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Saudi petrochemical giants braced for hike in gas costs  

Saudi petrochemicals Sabic
Saudi petrochemicals producers need a cost advantage because of the logistical disadvantage of being far from their core market, China
  • Riyadh subsidises price of two key gas feedstocks: methane and ethane
  • Low cost of raw materials helps Saudi businesses sell to China
  • Warnings about cuts to subsidies follow Q1 losses for some producers

Saudi Arabia’s petrochemicals companies, whose margins have tumbled this year, could be hit by higher prices for gas feedstocks if reforms to state subsidies materialise.

The petrochemicals industry is the kingdom’s most important after oil and chemicals manufacturing is a key part of the Vision 2030 economic diversification plan.

Yet some producers suffered losses in the first quarter and industry bellwether Saudi Basic Industries Corp (Sabic) reported a 90 percent drop in profit as sector margins slumped to two-decade lows

Saudi petrochemical manufacturers use five gas feedstocks: methane, ethane, propane, butane and naphtha.

Methane and ethane are the cheapest and are sold to producers at a fixed, government-subsidised price of $1.25 and $1.75 per mmbtu (million British thermal units) respectively. European producers pay around $10/mmbtu.

Dwindling supplies of methane and ethane are forcing Saudi manufacturers to switch to the other three gases, for which they do not pay a fixed price. Instead they receive a 20 percent discount on the Asian market prices.

“The change in feedstock usage has reduced Saudi producers’ cost competitive advantage versus Europe and Asia considerably,” said Yousef Husseini, director of chemical equity research at EFG Hermes in Cairo.

“Nowadays, when there are dips in the market, some Saudi producers lose money, which would have been unthinkable before.

“The first half of 2023 will be tough for the industry, but it’s difficult to call when exactly things will turn around given the lack of any clear trigger. Currently, demand is at recessionary levels and that usually doesn’t last more than 6-12 months.”

Saudi and US shale-based petrochemical manufacturers enjoy the lowest feedstock prices, while Europe and Asia pay the most.

The last time Saudi’s government hiked the fixed cost of methane and ethane was in December 2015, doubling them to their present price from $0.75/mmbtu.

Saudi petrochemcialsSabic
Saudi producers must pay for transport and insurance to sell to Asia and Europe. Some markets also levy import tariffs

Under Vision 2030, Riyadh aims to raise ethane and methane feedstock prices and ultimately link them to global prices – as it has with butane.

A price rise was expected in 2018 and then in 2020, but failed to materialise. About six months ago, speculation that the government was about to announce an increase restarted.

Prices are expected to rise by a small amount each year until methane is at $2.50/mmbtu and ethane at $3.50/mmbtu – double their current prices.

“That would make a lot of sense – Saudi wants feedstock prices to be slightly below those of the US,” said Husseini.

“My long-term forecasts assume there will be price rises of this magnitude. Higher prices push companies to be more efficient because it’s costlier to waste gas.

“Saudi producers need a cost advantage because of the logistical disadvantage of being far from their core market, China. Without that, China would just buy from its neighbours.”

Saudi producers must pay for long-haul transport, insurance and sometimes import tariffs to sell to Asian and European markets.  

Cheap feedstock from shale gas has enabled the US to become a major exporter of polyethylene.

“There’s indirect competition between the US and Saudi. There’s more than enough room for both of them and they enjoy the biggest cost advantages,” added Husseini.

Oliver Connor, vice president of energy equity research at Citi in London, said: “Given that Saudi petrochemicals companies are below the 10-year average in terms of margins and the importance of chemicals to Vision 2030, I doubt the magnitude of any feedstock price increases would drive a big difference to their costs.

“Why would you strangle the industry when it’s so important to your economic diversification plans?”