Leveraging Saudi Arabia’s Sweet Spot

Saudi Arabia’s efforts to broaden its share in the global petrochemicals market since the 1990s are paying off. An early start has given the Kingdom a sturdy foothold to fend off intensifying competition from Asia, the US and Iran in the rapidly-growing segment. Market growth also supports the diversification of Saudi Arabia’s oil-centric economy and broadens the local job market – both cornerstones of the Kingdom’s Vision 2030.

Saudi Arabia’s petrochemical industry posted a 5.8 percent growth rate last year, outpacing the wider GCC’s expansion rate of 3.7 percent, according to the Gulf Petrochemicals and Chemicals Association (GPCA). From 2007 to 2015 alone, the Kingdom’s capacity swelled from 51.2 million metric tons a year to 93.7 million mt/year – an 83 percent rise in eight years.

The country also accounted for 64.8 percent of the region’s production capacity in 2015. In terms of the main petrochemical building block ethylene, Saudi Arabia is the region’s leading producer, with production capacity currently at 17.2 million mt/year according to Platts Analytics estimates, more than double the volume of the region’s next biggest player Iran.

In a global context, Saudi Arabia accounts for 10 percent of world’s ethylene production capacity, according to Platts data. Add the contributions of the Emiratis, Omanis and other Gulf producers to the mix and it is little surprise that Grand View Research expects the Middle East to be the fastest expanding region for revenue in 2016-2025 with a 9.9 percent compound annual growth rate.

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Saudi Arabia’s growth has been underpinned by the acquisition of assets – GPCA values such acquisitions at $29 billion in 2002-2016 – and steady organic growth through new projects and expansions. In mid-August, for example, the commission of the last of 26 plants at the Sadara Chemical Company was completed.

Sadara is a $20 billion joint venture between Saudi Aramco and The Dow Chemical Company, which was established by the largest ever foreign direct investment in the Saudi petrochemicals industry – a tangible vote of confidence from the global investor community.

It is also the world’s largest integrated chemicals complex ever built in a single phase and will produce more than 3 million mt/year of high-value performance plastics and chemical products on completion. Sadara encapsulates the Kingdom’s proactive attitude, as it followed plans at the turn of the decade to evolve the domestic market beyond ‘basic plastics’ and instead offer an increasingly sophisticated and tailored palette.

Expanded PetroRabigh II
New petrochemical units at the expanded PetroRabigh II complex at Jubail on the Red Sea are also expected to reach full capacity by January. The expansion will add 2.6 million mt/year of capacity to the existing 2.4 million mt/year of chemicals currently produced by PetroRabigh, a joint venture of state-oil giant Saudi Aramco and Japan’s Sumitomo.

Meanwhile, international alliances are extending the Kingdom’s influence. For example, one of the world’s largest petrochemical companies, Riyadh-based Sabic, signed a strategic cooperation agreement with China’s state-owned Sinopec Group in March to explore joint venture petrochemical projects in both countries.

As Saudi Arabia’s expansion plans continue, two points cannot afford to slip from the top of the checklist; continued investment in human capital and innovative research and development (R&D). Quality trumps quantity – an equation that cannot be diluted by market forces, including the fact that the supply of cheap gas feedstock is not as plentiful as it once was.

The GCC increased its year-on-year chemical R&D spend by 38 percent to $729 million in 2015, versus a 9.5 percent decline in the global market. But the GPCA said the region’s overall contribution to global spending is still just 2 percent.

GCC and global producers could also benefit from deepening their commercial acumen in sales, marketing and management of the supply chain. Consultants BCG estimate that GCC producers’ product value loses 3-5 percent to middlemen due to an over-reliance on off-takers and traders to sell products. This is an unaffordable loss; global jostling for new business means each ton holds more competitive value than ever.

China and India are spearheading Asia’s rapidly growing market, with China potentially moving into Saudi Arabia’s ‘back garden’ if discussions with Egypt to establish a petrochemical industries complex in the Gulf of Suez gain traction.

Source: Alarabiya