INDUSTRY INSIGHT

The untapped potential of the Sino-Saudi cooperation in the petrochemical industry

The petrochemical industry is one of the most robust sectors of hydrocarbon demand and is expected to lead it over the next decades. However, several unforeseen challenges, including COVID-19, have heightened global uncertainties and stalled growth in the region. With this backdrop, China and Saudi Arabia remain committed to explore the untapped potential of the Sino-Saudi collaboration in the petrochemical Industry.

The dramatic slowdown of global economic activity due to the COVID-19 pandemic has caused significant disruptions within the global economy. In an effort to understand what this means for the petrochemical industry, the Gulf Petrochemicals & Chemicals Association (GPCA), King Abdullah Petroleum Studies and Research Center (KAPSARC) and Sinopec conducted a joint webinar on 14th of September to explore the future of the industry through Sino-Saudi collaboration. The webinar included two sessions, with the first exploring the industry’s outlook amid global uncertainties, and the second discussing the prospects of the Sino-Saudi cooperation in the petrochemical sector. Participating speakers came from different companies including KAPSARC, GPCA, Sinopec, China Petroleum and Chemical Industry Federation (CPCIF) and China National Petroleum & Chemical Planning Institute.

Industry outlook

Speakers in the first session discussed the future of petrochemicals and the significant disruptions to the global petrochemical industry due to the COVID-19 pandemic. It was highlighted by the speakers that lockdown restrictions and containing measures have reshaped demand for petrochemicals. Structural changes in global crude supply is changing the competitiveness of the petrochemical producers who are reassessing their project pipelines. It was also highlighted that trade disputes and disruptions in global logistics are impacting global petrochemical supply chains, significantly altering the competitiveness of the industry.

Prof. Ke Xiaoming, Director General of Marketing Institute at Sinopec, remarked that it is too early to assess the full impact of COVID-19 on the petrochemical industry. He stressed that the downstream industries are feeling the brunt of the outbreak, but the petrochemical/chemical industry is showing signs of recovery. In a sign of resilience from the Chinese chemical market, the Chinese chemical industry has showed first signs of recovery with a 4.8% increase in petrochemical production from Apr-20 – May-20 and 6.5% increase from May-20 – Jun-20. With that, if the pandemic can be contained, global petrochemical demand growth will be back on track, with the basic products expected to grow by around 4%. Saudi Arabia and China should work together to leverage the minimal effects felt by their chemical sectors and emerge stronger than other regions around the world.

“Structural changes in global crude supply are changing the competitiveness of the petrochemical producers who are reassessing their project pipelines.”

Prospects of Sino-Saudi cooperation

In the second session of the webinar, Dr. Abdulwahab Al-Sadoun, Secretary General, GPCA, showcased, in his presentation, the untapped potential of the Sino-Saudi collaboration. Saudi Arabia and China’s position in the global chemical industry continues to grow with many common objectives between both countries. With the current unforeseen challenges, the Sino-Saudi cooperation can allow producers from both countries to explore new ways to enhance competitiveness and keep up with challenging times. With Saudi Arabia and China being leading producers, they can both form strategies and long-term partnerships that can be mutually beneficial, adding value and going beyond the buyer-seller relationship. This long-term partnership can help prepare both countries for their next phase of development.

China and the GCC have emerged as key chemical production hubs over the past two decades, changing the global chemical industry landscape. China and Saudi’s staggering growth led to significant changes in their global petrochemical share. By 2019, China more than tripled its share from around 10% in year 2000 to ~35%, making it the largest chemical producer in the world. Likewise, the GCC has exhibited a similar growth trend increasing its world petrochemical capacity by doubling its market share over the same time span from 3.2% in 2000 to 7.1% in 2019, with Saudi Arabia contributing to more than 2/3rd of this growth. China and GCC’s volume growth were the highest globally, while the volume share of traditional production hubs has been shrinking. With these numbers, we see a trend that conventional and traditional production hubs, namely Europe and the US, have lost grounds for production to both China and the GCC, signalling a changing global industry landscape.

Current Sino-Saudi bilateral relations

Fast growing trade between China and Saudi Arabia has reinforced the interdependence of both countries. Chemical trade patterns between both countries imply that China is the largest trading partner for the GCC chemical industry accounting for 24% of the region’s total exports, with Saudi Arabia accounting for 62.5% of total GCC exports to China. The composition of exports to China is dominated by petrochemical intermediates and polymers. The breakdown export composition has not changed much since 1998 as intermediates currently represent about 61% of GCC chemical exports to China and polymers represent about 36.4%. Saudi Arabia accounts for the largest share of GCC total chemical output at 68.5% and Asia accounts for 62.5% of Saudi’s chemical exports.

Apart from trade, China and Saudi Arabia have taken steps to expand bilateral relationships with an emphasis on join ventures. As China’s markets continue to grow, Saudi Aramco and SABIC are investing more in joint venture production facilities in China, including four already operational JVs and three planned/under construction JVs. By contrast, China-Saudi JVs in Saudi Arabia are relatively smaller in scale of investment and production output. These projects are a clear sign of Saudi Arabia’s strategy to move away from a buyer-seller relationship with China to embrace a more collaborative relationship, contributing to China’s economic growth and development. As the Chinese market is becoming increasingly attractive for foreign multinationals, there is anticipation for more JV projects.

In contrast to China, Saudi Arabia is a small market with an abundant supply of feedstock and world class industrial and transportation infrastructure. It also sits on a geographically strategical position on the cross-roads of and easy connectivity to Europe and Asia. As a key partner in China’s Belt & Road Initiative (BRI), Saudi Arabia hopes to see more projects in partnership with China to capture opportunities in the downstream industry while being in close proximity to key growth markets, namely Africa and Europe.

Impact of COVID-19 and future outlook and prospects

As the world tries to navigate through the COVID-19 crisis, the chemical industry, like the rest of the world, is not immune to its negative impacts. Many regions around the world were hit hard, but the GCC region along with China have emerged stronger than the rest. In the first and second half of 2019, China and the GCC region have recorded the highest growth in production. As we move into 2020, the first half of the year experienced an unprecedented slowdown due to the spread of COVID-19, disrupting production and supply chains all over the world. The first half of 2020 has impacted every production base with global output falling by 3.4% against the same period in 2019 with China and the GCC being the least impacted. (see below)

Moving forward

Closer Sino-Saudi cooperation in the petrochemical sector can also be beneficial for improvement in trade and investment. To take the level of exchange of trade to new heights, strategic implications will require preferential market access, regulatory convergence, and liberal trade remedies, especially on the Chinese counterpart. A GCC-China Free Trade Agreement (FTA) could substantially boost the performance of the GCC industry resulting at up to USD 4 billion of yearly savings, while increasing GCC sales by up to 8%.

The second pillar of collaboration between both countries is investment. Since 2005, remarkable investment momentum has been observed with investment flows increasing >20 times. Based on currently known projects, Saudi shareholders are planning to/have invested ~USD 35 billion in projects in China, with production capacity reaching 7.5 million tons. However, there is still more potential to expand bilateral investment between both countries, but strategic implications are required to make it happen including revamping policies in China with regards to FDI, lowering barriers to investment and the removal of protectionist policies. All of these will improve the transparency of foreign investment between both counties and ensure that foreign-invested enterprises participate in market competition on an equal basis.

Mutual partnerships between Saudi Arabia and China could help both countries rebuild chemical supply chain resilience, maintaining economic growth and creating job opportunities. Based on discussions in the webinar, understanding the current market changes and ongoing projects will help to discover promising cooperation avenues in the petrochemical sector and identify the players that can facilitate this process.

To learn more about the Sino-Saudi Collaboration, read the GPCA report entitled, “China-Saudi Relations: Through the Lens of the Chemical Industry” The full report is available exclusively for GPCA members.

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