Gulf petrochemical sector needs increase in oil prices to stabilise

Consolidation and at least a 20 per cent jump in oil prices are needed to stabilise the Arabian Gulf petrochemical sector, according to the head of Saudi International Petrochemical Company (Sipchem).

Ahmad Al Ohali, the Sipchem chief executive, said on Wednesday in Dubai that the region was very exposed to changes in the global energy sector, which has led to volatility. “There are many things happening and I think it’s going to continue to be challenging,” he said.

Mr Al Ohali said a difficult operating environment would continue in terms of pricing and demand, and added that oil prices needed to reach between US$60 and $70 per barrel to “at least give some breathing room”.

Petrochemical prices are linked to oil and gas prices. Brent crude was trading at $52.73 per barrel on Wednesday afternoon.

“There are challenges facing the region and this boils down to feedstock availability, increased output from other regions such as the United States and China, and our own capabilities,” he said.

Cheaper oil and gas prices erode the competitive edge of regional petrochemical producers, who have enjoyed access to lower-cost feedstock compared with international rivals.

Along with the industry, Sipchem drastically decreased its capital expenditure, shelving new or non-critical projects.

“It all boils down to how the oil prices will change this quarter and also the first half of next year,” Mr Al Ohali said.

Next month is set to be decisive for oil prices, with Opec expected to follow through on its pledge to freeze output levels, and the result of the US presidential election.

The Gulf Petrochemicals and Chemicals Association (GPCA) said at the end of last year that the direction of crude oil prices was a key indicator among Middle East downstream buyers, who are usually more conservative if further declines are expected. If oil prices rally, petrochemical prices and demand could increase.

“Saudi Arabia, Qatar and Kuwait can afford to let oil prices fall further, but falling crude values are proving to be detrimental to their petrochemical industries,” the GPCA said.

Yet the price of oil is only part of the issue, as the Sipchem chief believes that sector consolidation is also necessary to spur growth. “Consolidation is more needed now than ever,” he said.

It was reported this year that the firm was revisiting merger talks that began two years ago with Sahara Petrochemicals Company, but Mr Al Ohali said that there were no current discussions being held.

Sipchem believes that mergers and acquisitions can help companies reduce cost and capitalise more on the synergies that they share, but there are obstacles to overcome first. Saudi Arabia, in particular, needs to address and resolve its regulatory framework before this can be achieved, he said. But that does not mean job losses.

“If you look at petrochemicals in Saudi Arabia, the [localisation] rate is about 65 to 70 per cent. So you have some room to go, and consolidation will help bring in synergy value and also growth opportunity that will open up more jobs,” he said.

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