SABIC to Augment Petrochemical Production Capacity by 12 Million Tons

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Researched by Industrial Info Resources (Sugar Land, Texas)--Saudi Arabian state-controlled enterprise, Saudi Basic Industries Corporation (SAU:2010) (SABIC) (Riyadh, Saudi Arabia), has unveiled plans to increase its petrochemical production capacity by 12 million tons per year by early 2012. The announcement came after the firm, one of the world's largest petrochemical producers, posted a dip of 76% in its second quarter profits and indicated that it did not expect the market and commodity prices to recover in the next two years.

SABIC's net profit in the second quarter of 2009 declined to $482.6 million from $14.67 billion during the same period last year. In the first quarter of 2009, SABIC booked a $314.7 million depreciation of goodwill on its acquisition of GE Plastics in 2007 and posted a loss of $257.7 million. This led to SABIC declaring a loss in first-quarter earnings for the first time since 2001. In the largest-ever acquisition by a Middle Eastern company, SABIC purchased the plastics division of General Electric Company (NYSE:GE) (Fairfield, Connecticut) in 2007 for $11.6 billion, and later renamed the company as SABIC Innovative Plastics. SABIC decided not to book depreciation for second quarter of 2009, which led to a slump of 76% in its net profits for the period. SABIC has decided not to make dividend payouts for the first half of this fiscal year. Company officials indicated that depending on financial implications, SABIC might include depreciation toward its purchase of GE Plastics in the third quarter of this fiscal year.

Earlier this month, SABIC started operations of the 4 million-ton-per-year facility of Yanbu Petrochemical Company (YANSAB) (Yanbu, Saudi Arabia), located on the Red Sea. The petrochemical complex, which consists of eight units, is expected to produce 400,000 tons per year of propylene, 770,000 tons per year of ethylene glycol, 1.3 million tons per year of ethylene, and 800,000 tons per year of low- and high-density polyethylene. SABIC, which owns a stake of 51% in YANSAB, earlier planned to begin operations of the $4.3 billion petrochemical complex in 2008.

Expansion of Al-Sharq (Jubail, Saudi Arabia), which is a joint venture between SABIC and a Japanese consortium led by Mitsubishi Corporation (TYO:8058) (Tokyo, Japan), is also on the cards. The facility is expected to produce 4.9 million tons per year of ethylene glycol, which will place SABIC among the world's top producers of the compound.

In May this year, SABIC also signed an agreement with Saudi International Petrochemical Company (SIPCHEM) (Riyadh) to set up new projects in the country that will utilize the surplus capacities of both companies. As part of the agreement, SIPCHEM will construct an $810 million plant to manufacture 200,000 tons per year of ethylene vinyl acetate and 125,000 tons per year of polyvinyl acetate. SABIC proposes to build approximately seven new projects, with a combined investment of $3.2 billion, to produce 3,000 tons per year of carbon filter, 250,000 tons per year of methyl methaacrylate, 50,000 tons per year of polyacetyl resins, 30,000 tons per year of poly methyl methaacrylate, 50,000 tons per year of polyacrylonitrile, 200,000 tons per year of acrylonitrile, and 40,000 tons per year of sodium cyanide. The projects are expected to begin operations by 2013.

Last week, SABIC also received approvals from Chinese authorities to begin work on the proposed 3.2-million-ton-per-year, $3 billion petrochemical complex in the Tiajin region of China. The initial investment was estimated to be about $1.7 billion, but the cost was later lowered 20%, and the production capacity was brought down by 20% to 3.2 million tons per year.

SABIC, a leading petrochemicals producer in the Middle East, has consolidated its position as global player with a turnover of approximately $40 billion in 2008. Last year, the company produced 1.3 millions tons per year of innovative plastics, 35.4 million tons per year of chemicals, and 7.9 million tons per year of polymers. In the second quarter of this fiscal year, SABIC recorded sales of 11.37 million tons, lower than the sale of 11.47 million tons recorded during the same period last year. However, the company plans to proceed with its expansion plans as part of its long-term market strategy.

SABIC's ambitious expansion plans, at a time when the global petrochemical industry is reeling under the impact of slumping demand and sharp decline in prices, is causing concern among competitors. Rivals claim that SABIC, which reportedly receives substantial subsidies including energy grants, is dumping its products in some markets. While, SABIC has refuted these allegations, Chinese and Indian petrochemical companies are pressuring their governments to put in place anti-dumping laws and levies to restrict imports from SABIC. SABIC has indicated that while import taxes on its Indian exports have not affected the company's bottom line, it is in talks with China to resolve the issue.

Asia is a very critical market for SABIC, as this region accounted for around 24% of the company's sales in 2008. Despite the economic slowdown, SABIC produced about 28.5 million tons of petrochemical products during the first half of 2009 and recorded sales of 22.9 million tons, a 2% increase year over year. As of June 30, 2009, SABIC's consolidated net income was $480 million, compared to $2 billion during the same period last year. The company's gross profit was $1.65 billion, a huge dip from the gross profit of $3.94 billion recorded last year.

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