Saudi Arabia is pumping nearly SR236 billion ($63 billion) into projects to boost its petrochemical industry and maintain its position as one of the world's top chemicals producers, the National Commercial Bank (NCB) said in a new study The study said the Saudi petrochemical sector would continue to hold a considerable global market share of product categories that lie not too far downstream of its pronounced feedstock advantage. "Producers' low cost margins and recent profit growth will allow them to stay afloat during the supply glut and squeeze out higher-cost producers in Europe and North America," it noted, adding that "this will open up acquisition opportunities for Saudi producers, and encourage diversification into more sophisticated derivatives production." The report said nearly 21 percent of the value of the 62 projects is in the execution stage while 33 percent is in the study phase and 18 percent is in the bidding stage, which shows that although capacity expansions are already being undertaken, larger industry growth and project development will be onstream after 2015. Projects "on hold" also form a significant share at 14.5 percent, it added. "The value and volume of forecast petrochemical contract awards are significantly higher in 2012 than in previous years, at SR124 billion and 23 projects. These capacity additions will become operational from 2015 onwards, thereby asserting that the kingdom will not only ride out the environment of overcapacity in the medium term but also become the primary center of global production over the long-term," NCB study said. The Saudi Ports Authority showed a decline in petrochemicals shipments for June, with exports down by 5.8 percent compared to May. However, year-on-year performance looked better. Saudi Arabia's petrochemicals industry shipped 2.44 million tons of products in the sixth month of this year, up slightly from the 2.29m tons in June 2010. However, despite the fall in June, Saudi's overall petrochemicals export performance for the first six months of 2011 was far better than for the same term last year, with shipments of just under 15m tons versus 14 million. Despite new expansion projects, the NCB study said the Saudi petrochemical industry is beset with challenges, including a shortage of skilled labor force in the medium term, scarcity of ethane and rising feedstock prices, sustainability of demand recovery in the Chinese market; and antidumping duties. "A key challenge is the need for a well trained and flexible labor force further down the product chain. Hydrocarbons extraction and basic petrochemical production is heavily capital-intensive and is able to provide employment to only 0.6 percent of the total labor force," it said. "However, downstream production requires skilled technical and craft personnel. The Kingdom's shortage of skilled personnel, particularly in petrochemicals, will not be remedied overnight, and will require the import of expatriate workers. This will create a long-term constraint on Saudi Arabia's capacity rollout and hinder its goal of creating sustainable job opportunities for Saudi nationals." The second and "most important" challenge of the sector is the scarcity of ethane, the report said. "With no guarantee of finding additional sources, policy makers are turning to liquid fuels. Naphtha is a more versatile feedstock, whose production opens up a broader range of aromatics and intermediates, and involves more manpower." Furthermore, the additional labor costs and expensive maintenance of naphtha-fed crackers make the rate of return on its products lower than those of ethane-based products, according to the study. It said the recent surge in petrochemical prices and subsequent growth of domestic producers' profits will offset the higher cost of naphtha in the short term. "However, in the long-term a more sophisticated feedstock mix involving both ethane and liquids will be required to encourage further foreign investment. This is why the trend towards refinery and petrochemical plant integration is on the rise … another feedstock solution would be to increase the production of non-associated gas," NCB said, adding that Saudi Arabia is raising gas production from non-associated gas fields to cater for rising domestic demand, which has been growing at seven percent annually in recent years. "The third challenge to producers is the sustainability of recovery in the Chinese market. China is Saudi Arabia's largest importer of petrochemicals, and acts as a processing center for European and US demand. However, rising Chinese petrochemical capacities threaten to reduce its demand for foreign imports."
