Saudis as producers: a dream comes true

For years it seemed like a nice dream for a country with money to burn. In one generation, Saudi Arabia aimed to leapfrog from its status as a nomadic desert kingdom, right through an adolescence of oil riches and pell-mell development, and into adulthood as a world power, not only in crude oil but in refined chemicals, gasoline, aluminum, and steel.

``It made sense,'' says a chemical industry economist, ``but it still surprised a lot of people when it worked.''

With its riches from oil exports, the kingdom assembled an industrial infrastructure in the 1970s and early '80s, with work continuing to this day. Workers and bosses arrived from throughout the world. Superhighways, ports, pipelines, were rushed into service. In joint ventures with multinational chemical and oil companies, $12 billion worth of state-of-the-art refineries and factories -- and the spanking new cities to support them -- went up at Yanbu on the Red Sea and Jubail on the Persian Gulf.

The plan: to use plentiful Saudi oil and gas to feed and power these chemical plants and sell the cheapest chemicals in the world.

Suddenly, Saudi Arabia's expensive dream is reality. On schedule -- even slightly ahead of it -- chemical plants of the Saudi Arabian Basic Industries Corporation (SABIC) are coming on line, producing cheap and plentiful supplies of such chemicals as methanol, linear low-density polyethylene, high-density polyethylene, styrene monomer -- all essential for the myriad of plastics in the world today.

Saudis form the basic management team, and slightly over half SABIC's 6,300 employees are Saudis. Another 1,200 Saudis are in training.

``There was enough money and enough outside help to do it,'' says Myron Foveaux of the Chemical Manufacturers Association. ``The hats of the world are off to them.''

In the abstract, yes. But the chemical industry itself has qualms. SABIC's initial markets are Southeast Asia, Japan, and Western Europe, but sales to North America are planned as well. Its aim is to garner 4 or 5 percent of the world chemical market by the late '80s.

That's good news for consumers, since inexpensive SABIC chemicals mean plastics products -- everything from personal-computer housings to carry-out boxes for Big Macs -- will not be rising in price anytime soon. Unfortunately for much of the chemical industry, it couldn't happen at a worse time. The world is awash in petrochemicals, as in oil. And as with steel and autos, jobs and investments are at stake and protectionism may develop. (SABIC steel and aluminum production will be relatively limited by world standards, and SABIC envisions selling mostly in the Persian Gulf region.)

``It's one thing for SABIC to produce these chemicals,'' says Mr. Foveaux; ``it's another to market them.''

Already the European Community has expressed concern about cheaper SABIC chemicals replacing those produced at older European refineries and thus driving those refineries out of business. In the face of Saudi protests of unfairness, the EC has imposed a 131/2 percent tariff on Saudi methanol.

Last Monday Ibrahim Abdullah Salamah, SABIC's managing director, denied that Saudi production of petrochemicals will be large enough to cause serious market disruption in Europe or elsewhere. Mr. Salamah was strongly critical of a paper released by CEFIC, the European chemical industry association, which called on the European Community to monitor Saudi petrochemical sales in Europe and suggested protection from ``excessive imports.''

This is unfair, SABIC says. Saudi Arabia estimates that the EC shipped $20 billion in exports to the kingdom in 1983 and imported only $10.5 billion from it. Those European goods entered Saudi Arabia duty free, and Salamah says ``it seems only natural that we should enjoy some reciprocal rights.''

It may seem natural, but it also appears that the Saudis have little leverage in the matter. The products they import from Europe cannot be produced in the kingdom, so retaliatory tariffs would simply mean higher prices for Saudis.

At present, the chemical market, says Abdelaziz S. al-Jarbou, SABIC's director of projects implementation, is undergoing ``global restructuring.'' Although Dr. Jarbou feels this restructuring is inevitable, he is aware of protectionist ramifications.

Saudi Arabia, he notes, chose to have the plants built in joint ventures with companies such as Exxon, Celanese, Shell USA, and Mitsubishi in order to ensure that ``our products would meet the highest international standards and that their entry into the world market would be in an orderly manner.''

SABIC's approach to entering this market (outlined on Page 18), however, does seem cautious and methodical. In part, this may be because the Saudis now have to sell both oil and chemicals to generate revenue for their continuing development needs and for their extensive domestic and foreign clients.

And lately the world has not exactly been beating a path to Saudi Arabia's door. Unlike the 1970s, when Saudi oil was coveted by the West, the world has plenty of oil now. Because of the '81-82 recession and the sluggish recovery in most of the world, chemical usage has not grown as expected.

Since chemicals are a ``downstream'' industry from oil production, the Saudis appear to have sped completion of the refineries to help compensate for the shortfall in their revenues brought on by slack oil sales.

At the same time, the new chemical refineries to some degree lock the Saudis into relatively high oil production, which adds to the oil glut. This is because the energy needs of the refineries -- and other vital energy needs in the kingdom, especially water desalination -- come from ``associated'' natural gas -- gas that used to be flared off and is now gathered and put to domestic use.

Dr. Jarbou points out that much of SABIC's own energy comes from ``nonassociated'' fields. But clearly if oil production drops too low, there is less natural gas around for the kingdom's many needs. At the same time, if there is less chemical production, there is less revenue around for the kingdom's budget.

All of which leads industry analysts to agree that SABIC chemicals are a-coming and to examine the impact.

Leslie G. Ravitz, a chemical industry specialist with Salomon Brothers in New York, sees the world chemical market as remaining ``sloppy'' for the next year or two. But he points out that since SABIC is adding only 4 percent to the world chemical capacity, ``that's one's year's growth in chemical usage.''

Theodore S. Semegran, chemical analyst at Shearson Lehman/American Express, notes that SABIC's move onto the market is part of a trend that began in the '70s in which major oil producers ``took over the production of petrochemical raw materials, and other chemical companies began going more and more into higher value-added and specialty chemicals.''

Thus the advent of cheap, plentiful ``raw materials'' from SABIC actually helps the ``higher value-added segment of the industry,'' Mr. Semegran says. ``It's not a negative, although it's not a big positive. I consider it one blip in a decade. It hurts for a year or two at the most.''

So far, there is little sign of protectionist sentiment coalescing around SABIC. But as with the US ammonia industry, which has sought, unsuccessfully, to block Mexican ammonia because of its sixfold cost advantage, the methanol industry might be feeling the pinch enough by the late '80s to move for protection.

Analysts say Dow, Union Carbide, and smaller companies such as National Distillers could feel the effects of SABIC most. ``We are watching the situation,'' says an official at the Office of the US Trade Representative in Washington.

A Commerce Department official says that ``some plant shutting is anticipated, some dislocation, some laborers are going to be displaced, but US industry has not been caught unawares.'' From a broad perspective, he adds, ``If Saudi Arabia increases its exports to us, and if US consumers benefit, and if Saudi Arabia then purchases more products from us, the net effect is positive.''

Foveaux of the Chemical Manufacturers Association notes, however, that the SABIC adds to the industry's ``reasons not to build new plants and reinvest. Ultimately, US plants will become obsolete.

``But if usage increases and economic growth picks up,'' he says, ``that could help.''

You've read  of  free articles. Subscribe to continue.
QR Code to Saudis as producers: a dream comes true
Read this article in
QR Code to Subscription page
Start your subscription today