Petrochemical producers of the region spread wings

The Saudi Arabia Basic Industries Corporation-Sinopec joint venture this month may have gone down as just another recession-induced merger.

However, Gulf-based petrochemical industries players see the step as another milestone and an increasing assertiveness of the sector and how a growing demand is helping it spread wings.

China approved the Sabic and Sinopec joint venture plant early this month. The $20 billion (Dh73.4bn) project, which costs 20 per cent more than the amount announced a month earlier, will see the construction of a pertrochemical plant in the northern Chinese region of Tianjin.

Petrochemical plants were set up by the GCC governments in the 1970s to utilise the comparatively cheaper hydrocarbon resources (feedstock). However, this has evolved of late into a strategy to use the region's geographical location and comparatively better liquidity to its advantage.

The Organisation of Petroleum Exporting Countries (Opec) discussed this in detail, in its 296-page outlook for 2009, and said the petrochemicals industry, which has its origin in the West, is now shifting its weight to the Middle East. "It is important to note that the industry is witnessing a geographic shift from the traditional production regions of North America and Western Europe to developing economies of Asia-Pacific and the Middle East," said Opec. The downturn also occured at a time when a wave of petrochemical projects were expected to come on line, particularly in the Middle East and Asia-Pacific. Many of the projects in the Middle East were based on the availability of hydrocarbon feedstock at favourable costs and on the proximity to the emerging Asian markets. So, they may have been based on competition with existing capacity rather than a foreseen growth in absolute global demand," said Opec.

Sabic's entry into China is just one of the good news to come out in recent days. Borouj Petrochemicals of the UAE said it is moving forward with plans to double the production of polyurethane Olefins by the end of 2013.

Looking beyond the present situation and given the expected growth, there is much for the GCC petrochemicals industry to be positive about.

Reports have repeatedly claimed that Middle East is the only region where demand for oil and gas will increase in 2009.

But what is little known is that one of the key factors driving this demand is the region's petrochemical industries.

"The contribution of the petrochemical industries to global crude oil demand may be small when compared to the automotive industry. But the share of this industry in total oil demand is significant and its role is expected to rise in future," said Opec.


Borouge

Borouj Petrochemicals said in a statement yesterday that it expects to start production of 2.5 million tonnes of polyethylene olefins by the fourth quarter of 2013.

Abdulaziz Al Hajri, CEO of Borouj, said the operation will ensure that Borouj Two take advantage of the additional quantity of feedstock available after the expansion of Abu Dhabi National Oil Company (Adnoc) in the area of gas refinery in Ruwais.

After the completion of Borouj Three project, the company's total capacity will increase to 4.5 million tonnes per year.

Borouge, a manufacturer of polyoleofins, was founded in 1998 and is a joint venture between Adnoc and Austria's Borealis.

It has two complementary ventures: One based in Abu Dhabi and another in Singapore.

Borouge is a leading supplier of environmentally superior polyolefin plastics – polyethylene and polypropylene. The company recently awarded a series of contracts, worth more than $1bn, for construction and design deals at its Ruwais site.

The contracts are part of the third-phase expansion of Borouge's petrochemicals production at Ruwais.

The Borouge Three expansion will result in the company increasing output to 4.5 million tonnes a year by 2013.


Sabic

Net profits of the company touched SR22bn (Dh21bn) in 2008. Total assets stood at SR272bn at the end of 2008.

The value of current assets at the end of 2008 stood at SR95bn.

Sabic's overall production has risen from 35 million metric tonnes in 2001 to 56 million metric tonnes in 2008.

Sabic is the largest and most profitable non-oil company in the Middle East and one of the five largest petrochemicals manufacturers. The Saudi Arabian Government owns 70 per cent of its shares and the remaining are held by private investors in Saudi Arabia and other GCC countries.


Industries Qatar

Industries Qatar (IQ) – a conglomerate of three of the best-known chemical manufacturers in the region, has been a strong performer even during the financial crisis. And although the company has not announced any plans to move to foreign shores, it has done well as far as its revenues and performance are concerned.

In 2008, the Qatar Petrochemical Company (Qapco), a constituent of IQ, recorded an 87 per cent increase in sales to QR3.1bn. Its gross profits rose 83 per cent to QR2.4bn.

The net profit before tax rose 80 per cent to QR2.4bn. IQ employs more than 3,000 workers and has offices all over the world. It is also one of Qatar's biggest companies. IQ's operations span from metal industry to petrochemicals and its products are sold in markets as diverse as Australia, India and the United States. The group operates a number of world-class production facilities in Qatar and the UAE. Financially, IQ is in a league of its own: revenue and profits are larger than the next three companies combined.

Abdullah bin Hamad Al Attiyah, Qatar's Minister for Energy and Industry, recently said: "Qapco has completed its ethylene expansion project and is now concentrating on LDPE expansion project. Among the new petrochemical projects in Qatar, Ras Laffan Ethylene Cracker, Qatofin project of LLDPE, Q-Chem –2 project of HDPE and Qafco-5 project of ammonia and urea are going well and are expected to start commercial productions in the near future.


Petrochemicals Industries Corporation (PIC)

The year 2009 began with bad news for the petrochemical sector in the region after PIC, the oldest petrochemical company in the Gulf, walked out of a contract with Dow Chemicals Company. Insiders were astonished when Kuwait's state news agency reported that the Kuwaiti Government has cancelled the $17.4bn contract with Dow Chemical to create K-Dow Petrochemicals, which was planned to begin operations on January 1.

K-Dow would have been a joint venture between Kuwait's Petrochemical Industries Co (PIC), a subsidiary of the country's state-owned oil company Kuwait Petroleum, and Dow Chemical. PIC was due to pay Dow $7.5bn for a 50 per cent stake in several chemical plants. Kuwait's top petroleum policy council's decision to bail out of the deal was precipitated by pressure from the Kuwaiti parliament to scrap the deal. According to a Bloomberg article, the parliament said it was overpriced and came at the wrong time, as well as quoted lower oil prices than Kuwait had anticipated when the joint venture was first drafted (due to the fixed-cost nature of Kuwait's feedstock, high energy prices translate into higher chemical margins). Plus, the project was criticised in Kuwait as a waste of public funding, and, according to a Reuters' report, if the deal had gone through, lawmakers were set to grill the Kuwaiti prime minister in parliament.

PIC, however, has two joint ventures with Dow Jones. While ME Global has production facilities in Canada and Malaysia, Equipolymers has production facilities in Ottana, Italy, and Schkopau. Germany.

All petrochemical industries in the region took a hit in the first quarter this year as demand slumped and inventories piled up.

Hassan Ahmed, Global Head, Petrochemical Research, HSBC, said in his reports that producers are waiting for demand to pick up in China.

Analysts at PFC Energy, the global energy analysis firm, advised Gulf-based petrochemical producers to move in quickly in China to link up long-term feedstock and petrochemical supplies.

Sabic has apparently followed the advice.

Ahmed said prominent fertiliser producers in the GCC suffered in the second quarter as fertiliser imports fell across the world.

"We believe companies, such as IQ and Saudi Arabian Fertiliser Co (Safco), which are exposed to ammonia and urea, will experience modest sequential declines in Q2-2009 net income. We believe there is a lag between energy prices going up and product prices following suit and we expect ammonia and urea prices to rise over the next few months," he said.

As an indicator of the industry's performance, the share price of an average Gulf-based petrochemical producer has fallen 58 per cent below its recent highs, said Ahmed.

Demand for fertiliser fell substantially in most of the countries, where Gulf-based petrochemical producers export to.

While lack of rain forced a delay in sowing of crops in India, a major section of agricultural region in China is said to be experiencing draught-like conditions.

El Nino, a weather phenomenon that brings draughts, has adversely impacted fertiliser demand in farmlands ranging from Australia to South America.

However, Gulf-based petrochemical producers that are not exposed to fertilisers fared better than those producing fertilisers.

Sabic is poised to record "robust" revenue in the second quarter, said Ahmed.

The Washington-based analyst had recently enumerated the list of several plants that are expected to face shutdown across the world. The list, which was led by China, included GCC producer.


The gas problem

Though gas-rich countries such as Qatar and to an extent Saudi Arabia have been able to use the fuel for their feedstock, the same is not true for petrochemical producing countries such as Bahrain, Oman and Kuwait.

Abdul Rahman Jawahery, General Manager of Bahrain-based Gulf Petrochemicals Industries Company, had recently complained of difficulties in securing Qatari gas supply for his production plants.


The future

Mustaq Al Morshed, Vice-President (Corporate Finance), Sabic, said about half [46 per cent] of chemical exports from the Middle East go to Asia, 20 per cent is distributed in the Gulf and the Subcontinent, 14 per cent to Europe, 10 per cent to the United States and the remaining to Australia [5.4 per cent] and South Africa [1.7 per cent].

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