SABIC's Proposed European JV with EniChem.

According to press reports, JV would cover EniChem's existing plants: seventeen in Europe and one in the USA.

Products include olefins, aromatics, polyethylene, styrene, polystyrene, elastomers, and various chemical intermediates.

Current Capacities, KT/Yr:

Product           SABIC*    EniChem
Ethylene          3,923      2,569
Polyethylene      1,392      1,765
Styrene             640        622
*  Based on SABIC's share of Saudi JV's.

Initial 50/50 JV could lead to eventual 100% SABIC ownership. Supports SABIC's long-term objective of being a global producer and among the four or five industry leaders in commodity petrochemicals.

As shown on the chart, the trade press has reported that SABIC and EniChem of Italy are negotiating a joint venture that would include most of EniChem's assets. EniChem has seventeen petrochemical manufacturing plants in Europe and one in the United States. As indicated on the chart, EniChem is a diversified producer of basic petrochemical, intermediates and polymers. Its capacities for ethylene, polyethylene and styrene are comparable to SABIC's.

A SABIC-EniChem combination would be the leading olefins producer in Europe, the number three polyolefins producer and the market leader in linear low-density polyethylene. Eventually, this alliance could lead to a 100% SABIC takeover, since EniChem's parent, ENI, has indicated its desire to exit the petrochemical business in the long-term.

From SABIC's perspective, such an alliance would support its stated long-term objective of being among the four or five leading commodity petrochemical producers on a global basis. SABIC could not grow fast enough to reach this objective without a major acquisition, since the shortage of additional low-cost feedstock would ultimately limit future profitable growth in Saudi Arabia. This alliance would also develop SABIC competencies in technology, plant operations, and customer service.

There is also some opportunity for forward integration through supply of SABIC petrochemicals as feedstocks to some of EniChem's downstream plants. Looking back at the Middle East and North Africa Region again, it is interesting to consider the effect of all the announced expansion plans of the past year on MENA's future global share of capacity for the major exported petrochemicals.

     MENA PROJECTED 2006 CAPACITIES FOR KEY COMMODITY PETROCHEMICALS
Product          Capacity              Share of World
                 Million Tons/Year        Capacity
Ethylene           24.4                     20%
Polyethylene       12.8                     17%
Polypropylene       5.0                     10%
Urea               17.1                     14%
Methanol           12.5                     33%

Number of Operating MENA Ventures for all Petrochemicals = 115

If all of the MENA expansion plans come to implementation as scheduled, then MENA's share of world capacity by 2006, as compared to 2001, will grow from nine percent to twenty percent for ethylene, from eight percent to seventeen percent for polyethylene, from five percent to ten percent for polypropylene, from ten percent to fourteen percent for urea, and from twenty-two to thirty-three percent for methanol. This level of growth, especially for polyethylene and methanol, cannot be achieved without the risk of severe global overcapacity. In order to absorb this new capacity in such a brief period of five years, extremely robust growth would be required in global demand. Unfortunately, what we have seen recently is just the reverse.

This brings us to another significant development in the current year. While all of these growth, diversification and expansion plans are developing, the global petrochemical industry has fallen into a deep recession. Sales volumes have declined about ten percent in the past year, as compared to previous annual growth rates in the range of four to six percent.

         The Petrochemicals Slump of 2001

Price Declines from July 2000
                    to July 2001
Polyethylene          20%
Methanol              50%
Styrene               50%
Benzene               50%
Polypropylene         10%
MTBE                  55%

Earnings Declines from 1st Half, 2000 to 1st Half, 2001
Dow Chemical         137%
BP Chemicals          86%
Shell Chemicals       70%
ExxonMobil Chem.      50%
BASF                  33%
SABIC                 27%

Prices for key commodities in export markets have declined by ten to fifty percent. As shown on the chart, the price declines for this representative group of petrochemicals produced in the MENA region have been quite dramatic. As shown on the right of the chart, the leading global chemical companies have seen dramatic earnings declines, comparing the First Half of 2001 with the First Half of 2000. Many companies were in a loss position for the First Half of 2001, Dow for example, and a few well-known chemical companies have declared bankruptcy.

Even SABIC has suffered an earnings decline of 27 percent, but its raw material cost advantage has protected it from the more severe declines suffered by its major competitors.

There is simply too much capacity, including new capacity that streamed this year in the Middle East and elsewhere, for the diminished demand that has resulted from the weakening global economy.

When there are periods of overcapacity like this, prices for commodity petrochemicals typically drop to the cash cost of the highest-cost producer whose production is still needed to satisfy demand. Today, these higher cost producers are in Asia, Europe or North America. They do not enjoy the lower feedstock costs of a Saudi Arabia, an Iran, a Qatar or a Kuwait. As a result, most MENA producers can still make a modest profit, or at least cover their book costs in today's market.

Looking ahead to 2006, the picture is not so bright.