JEDDAH – The global landscape of the petrochemical industry is set to radically change over the next five years on the back of recent shale oil and gas deposit discoveries, as well as demand and supply shifting East, the National Commercial Bank (NCB) said in its latest “Semi-Annual Sector Review”. Large capacity additions are anticipated to come on-stream by both Asian and Middle Eastern producers in the medium-term. High-cost producers in other parts of the world will be squeezed out, and petrochemical prices are likely to come under pressure long-term. Domestically, Saudi Arabian producers benefit from the lowest margins in the world, as well as a supportive government determined to diversify its petrochemical sector. Value-added economic plans and legislation has accelerated the buildup of world-scale plants. The abundance of ethane-rich associated gas sold at a subsidized rate of $0.75 per million BTU has allowed the launch of a series of projects that are set to put the Kingdom as a global hub of ethylene and its derivatives. Furthermore, producers' close proximity to dominant Asian markets not only allows them to capture a greater share of demand, but also encourage foreign investment. In addition, market accessibility through a network of international partners and their own marketing, is supported by strong demand in these economies. Domestic capacities of ethylene and polyethylene are forecast to reach 16.08 million tons per annum (mntpa) and 5.45 mntpa by 2015, respectively. Domestic producers are also able to procure propane at a discounted rate to the naphtha export price, thereby making propylene a commonly used olefin. Projects by Sahara Petrochemical and Saudi Aramco will expand propylene and polypropylene capacities and will reach 5.09 mntpa and 7.52 mntpa by 2015, respectively. The sector is likely to face challenges in the medium term. Most importantly is the scarcity of ethane and the need to diversify into more versatile feedstock, such as naphtha. Another challenge is the sustainability of recovery in the Chinese market, coupled with their rising petrochemical capacities through coal-to-olefin technology and resulting commercial viability. Long-term, recent US shale gas (significant deposits near 2,000 trillion CF) means US producers will move down the cost curve, the report noted. Together with Iraq's plan to develop its sizeable gas sector, international natural gas prices are likely to come under pressure, weakening local producers' comparative advantage, and reducing their profit margin. – SG
