Issue Date: November 19, 2007
First The Kingdom, Then The World
Saudi Basic Industries Corp. (SABIC) is the company that every petrochemical firm wants to imitate. But SABIC aspires to be something more than just a producer of commodity chemicals. It wants to become a diversified global chemical company on the order of Dow Chemical or BASF.
As it stands, SABIC is the most profitable chemical company in the world: It racked up $8.4 billion in operating profits on chemical sales of $19.7 billion in 2006. Dow and BASF, the world's top two chemical manufacturers, made only about half that much in profit last year, and they are two-and-a-half-times bigger than SABIC.
But SABIC is hardly complacent. It is using its gargantuan earnings to spur more growth. Earlier this year, the company purchased storied engineering polymers producer GE Plastics for $11.6 billion and renamed it SABIC Innovative Plastics. While it continues to expand its core commodity chemicals business, SABIC is also investing in specialty chemicals to make itself more sustainable. SABIC's executives know that Saudi Arabia's low-cost natural gas, its big competitive advantage in chemicals, is not going to last forever.
SABIC pays about 75 cents per million Btu for natural gas feedstock, about a tenth of what U.S. firms pay. Envious of low-cost Middle Eastern feedstocks, Western petrochemical companies such as Dow, ExxonMobil, Total, and Chevron Phillips are investing heavily in the region. Each of these companies is planning or already constructing one or more major petrochemical complexes with local, government-owned companies.
But SABIC, 70% held by the government of the Kingdom of Saudi Arabia, has been at the chemical game longer than other firms in the region, and its ambitions have become greater than merely being a partner to a foreign company.
In Saudi Arabia, methane and ethane are recovered as by-products of oil extraction. Because the country is sparsely populated and has no pipelines to international markets, the gas produced there was mostly flared off until the early 1980s, when the government spearheaded the development of natural-gas-based industries such as steel, petrochemicals, and fertilizers.
Founded in 1976, SABIC was a critical part of that development. Early projects used natural gas as a cheap energy source to make steel. Methane was used for nitrogen fertilizer and methanol production. By the mid-1980s, the company was teaming up with foreign partners such as ExxonMobil and Shell to construct large ethane-based petrochemical complexes. These facilities churned out products such as polyethylene and ethylene glycol for export, mostly to Asia. More recent projects have generally been led by the company, often with partners in the Saudi private sector.
In just 30 years, SABIC has become the 11th largest chemical company in the world as measured by sales. It is the largest ethylene glycol maker and the third largest polyethylene producer on Earth.
Mohamed H. Al-Mady, SABIC's chief executive officer, attributes the company's explosive growth to its determination to stay whole and reinvest its profits. "Our board from the beginning wanted a company that would stay together," he says. "There could have been a time when we sold our metals business or fertilizer business, but we said, 'No, we will use the metal business to spearhead our petrochemical business.' "
GE Plastics is the linchpin of the next stage in SABIC's development: to globalize and diversify its products and technology. The companies couldn't be more different. While SABIC developed as a home for surplus raw materials, GE Plastics' forte was in commercializing technology. It is one of the companies that invented tough polycarbonate, trademarked as Lexan, and Noryl polyphenylene oxide/polystyrene blends, strong, dimensionally stable engineering plastics. With $6.7 billion in 2006 sales, GE Plastics was a global leader in engineering plastics.
Al-Mady is counting on steady results from engineering plastics and other specialty chemicals to offset the volatility of its more cyclical commodity businesses. "We are after growth and profit, of course, and stable income," he says. "We are hoping that between the commodities and engineering plastics, we can sustain steady growth for SABIC. Engineering plastics is a business that enjoys good financials during the cycle."
Despite the differences between the two companies, Al-Mady sees synergies. SABIC Innovative Plastics will market polycarbonate made at Saudi Kayan, a joint venture that will open in 2009 in Al Jubail, Saudi Arabia. The venture, which is 35% owned by SABIC, is also part of SABIC's diversification plans. In addition to SABIC mainstays like ethylene and polyethylene, Saudi Kayan will make specialty chemicals such as ethanolamines and ethoxylates, which are used in such applications as detergents and personal care products.
Al-Mady is also counting on technical and marketing synergies between SABIC Innovative Plastics and its European polypropylene business, which SABIC acquired with its 2002 purchase of DSM's petrochemical division. Now called SABIC Europe, the division is also one of Europe's largest sellers of benzene, a key raw material for SABIC Innovative Plastics. High benzene costs were among the reasons GE sold its plastics business.
Another big deal for SABIC was its purchase earlier this year of Huntsman Corp.'s European petrochemical business, based at a low-cost chemical complex in Teesside, England. SABIC is continuing a Huntsman project to build a low-density polyethylene plant on the site. On the other hand, it recently shelved DSM's long-term plan to expand an ethylene cracker in Geleen, the Netherlands.
While the GE Plastics purchase represents SABIC's first foray into the U.S., unlike the European deals, it is decidedly not a petrochemicals play. Al-Mady says the company has considered petrochemical investments in the U.S. but shied away because of high natural gas costs. "The U.S. is a very important market, and we have been following other investments in the U.S. over the years," he says. "With the increased energy cost, it was really almost impossible to find investment. We have been following GE Plastics for a number of years, and when it was announced that the company would be sold, we wanted to have the opportunity to establish a presence here in the U.S."
SABIC also wants to invest in China, a key market for exports out of Saudi Arabia. The company recently suffered a setback in a proposed joint venture with the local company Shide Group to build a petrochemical complex in Dalian, China. Al-Mady says the project has been delayed by the Chinese government. A joint venture with the Chinese oil company Sinopec to construct a chemical complex in Tianjin, China, is still proceeding.
Because it is focusing on the new plastics business and investments at home, SABIC isn't interested in further acquisitions unless a compelling opportunity arises, Al-Mady says. "We are now busy with this acquisition and whatever we have in the kingdom," he explains. "So our appetite for further investment at this time is really limited, not because of the financial strength, but because of our ability to manage the growth."
In Saudi Arabia, SABIC is considering a joint venture with ExxonMobil to make carbon black and various synthetic rubbers, all ingredients for tires. The company also continues to juggle multiple expansions in ethylene, polyethylene, and ethylene glycol.
But Andrew Spiers, senior vice president of chemicals at the international consulting firm Nexant Chem Systems, contends that large ethylene expansions based on ethane cannot continue at the same clip as they have in the past. "There isn't necessarily the ethane availability at the rate that SABIC has grown to date," he says.
Because ethane in Saudi Arabia is recovered as a coproduct of oil extraction, Spiers explains, additional supplies of ethane are largely contingent on increasing oil output. But since growth in Saudi oil output is slowing, natural gas fields will have to be developed to substantially increase feedstock ethane supplies. Because it isn't a coproduct, such natural gas would be expensive to produce and erode SABIC's big cost advantage.
Indeed, starting in 2012, the Saudi government intends to charge about $1.25 per million Btu for natural gas. Some major chemical projects, like those proposed by national oil company Saudi Aramco, will use liquid feedstocks in addition to ethane. Spiers says Saudi Arabia doesn't have the advantage in liquid feedstocks that it does in ethane. Thus, he says, it makes more sense than ever for SABIC to branch out of commodity chemicals made in Saudi Arabia.
Al-Mady says diversification makes sense regardless of the feedstock scenario. "If we had all the ethane in the world in Saudi Arabia, we would still do the same thing. It has nothing to do with shortages," he maintains. "It is just prudence to have a global footprint, to have a strong technology presence, and to have human resources. But naturally, it will be helping in an eventuality there will be a scarcity of ethane."
When asked about what the future might bring for SABIC, Al-Mady cheerfully predicts more of the same. "Growth, more growth, and more technology," he says. "Of course, this cannot happen just through organic growth. This also depends on strategic acquisition, which we did with SABIC Innovative Plastics."
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