SABIC Profitability.

High world crude oil prices since mid-1999 and low cost of gas feedstocks have given SABIC a unique advantage over its competitors worldwide, while the profits for ethylene producers dependent only on naphtha and/or LPG have been depressed in recent months. A Jacobs Consultancy report in September said SABIC's profit of about $980/ton from ethylene in August represented a pre-tax return on capital of 60%. Profits from mono-ethylene glycol (MEG) then were $1,278/ton. Now prices of ethylene are above $1,020/ton and those of MEG are around $1,310/ton.

As the front-month price of WTI at NYMEX continues to hover around the $45-50/barrel range, having stayed well above $30 since the beginning of 2004, petrochemicals producers in Asia, Europe and the US have had their profits squeezed. The market for petrochemicals is once again in an upward cycle.

SABIC posted record net profits of almost $2,600m for the first nine months of 2004, a year-on-year increase of 101% and a result unmatched by any other petrochemicals company for that period, according to the Middle East Economic Digest on Nov. 12. With plenty of cash in hand, as MEED has noted, SABIC has been quick to push forward with new expansion projects in Jubail and Yanbu. SABIC's production capacity should exceed 60m t/y before 2010.

SABIC's sales during the first three quarters of 2004 were up by 12.6% to 25.5m tons and revenues increased by 31% to SR 46,000 million ($12,000m).

SABIC's biggest projects will be a $3,000m greenfield complex at Yanbu', where the company plans a scaled-up version of its Jubail United Petrochemical Co. (United) olefins complex, and at Jubail-based affiliate Eastern Petrochemical Company (Sharq), a 50:50 joint venture between SABIC and a Japanese group led by Mitsubishi Corporation. The $2,300m Sharq expansion will cover construction of a 1.5m t/y cracker and ethylene glycol (EG) and polyethylene (PE) units, to be completed in 2008.

Among new projects at Jubail is 350,000 t/y PP unit for Saudi European Petrochemical Co. (Ibn Zahr) scheduled for completion in 2008. This will be added to Ibn Zahr's existing PP capacity of 640,000 t/y. Ibn Zahr is 70% owned by Sabic, with the remainder split between Arab Petroleum Investments Corp. (Apicorp), Ecofuel of Italy (of ENI group) and Fortum Corp. of Finland.

More than 10 projects, including several major olefins complexes, are now being planned or implemented in Saudi Arabia, driven by the availability of cheap feedstocks, high liquidity in the kingdom and favourable market conditions. Sahara Petrochemical Company, Saudi Industrial Petrochemical Company (Sipchem), Tasnee Petrochemicals, and Project Management & Development Co. (PMD) are the players with the most ambitious plans. Several smaller projects, particularly a number of combined PP/propane dehydrogenation (PDH) ventures, are being implemented.

The other projects, all at Jubail, include a new olefins complex at Arabian Petrochemical Company (Petrokemya), and the fourth and fifth methanol units at Saudi Methanol Co. (Ar-Razi).

For Ar-Razi's fourth methanol unit, to cost $450m, Lurgi of Germany and Mitsubishi Heavy Industries (MHI) of Japan on Nov. 6 submitted technical and unpriced commercial offers. Priced offers for the EPC contract are to be submitted on Dec. 15. The contract will be awarded in the first quarter of 2005. The fifth methanol plant will have capacity of 1.5m t/y. The complex - the biggest single methanol production site in the world - is owned by a 50:50 venture between SABIC and a consortium of Japanese companies led by Mitsubishi Gas Chemical Co.

However, there are not enough feedstocks to feed any production increase from existing plants before late 2007. The private sector has also expanded rapidly and needs additional feedstocks.

It is because SABIC cannot achieve the continued growth rates that it has been used to by just investing in Saudi Arabia that it has branched to overseas ventures. If it continues to have major cash surpluses, SABIC will increase its overseas acquisitions.

The other constraint is the limited number of international EPC contractors and local sub-contractors available to handle expansions in Saudi Arabia. The same is true in other part of the Arabian Peninsula and in Iran.

Because of high costs of commodities such as steel and other materials needed in EPC contracts, as well as rising costs of insurance, the turnkey contracting business is no longer as attractive as it used to be in the previous years (see down18cNov1-04).

On Nov. 12, MEED quoted an executive of a major European EPC contractor pursuing projects in Saudi Arabia as saying: "I do not remember a period with so many projects at the same time". MEED then said: "Despite the vitality of the market, the sheer number of planned projects has raised some concerns about possible construction bottlenecks". In particular, only a handful of sub-contractors are capable of working on large-scale projects worth more than $300m.

Saudi contractors offering their services to the major EPC companies say tighter visa regulations on foreign workers under the government's Saudisation programme are creating additional problems.