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Chemical warfare.

WHEN SAUDI ARABIA embarked on its gigantic petrochemicals programme in the 1970s, there was much knowing scepticism among outsiders. The Saudi Basic Industries Corporation (Sabic) has confounded them all. In the intervening period, its joint venture petrochemical plants have come on stream, carved out a niche in the world market and are constantly expanding capacity into new products. At the same time, Sabic has spawned a host of secondary petrochemical manufacturing companies to create the basis for a self-sustaining Saudi industry. Taking advantage of low-cost feedstock and state of the art technology (and boasting one of the world's best safety rates for the industry), Sabic can be justifiably proud of its success.

Yet in 1992 for the fourth consecutive year, Sabic recorded a fall in profits. From a peak of almost $1bn in 1988, net income dropped to $524m last year. Yet total sales revenues were $3.5bn and output was lifted by over 19% to 15.7 tonnes. Sabic should have little difficulty in raising production to 20m tonnes by 1995. But even given expanding production and a high sales volume, Sabic's profits may fall even lower in 1993.

The problem is that the international petrochemical industry is suffering from a disastrous and prolonged depression, brought about not only by the global recession but also by overcapacity and European protectionist policies. The profitability pattern of West European producers since the mid-1970s is indicative of the difficulties of the petrochemical business in the established industrial countries.

For all of the first half of the 1980s, European petrochemical manufacturers suffered a slump in profits. The recovery was sharp but shortlived. Profits plummeted drastically in 1991 and have given no signs of recovery. Gloom is prevalent and business is still contracting.

One of the reasons for Europe's difficulties has been its exposure to a flood of petrochemical products from East European suppliers. This is beginning to slow down as the East Europeans are being forced to pay more realistic prices for their inputs. Nonetheless, the major petrochemical manufacturers in Europe are now obliged to go through another painful bout of rationalisation and merger of operations. The end result is almost certain to be a further reduction of capacity. The big question is whether the inevitable shakedown will be enough to restore Europe's petrochemical industry to health.

The future of the European industry will be important to Gulf producers such as Sabic. By any standards, prospects for the Saudi industry are promising. It will continue to be able to count on low-cost feedstock; last year, the government decreed that input prices would be fixed 30% lower than comparable costs elsewhere. With such an inbuilt advantage, Sabic can better afford to weather a long recession than most of its competitors.

Inevitably, the Europeans will cry foul. Barriers to Gulf petrochemical exports to Europe have long been a bone of contention between the GCC producers and the European Community. If the European industry cannot drag itself out of the sick bay with the current round of reorganisation, the Euro-Arab war over petrochemicals will continue to poison relations between the two trading blocks. So long as Europe penalises Gulf imports through quotas and tariffs, Saudi Arabia and the other GCC producers will feel discriminated against. In the long term, market forces will unquestionably favour low-cost Gulf producers, primarily Saudi Arabia. They are impatient at the Europeans' refusal to recognise the inevitable.

The real competition they face comes from the Far East. There, too, new producers are emerging with an eye to the export markets. Shut out of Europe, Gulf manufacturers have so far looked to East Asia as their most promising source of export demand. But the East Asian industry enjoys all the same advantages as the Gulf, and more -- cheap inputs, modern technology and proximity to the world's fastest growing market. Looking one way or another between Europe and the Far East, Gulf producers have their work cut out.
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:prospects for the Middle East's petrochemical industry
Publication:The Middle East
Article Type:Industry Overview
Date:Jul 1, 1993
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