INDUSTRY INSIGHTThought Leadership

Unlocking opportunities in challenging times: Saudi Arabia’s chemical producers welcome 2022 with optimism

By Matthew Rajendra, Middle East Polymer Reporter and Muhamad Fadhil, VP, Global Business Development, Argus Media

The date was 29 April 2021. Major petrochemical players sat on the edge of their seats as a flurry of WhatsApp messages whirled in quick succession. The news? Saudi-based petrochemical producers Saudi Basic Industries Corporation (SABIC) and Saudi Aramco jointly announced the reshuffling of their petrochemical distributions. This day would go down in history as one of the biggest shakeups in the petrochemical space. SABIC will now be the responsible for the sales and marketing rights of an additional 5.4mn t of chemical and polymer products.

“As we move forward, the potential of our alignment with Aramco is significant, and our global customers can expect to benefit from our enhanced ability to provide a world-class products and services offering,” said SABIC Chief Executive and Vice Chairman Yousef Abdullah Al-Benyan.

Market participants have been anticipating this moment since June 2020 when Aramco acquired a 70pc stake in Sabic for $70bn from the Saudi government. Aramco had been deliberating for some time about streamlining their downstream petrochemicals business and the acquisition was seen by many as a step forward in that direction.

The first real glimpse of new distribution arrangements was in March 2021. Fellow Saudi producer Sadara announced SABIC and US petrochemical producer Dow will begin marketing its products in the Middle East from 1 July. Sadara is a joint venture between Saudi Aramco, which owns a 65pc stake, and Dow.

Aramco also transferred responsibilities for its Malaysia-based Pengerang Petrochemical Company (PRefChem), Saudi-based Sadara and South Korea-based S-Oil joint-ventures to SABIC. With effect from 1 October, SABIC also began marketing the petrochemical products of Rabigh Refining and Petrochemical Company (Petro Rabigh).

With new distribution networks at its disposal, SABIC could forge ahead with its plans to be closer to customers in its strategically important markets.

“We are creating a one-stop-shop that will benefit our customers globally, including strategically important geographies. These marketing, sales and operational changes are intended to put us closer to market, drive greater agility and flexibility, and deliver added value to customers,” according to Al-Benyan.

The reshuffling also includes a transfer of several fuel-related products from SABIC to Aramco. With this consolidation, SABIC will now focus on petrochemicals with Aramco on fuel products.

“Thanks to their advanced industry applications, we expect the transferred products to further advance our position as an innovative solutions provider in the global chemicals industry, while supporting the long-term growth of our business,” said Al-Benyan.

“The sales and marketing rights of approximately 5.4mn t/yr of chemical and polymer products are being transferred from Aramco to SABIC on a phased basis,” Al-Benyan added.

Key consolidations in the GCC

CompanyYear
Saudi AramcoSabic2021
Qatar EnergyMuntajat2020
OQOrpic2019
SipchemSahara2019

 

GCC consolidations gathered pace in recent years

The SABIC and Aramco alignment comes on the back of other similar consolidations in the Middle East. Diversified producer Sipchem merged with major polypropylene (PP) supplier Sahara Petrochemicals in 2019. Oman’s government merged its state-owned oil company OOC, refiner Orpic and seven other domestic energy firms under a new entity OQ in 2019. The integration enabled Oman to streamline its downstream operations before new refinery and petrochemical projects start up in the coming years.

“Consolidation is great if it’s done for the purpose of synergies, lowering cost and improving our business models,” notes Tasnee Chief Executive Mutlaq H. Al-Morished.

In 2020, Qatar’s state-owned QP integrated petrochemical marketer Muntajat into its operations. Muntajat is a marketer of polyethylene (PE) produced by domestic firms Qapco, Qatofin and Q-Chem. The move came as part of continued efforts to strengthen Qatar’s global competitive position in the downstream sector.

Consolidations have played a major strategic role for many petrochemical producers in the Middle East. It gives major petrochemical producers control over the different petrochemical assets, allowing them to allocate its resources more efficiently to serve the needs of the markets.

But beyond this, the alignment with Aramco has also presented an opportunity for SSABIC to create value for the benefit of their organization, customers, stakeholders and shareholders.

“SABIC’s share in the value creation is expected to amount to a recurring annual value of $1.5-1.8bn, which we expect to achieve by 2025 … based on the value generated so far, we are well on track towards achieving our targets. During the first nine months of 2021, SABIC achieved $350mn in value realization,” said Al-Benyan. In the latest earnings release, Aramco announced a profit of 114.09bn riyals ($30.43bn) in Q3 2021 – an increase of some 158pc on its profit during the same period last year. SABIC on the other hand earned a revenue of 43.7bn riyals ($11.65bn) in Q3 2021 – an increase of 49pc on its revenue year-on-year.

Production expansions

Apart from consolidations, major Saudi petrochemical producers have also been looking at expansions, capital investments and collaborations with foreign petrochemical producers to expand production facilities in Saudi Arabia.

CompanyProductCapacity (‘000 t/yr)StartupLocation
Total – AramcoEthylene1,5002024Jubail
DaelimPolybutene802024Jubail
IneosAcrylonitrile4252025Jubail
IneosLinear Alpha Olefin4002025Jubail
AGIC-SKGPPropylene (PDH)8432024Jubail
AGIC-SKGPPolypropylene8002024Jubail

 

Project Amiral is a key pillar in this endeavor and in the push for Saudi Vision 2030. The Kingdom has been pushing to diversify its downstream product suite in line with the Saudi Vision 2030 project spearheaded by crown prince Mohammad bin Salman.

The new petrochemical complex in Jubail is a $5bn joint initiative between Aramco and French petrochemical producer Total Energies. The complex will include a mixed-feed cracker with the capacity to produce 1.5mn t/yr of ethylene. It is expected to be completed in 2024.

Other foreign petrochemical firms have also invested heavily in the new petrochemical complex. South Korean petrochemical producer Daelim Industrial plans to build an 80,000 t/yr polybutene plant at the complex in Jubail. Construction of the new plant is scheduled to begin in 2022 and to be completed in 2024.

British petrochemical company Ineos also invested $2bn to build three new plants in Jubail. This is its first investment in the Middle East. Its investment will cover a 425,000 t/yr acrylonitrile plant, the first plant of its kind in the Middle East, as well as a 400,000 t/yr Linear Alpha Olefin (LAO) plant and associated world-scale Poly Alpha Olefin (PAO) unit. All three plants are expected to start production in 2025.

Collaborations between Saudi and foreign petrochemical producers are not solely limited to Project Amiral. Producers see the value in these collaborations to leverage each other’s unique competitive advantages and capabilities. The Advanced Polyolefins (APOC) plant in Saudi Arabia is another instance of such industry-leading collaborations.

Saudi petrochemical producer Advanced Global Investment (AGIC) and South Korea’s SK Gas Petrochemical (SKGP) are constructing a 843,000 t/yr propane dehydrogenation (PDH) and 800,000 t/yr PP project in for its planned Advanced Polyolefins (APOC) facility in Jubail. Construction has started this year and the plant is on track for completion in 2024 according to Fahad Al-Matrafi, President and Chief Executive of Advanced Petrochemical Company, AGIC’s parent company.

“The new joint venture will use state of the art technologies for both PDH and PP with the latest economies of scale including a varied specialized PP product portfolio. This will provide an edge for Advanced to penetrate value-added PP segments,” said Al-Matrafi.

In a time of limited feedstock availability and high feedstock prices, integrated PDH-PP plants are being considered by many petrochemical producers worldwide. The addition of the new PDH-PP plant will give Advanced more options in its PP offerings. “From Advanced’s point of view, competitive feedstock availability, cost competitiveness, operational excellence and dynamic marketing strategy are the key pillars to drive our success,” said Al-Matrafi. AGIC will own 85pc of the PDH and PP units, with the remainder owned by SKGP.

Sustainability top of mind for Gulf producers

Beyond traditional investments and capacity expansions, sustainability is top of mind for key stakeholders in the Gulf. In October, Saudi Arabia announced a $190bn spending plan to reach net zero greenhouse gas emissions by 2060. It aims to reduce carbon emissions by more than 278mn t/yr by 2030 — twice as much as it was targeting under its earlier nationally determined contribution — while also cutting methane emissions by 30pc.

The government has taken a progressive and measured approach to sustainability. And this is for good reason. Although renewables will play an important part in reducing emissions, “the world cannot operate without hydrocarbons, without fossil fuels, without renewables. None of those things would be the rescue. It has to be a comprehensive solution,” said Saudi Energy Minister Prince Abdulaziz bin Salman.

One Saudi petrochemical producer shares similar sentiments. Tasnee Chief Executive Mutlaq H. Al-Morished said “We should do things that’re good and everything, but at the same time logical and achievable. We would rather make small steps to achieve our goals. So, we have our approach which is realistic and scientific to significantly reduce adverse impact on our environment.”

Tasnee produces over 2mn units of acid lead batteries in Saudi Arabia using lead from old batteries, according to Al-Morished. “We’re not only recovering the plastic and turn it back again to a new battery, but also, we are recovering the lead which is a poisonous element if it’s left in the environment,” Al-Morished added.

But sustainability initiatives do not begin and end with producers. Final goods manufacturers have an equally important role to play in sustainability initiatives. This year, SABIC tied up with global computer giant Microsoft to manufacture a computer mouse with an exterior shell made from 20pc recycled ocean plastic. This was made possible through the creation of its new Xenoy resin that comprises 20pc recycled ocean plastic.

The collaboration between Microsoft and SABIC highlights the need for producers to collaborate more closely with its customers in order to invent new solutions that will bring us closer to establishing a truly circular economy.

Overcoming unprecedented challenges during a pandemic

While Saudi petrochemical producers continued on the paths of expansion, value creation and sustainability, their journeys in 2021 were not without its challenges. The Covid-19 pandemic remains a concern for many producers. Packaging demand has increased on the back of the pandemic. But increased safety precautions and safe-distancing measures have been a challenge for petrochemical production.

Advanced Petrochemicals ably adapted to new Covid-19 realities. “We took all possible precautions in the shortest time to ensure a safe working environment at the office and plant premises. A “Crisis Management Committee” was immediately formed to monitor all aspects of potential issues because of Covid namely employee health; operational and supply chain continuity,” said President and Chief Executive Al-Matrafi.

But Covid-19 also had a far-reaching effect on traditional supply chains. Heightened restrictions meant longer waiting times at ports as port authorities conducted checks to ensure ships were safe to load and unload containers. This made it difficult for vessels to unload empty containers, leading to the global container shortage we are seeing today. The pandemic also saw an increase in online shopping, which in turn increased the demand for containers. These factors drove freight rates up.

Freight routeChange from 1 year ago
Jubail – Mumbai+333%
Jubail – Karachi+420%
Jubail – Turkey+406%
Jubail – China+1133%

“Such dislocations resulted in significant interruptions in the supply chain, globally and across most industries. However, it’s like anything when demand goes up, prices will go up,” said Tasnee Chief Executive Al-Morished.

But Saudi producers remain unfazed and are optimistic despite the challenges. “We are taking all possible steps to minimize the impact to the extent possible and are confident that we can pass through these difficult times without any business interruption,” said Al-Matrafi.

The pandemic has also forced Saudi producers to diversify the sourcing of its resources due to supply constraints. Jubail has been key in facilitating this. “Jubail is one of the largest industrial cities on planet, and one of the things the pandemic forced us to do is to share resources. We are competitors in the marketplace, but we can also collaborate. We can collaborate by sharing spare parts, for example, with our next door neighbour,” said Al-Morished.

Other producers had different solutions to the freight situation. The Sabic-Aramco alignment gave SABIC an edge in the global petrochemical space as SABIC will now be able to sell and market petrochemicals from Aramco’s joint ventures in China and South Korea. “In this context, our alignment with Aramco has strengthened our supply chain, as we now count with additional supply from well-established manufacturing sites in markets like the Middle East and Asia,” said SABIC Chief Executive Al-Benyan.

China’s role in a globalised market

Beyond the pandemic, 2021 also saw the emergence of a new competitor in Asia. China increased its PP capacity this year with the addition of 5.6mn t/yr of additional capacity. The additional capacities saw China begin exporting PP to south Asia, Turkey, south America and southeast Asia. Between March and May 2021, China exported around 706,000t of PP. This was 559,000t higher than the same period one year ago.

On the emergence of China, Al-Matrafi said “PP is a very versatile polymer with different application segments and combined with our marketing strategy we will plan to place our products at the right time in the right region to best suit our business requirements.”

The competition from China may be stiff and exports out of China are expected to increase in the coming years. But Middle East producers maintain their first mover advantage due to technically superior products and the sheer variety of grades produced.

Opportunities in emerging markets

Beyond expanding facilities and capital investments, Saudi petrochemical producers are always on the lookout for emerging markets. These markets are highly prized due to their growth potential. One such market is Turkey. Saudi producers have an advantage over Asian producers in exporting to Turkey due to lower production costs. Asian producers use naphtha as feedstock for downstream petrochemical and polymer production. This has driven up their cost of production, making cargoes from Saudi producers preferable.

US and European producers have been actively targeting Turkish buyers since 2019. But Tasnee’s Chief Executive thinks that there is enough room for all to co-exist. “It is a big market and all producers can have their share in the market. Tasnee has great long-term relationships with our customers, we are proactive and supportive in providing technical support through our Research Center in Jubail…We rely on our long-term stable relationships, in addition to our other technical support, product quality and reliability” said Al-Morished.

A challenging but opportune 2022 for Saudi producers

2021 has been a year of challenges and new opportunities for major petrochemical players. Heading into 2022, producers are measured in their outlook with freight being a major concern. “The world market must and will adjust back to its usual base after the covid-19 induced disruptive impact fades away. The supply chain issues shall resolve with time (possibly few more quarters) barring any other disruptions caused by any other factors,” said Al-Morished.

Advanced CEO Fahad Al-Matrafi similarly expects further headwinds in the container crunch, lasting at least up until mid of next year. “We are very well aware of what is happening in the container market which has resulted in the current high freight costs, which may prolong until mid-2022 or a bit longer as per third party market experts.  We are taking all possible steps to minimize the impact to the extent possible and are confident that we can pass through these difficult times without any business interruption.”

“If we look at the global petrochemicals market, despite strong recoveries in some economies which are being driven by a healthy GDP growth rate of about 5.6pc, increased consumer spending and higher levels of business investment, the environment is still challenging,” said Al-Benyan. But he remains optimistic that the alignment with Aramco will be a huge tailwind in the long-term and “advance SABIC’s ambition to be the preferred world leader in chemicals.”