Sabic’s total exports reached approximately 26 million metric tons.

Ethylene is a key building block in the petrochemical industry. In recent years, the world has witnessed its largest ethylene capacity expansion, growing at a compound annual growth rate (CAGR) of 4 percent between 2007 and 2012, to reach 155.9 million tons in 2012. 

In 2012, worldwide capacity additions were much lower than the record additions registered in 2010 when 11.4 million tons/year of ethylene capacity was added. However, GCC capacity addition in 2012 trended downwards by 13 percent. 

The majority of capacity additions within the GCC be-tween 2007 and 2012 took place in Saudi Arabia, which accounted for 64 percent of the regional capacity additions. With 17.5 million tons/year, Saudi Arabia is the largest ethylene producer in the region, accounting for 72 percent of the regional ethylene capacity, up by 7.7 million tons/year compared to five years ago. This massive expansion in ethylene production capacity has resulted in Saudi Arabia becoming the third largest producer worldwide, ac-counting for 11 percent of global ethylene capacity.

Ethylene’s global cost curve reflects that the Middle East overall still has a comparative cost advantage. 

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