As the Middle East’s largest downstream producer, Saudi Arabia is increasingly being affected by global petrochemical and economic trends.
The significant drop in oil prices since June 2014, aside from putting a huge strain on the budget, has led to a decline in naphtha, which in turn resulted in lower profit margins for the Kingdom’s ethane-fed industry.
Domestically, Saudi producers continue to face feedstock competition from the gas-hungry power sector, while surging Iranian production and rising global competition are adding to their woes abroad.
Another pressing challenge remains China’s increasing self-sufficiency, particularly in the production of ethylene, propylene, polyethylene and polypropylene. The country’s petrochemical capacity is projected to grow significantly over the next couple of years which would inevitably erode further the already weak demand for Saudi exports.
“China is the main growth market for all producers particularly in the GCC, and we will continue to target the region. But keep in mind that their self-sufficient strategy is built up at this point,” said Yousef Al-Benyan, CEO of Saudi Arabia Basic Industries (SABIC).
He also warned of the United State’s growing role as a global petrochemical net exporter. The sharp increase in US shale production in the last couple of years has had a major impact on global ethane and propane prices, significantly improving the competitiveness of US crackers.
“Right now Middle East crackers are the most competitive in the world but US shale [companies] are no longer the highest cost producers. Instead, they are now the most competitive in the world outside the Middle East,” Benyan said.
As a result, instead of being a potential target market, the US has now become a very competitive exporter specifically to Europe, he added.
The slowdown in Chinese demand and rising competition from US producers couldn’t come at a worse time for Saudi Arabia. With two of its largest petrochemical projects coming on stream this year, the Kingdom will be able to export larger volumes of products in a much more diverse range.
Revolutionary projects like Sadara – a $20bn joint venture between Saudi Aramco and Dow Chemicals – will use naphtha as feedstock for the first time in the region’s history to manufacture products that have never before been produced in the Middle East.
Furthermore, the Petro Rabigh 2 expansion project, a joint effort between Saudi Aramco and Japan’s Sumitomo Chemical, will add 12 new products to the Saudi market.
“Growth in Saudi petrochemicals capacity will come at a time when China – Saudi Arabia’s key export market – is ramping up its capacities, including a total of 3mn tonnes per annum of ethylene, while the country is seeing slower consumption growth,” BMI Research said in a recent report.
Over the medium term, the report added, the Kingdom will be better placed than some smaller ethane-oriented regional rivals. On the international scene, however, competition will be a lot harder to beat. But thanks to its mixed feed crackers and continuous efforts to diversify and add value, Saudi Arabia is likely to retain its competitive edge both in the GCC and abroad.
