SABIC and the Petrochemical Industry of Saudi Arabia

Abstract

SABIC also continues to invest in chemical and petroleum products in various continents and they are busy increasing into new customer segments. After doing extensive financial research on SABIC, I have gathered important information and recommendations for current shareholders and potential investors. This paper begins with an overview of the company followed by financial statement analysis. Through analysis, I was able to conclude different financial ratios that helped me see how SABIC stock was doing in the market. I was able to determine its liquidity, debt, asset management/efficiency, profitability, and market-based ratios to help me decide whether the shares are worth investing in or not. This paper concludes with my recommendation, based on my findings, as to whether or not potential investors should look into investing in SABIC shares and if current shareholders should hold onto their shares or decide to sell them.

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Introduction

Petroleum and petrochemical industry of Saudi Arabia is one of the most vital pillars of the Saudi’s economy. Earlier, the economic development of the country was mainly based on the oil sector of the Country. Over time, other than petroleum and petrochemical industries, other industries have also started to provide a huge boost to the economy of the country. But the petroleum and Petrochemical industry has still remained one of the most important industries of the country. Petroleum and petrochemical products account for a substantial proportion of the country. In the global market of petroleum and petrochemical products, Saudi Arabia is one of the most important and powerful market players. Saudi Arabia accounts for a substantial share in the global market of petroleum and petrochemical products owing to the reason that the petroleum and petrochemical industries of the country enjoys a number of competitive advantages. (Saudi Arabia Petrochemicals Report Q2, p. 6,; Azzam, p. 12).

Saudi Arabia’s accession to the World Trade Organization is expected to increase the competitive advantage of Saudi’s petroleum and petrochemical industries. It is forecasted that WTO accession of Saudi will strengthen the position of the country in the global market of petroleum and petrochemical products. However, it has also been forecasted that the impact of WTO membership on the competitive advantages of the Saudi’s petroleum and Petrochemical industries will not be observed in the immediate short run. It will take some time for the realization of the actual impacts on the industries. In the WTO regime, the petrochemical sector of Saudi will gain on account of a large number of factors. First, under the WTO regime, the prices of financial services and insurance and transportation costs are expected to decline significantly. Now, these three services are consumed by the petrochemical sector of Saudi by large amount, and hence it is quite evident the reductions in the prices of these services will result in decline in the costs of production in the petrochemical sector of the country and may enhance the competitive advances of this industry. And second, under the WTO regime, barriers to trade have been removed. Hence it can be well expected that removal of trade barriers in the form of reduction in tariffs in the economies which earlier imposed high level of tariffs on importable will place higher demand for the importable commodities. Thus, the producers of petrochemical products of Saudi will be able to offer lower prices to the economies of the EU countries, the United States as in Asian markets, like in the market of Japan which earlier used to impose high rate of tariffs on imports. The reduction of rate of tariff in these economies will significantly increase demand for Saudi petrochemical products in the market of these countries. The increased level of demands for the imported petrochemical products in these economies will be more efficiently met by Saudi Arabia than other petrochemical products exporting countries. The reason is that under a lower rate of tariff the prices of the products will also be lower and for those countries which have to incur high costs of production will find it very difficult to offer their products at lower market prices. Thus the WTO membership is supposed to increase the competitive advantages of the petrochemical industry of Saudi Arab in the international market. (Al-Sadoun, p.8; Aguiar, 18).

According to the petrochemical report of Saudi Arabia for the second quarter of 2009, although entering into WTO regime gives a strong hope for increase in the level of demand for the petrochemical products of the country in the international as well as domestic markets in long run, the current situation is not very impressive. Since the petrochemical industry of Saudi is very much export oriented, global economic downturn has severely affected this industry. Particularly, it’s exports to Chinese markets, which seems to be the most lucrative markets, has suffered a lot. The poor situation in the demand for petrochemical products due to substantial decrease in demand in the major export markets can not be improved by it’s the sell of petrochemical products in the small GCC market. The performances of petrochemical producers of Saudi suffered a lot in 2008.

The ongoing global economic slow down is expected to delay in a number of petrochemical projects in Saudi. For example, the famous Ras Tanura complex can not be completed before 2014. Similarly many other projects which have been supposed to start their operation in coming 1-2 years have been delayed by many years. (Saudi Arabia Petrochemicals Report Q2, 8; Saudi Arabia Petrochemicals Report Q2 2009, p.10)

Saudi industrial companies Industry Fundamentals

The petroleum sector of Saudi Arabia is considered to be an important economic sector of the country which earns huge revenues and significantly contributes to the country’s GDP. This sector has been built on the basis of huge reserves of oil and natural gas of the country. Petroleum products produced by this sector not only cater to the huge domestic market, but also to the global markets. A major portion of the demand for oil and natural gas in the international market is met by Saudi Arabia.

Oil Production Capacity: – Oil is the most precious asset of Saudi Arabia. Saudi Arabia has huge oil reserves. It has been estimated that Saudi has around 267 billion barrels of oil reserves which belong to the proven category. This huge reserve of oil in Saudi Arabia amounts to around one-fifth of total conventional oil reserves across the world. The quality of the oil reserves of Saudi is of quite high. It is found that two-thirds of total oil reserves of the country belong to either light or extra light or super light category of oil. The rest of the oil reserves of the country belong to medium and heavy grades. In total around 100 major fields of oil and natural gas are present in Saudi. However, among all these 100 oil fields, only eight oil fields contain more than half of the total oil reserves of the country. The world’s largest oil field Ghawar is situated in Saudi and belongs to these eight oil fields that provide largest part of the total oil reserves of the country. The world’s biggest offshore oil field, Safaniya, is also situated in Saudi Arabia. (Saudi Arabia- Oil, 6)

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Along with having one of the largest reserves of oil in the world, the production capacity of the country is also very high. In fact, in terms of the production capacity of oil, Saudi has the largest production capacity of crude oil in the world. It has been estimated that approximately 10.5 to 11 million bbl/d was produced in mid-2008. The Saudi ministry plans to enhance its production capacity to the level of 12.5 million bbl/d by 2009. It is being expected that with this new production plan, in near future Saudi Arabia will be producing the highest level of crude oil since the early years of the decade of 1980. According to this plan of new capacity generation since 2009, most of this new capacity will be formed on the basis of the development of Khursaniyah oil field. (Saudi Arabia- Oil, 7).

Since 2000, the level of domestic consumption of petroleum in Saudi Arabia has increased by approximately 50 percent. Before the world economy started to enter into the recessionary state in 2008, most of the increase in domestic consumption of petroleum was driven by high level of growth in the industrial sector as well as in the whole economy along with highly subsidized prices. According to some forecast, through 2010, the level of domestic consumption is expected to rise by 8 to 10 percent. Most of the increase in demand for oil is expected to come from the electricity and petrochemical sectors of the country. In the Middle East, Saudi Arabia is considered to be the largest oil consuming country. However, in recent time, the country has been trying to use natural gas by larger extent in the placer of oil for the purpose of energy generation domestically in order to decrease domestic level of consumption of oil and increase the level of petroleum exports. (Saudi Arabia- Oil, 9).

Saudi Arabia has been trying to increase its production capacity of light crude oil. Increasing the level of production of lighter grades of crude has become one of the most important long term goals of the country. To fulfill this goal, Saudi has started to explore the oil fields of Shaybah, Abu Hardiya, Fadhili etc. some of these oilfield are located in the remote bordering areas of the UAE. (Saudi Arabia- Oil, 10).

One of the major challenges that the Saudi is expected to face in meeting its goal of adding to its existing capacity is the rate of decline in the production capacity of its existing oil fields. It has been reported that the production capacity of the existing oilfields is declining at an average rate of six to eight percent on annual basis. This simply implies that the country requires building around 700,000 bbl/d additional production capacity annually in order to just compensate the loss in capacity due to natural declines. There, however, exists, debate regarding the rate of decline in the production capacity of the existing oil fields. According to the Ministry of Petroleum of the country, the rate of decline in the production capacity of the existing oilfields of Saudi Arabia declines annually at an average rate of 2 percent. According to the estimate of the national oil company Saudi Aramco around 29 percent of the total oil reserves of the existing oil filed have already been depleted. According to many analysts the existing oil reserves of the country will not last very long. But the national oil producing company Saudi Aramco is optimistic about the situation. The Ministry thinks that the proposed projects get started they country will be able to add around 200 billion barrels of proven crude oil to the existing reserves. The country is also taking measures to reduce the level of depletion. Through installing modern technologies, the old and matured wells are now undergoing the programs of reservoir management and rehabilitation. (Saudi Arabia- Oil, 11)

Petrochemical Industry: Developments and Trends

As mentioned earlier the petrochemical industry of Saudi is one of the strongest pillars of its economy. In the global market of petrochemical products, Saudi is also a very important player. Although combing all petrochemical products together, the share of the company in the global market is little more than 5 percent, for some particular products like Methyl tertiary Butyl Ether, methanol, ethylene glycol the country accounts for more than 10 percent share in the global market for each of this product. The petrochemical chemical industry of the country is mainly export oriented and over 76 percent of petrochemical products in the country are exported. The country has gained competitive advantage in the global market of petrochemical products through the easy access to low cost feed stocks and low costs utilities. Major disadvantages, on the other hand, are inadequate technological know-how and lack of skills of workers. (Al-Ghamdi and Sohail, P. 14).

Saudi Arabia’s Petrochemical Industry

Some of the major petrochemical companies of Saudi are Saudi Basic Industries Corporation (SABIC), Sipchem (Saudi International Petrochemical Corporation, Methanol Chemicals Co. Ltd. Saudi Arabian Fertilizers Co. National Industrialization Co, Nama Chemicals Co., Sahara Petrochemical Co., Yanbu National Petrochemicals Co. etc.

SABIC: Saudi Arabia’s Giant: SABIC is a major market player in the petrochemical sector of Saudi. It is an old firm established in 1976. In the Middle East SABIC is the largest as well as the most profit making firm in the non-oil sector. It is basically a public company which is based in the capital of Saudi, Riyadh. The government of Saudi Arabia holds around 70 percent shares of this firm while the remaining 30 percent shares are held by private equity owners. The private equity holders of SABIC are not only from Saudi Arabia, but also from other Gulf countries. SABIC has played a major role in the formation of the Gulf Petrochemicals and Chemicals association (GPCA). (SABIC- Our Company, 17; Layman, 33).

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With the passage of time SABIC has enlarged the area of its operation, but production of petrochemical products has remained its major priority. Since by nature petrochemical industry of any country involves important interrelations between different organizations, SABIC has followed the strategy of setting up various manufacturing subsidiaries for consolidating procurement activities. Since 1980s, around sixteen subsidiaries have been set up by SABIC. Among these sixteen subsidiaries, nine are engaged in the manufacturing of chemicals or petrochemicals products, while three manufacture fertilizers, two of them manufacture iron and steel and the remaining two produces industrial gas and polyester. With time all these subsidiaries of SABIC has been growing substantially and after entering into the new millennium SABIC including its all subsidiaries has become the third largest petrochemical producer. At present it is one of the world’s five biggest petrochemical producers. (Al-Ghamdi and Sohail, 16).

The company has forecasted to achieve annual production capacity of over 130 million metric ton by 2020. The Chemicals unit is the largest business unit of SABIC and it accounts for around 60 percent share of total production of SABIC (SABIC-Facts and Figures-Production, 09). It also occupies the top most position as a producer in the world in terms of the production of mono-ethylene glycol, MTBE, polyether, and granular urea. Over the years the level of production has increased substantially. In 2001 its overall production level stood at a level of 35 million metric tons, while in 2008, the level of overall production increased to a level of 56 million metric tons. (SABIC-Facts and Figures-Financial Performance, P. 15). In 2008, net profits of SABIC became SR 22 billion which is equivalent to around US $ 5.86 billion. At presents the operation of SABIC is not confined in the land of Saudi Arabia only. Today SABIC operate in over 40 nations across the world. It has 60 plants situated across the Middle East, Europe, America and Asia. All of these plants are of world class level. (SABIC-Facts and Figures-Organization, P. 11)

Petrochemical Supply and Demand:- The petrochemicals sector of Saudi is the largest non-oil sector of the country. In terms of petrochemical production and supply, Saudi Arabia holds the position of 11th largest petrochemicals supplier in the world. It accounts for around 7 to 8% of total supply at present. Saudi Arabia is trying to increase its global market share to 13-14% by 2010. (Petrochemicals, 7; Al-Dabibi, 3; Knott, 43).

The petrochemical companies of Saudi Arabia have been undertaking various developmental projects for the purpose of increasing their production capacity. All these efforts have contributed to the massive expansion in the supply of petrochemical products by the Saudi firms in the domestic market as well as in the international market. According to the Saudi Arabia Petrochemicals Report for the year of 2008, the supply of the petrochemical products has expanded further and it is now being expected that the country will reach its full potential in terms of its production capacity by 2015. (Petrochemicals; Saudi Arabia Petrochemicals Report Q3 2009; 9; Cousins, 16).

In 2008, a number of plants producing polymer products started their operations. As far as the production of ethylene products are concerned, it is now being expected that by 2012 the capacity of production of ethylene will rise substantially and the production capacity may rise to the level of 19.67 million tons per year. On the other hand, the production capacity for polymer products will become as high as 14.66 million tons per year by 2012. These values have been projected on the basis of the developmental projects that have been undertaken by the companies. (Saudi Arabia Petrochemicals Report Q3 2009, 9).

However, as far as the capacity enhancement for petrochemical products are concerned, the projected values of the capacities will be met only if the availability of the most preferred feed stock of the petrochemical sector, i.e. ethane, remains as smooth as its is now. But a number of analysts fear that feedstock of ethane might face decline. According to the current estimates, the amount of feed stocks that the companies are needed for their new projects exceeds the existing amount of feed stock of ethane. Hence, the projects will be able to start their operations at their full potential during the projected period only if the capacity of producing natural gas is increased. The forecasted in crease in the level of supply of petrochemical products in future period also might get hindered by increasing costs of feed stocks which have potential to make many projects unviable. (Al-Dabibi, 8).

As far as the issue of demand is concerned, it is forecasted that over time the level of demand will increase very sharply on account of industrial growth in Saudi Arabia itself as well as in other countries mainly in the developing nations of Asia. Demand for petrochemical products of Saudi firms comes from numerous customers from within the country as well as from other nations, particularly from other gulf countries, Indian sub-continent, countries of Middle East, African nations, European countries as well as from Japan. The petrochemical sector of the country is also undertaking various efforts to open its markets in more and more countries. After becoming a member of the WTO, the possibilities of opening up new markets have widened further. Not only that with the removal of trade barriers, demand from the existing markets have also increased substantially and in future the demand is expected to grow more rapidly. (Al-Ghamdi and Sohail, 8).

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Most of the petrochemical firms of Saudi adopt those strategies which will help them to cater to not only domestic market but also international markets. The firms are not only trying to increase their existing markets but also to tap new markets. An interesting feature about these strategies is that the petrochemical industries of the Saudi have been trying to reduce their dependence on the markets of developed countries. To them the emerging markets of development countries are increasingly being seeme4d as more lucrative. (Al-Ghamdi and Sohail, 8).

Although the demand from international markets as well as from domestic markets currently indicating an increasing tendency, but one thing also should be kept in mind that to maintain the demands for its products in domestic as well as global markets, the petrochemical industry of Saudi has to be more careful as more and more new competitors are arriving in the global market. The country needs to place great focus on maintaining its competitive advantage in the global market.(Saudi Arabia Petrochemicals Report Q2 2008, 8; Al-Ghamdi and Sohail, 10)

Impact of the Regional Demand on Global Trade:- As far as the impact of regional demand on global trade volume is concerned, it is generally presumes that without having much alteration in productive capacity, if domestic consumption level rises, export will automatically fall. In Saudi, the domestic demand for petrochemical products has still not been very high. But given the expansion as well as establishment of various industries, the domestic demand for the petrochemical products will rise significantly in near future. Now, if the new facilities start their operation at their full potential then, there will be no fall in the level of exports. But if the plants fail to operate at their full potential due to various problems that will be discussed later in this chapter the level of global trade of petrochemical products might fall.

Ratio Analysis

RATIO FORMULAE 2008 2007
Liquidity Ratios
Current Ratio Current Ratio 95,454,974
26,580,007
=3.6:1
98,305,265
33,682,638
=2.9:1
Quick Ratio Quick Ratio 95,454,974-24,359,750
26,580,007
=2.7:1
98,305,265-22,305,959
33,682,638
=2.3:1
Working Capital Ratio Working Capital Ratio 95,454,974-26,580,007
150,809,596
=0.46:1
98,305,265-33,682,638
126,204,404
=0.51:1
Cash Ratio Cash Ratio 51,027,586
271,759,989
= 0.19:1
45,876,795
253,731,081
=0.18:1
Asset Activity Ratios
Receivables Turnover Ratio Receivables Turnover Ratio 150,809,596
16,104,204
= 9.4times
126,204,404
25,977,943
=4.9 times
Days Sales Outstanding Days Sales in Inventory 365= 39 days
9.4
365= 75 days
4.9
Inventory Turnover Ratio Inventory Turnover Ratio 105,046,315
24,359,750
= 4.3:1
78,254,228
22,305,959
=3.5:1
Days Sales in Inventory Days Sales in Inventory 365= 85 days
4.3
365= 105 days
3.5
Fixed Asset Turnover Ratio Fixed Asset Turnover Ratio 150,809,596
176,305,015
= 0.86 times
126,204,404
155,425,816
=0.81 times
Total Asset Turnover Ratio Total Asset Turnover Ratio 150,809,596
271,759,989
= 0.55 times
126,204,404
253,731,081
=0.51 times
Leverage Ratios
Debt Ratio Debt Ratio 125,118,376
271,759,989
=0.46:1
119,234,809
253,731,081
=0.47:1
Debt-to-Equity Ratio Debt-to-Equity Ratio 125,118,376
102,932,474
=1.2:1
119,234,809
91,154,031
=1.3:1
Equity Multiplier Equity Multiplier 271,759,989
102,932,474
= 2.6 times
253,731,081
91,154,031
=2.8 times
Coverage Ratios
Interest Coverage Ratio Interest Coverage Ratio 36,591,289
3,800,927
= 9.6 times
41,046,523
2,869,168
= 14.3 times
Fixed Charge Coverage Ratio Fixed Charge Coverage Ratio 36,591,289+4544649
3,800,927+4,544,649
= 4.8 times
41,046,523+4230235
2,869,168+4,230,235
= 6.4 times
Profitability Ratios
Gross Profit Margin Gross Profit Margin 45,763,281
150,809,596
=30.34%
47,950,176
126,204,404
= 38%
Net Profit Margin Net Profit Margin 37,335,011
150,809,596
=24.8%
42,407,590
126,204,404
=33.60%
Earning Power Earning Power 36,591,289
271,759,989
= 13.5%
41,046,523
253,731,081
= 16.2%
Return on Assets Return on Assets 37,335,011
271,759,989
= 13.7%
42,407,590
253,731,081
= 16.7%
Return on Equity Return on Equity 22,029,843
102,932,474
=
27,022,272
91,154,031
=
Market Value Ratios
P/E Ratio PE Ratio 81.75 = 6.5
12.57
81.75 = 5.8
13.99
Market-to-Book Ratio Market-to-Book Ratio 81.75 = 1.68
48.88
81.75 = 1.51
53.8
Book value per share Book value per share 146,641,613
3,000,000
= 48.88
134,496,272
2,500,000
= 53.80
Earnings Yield Earnings Yield 12.57= 15.38%
81.75
13.99= 17.11%
81.75
DuPont Analysis (Profit marg.)(Asset TO)(Eq. Mult.) 2.6X0.55X0.228
=32.6%
2.8X0.51X0.336
= 48%

Analysis

Liquidity: – Liquidity position of SABIC Company has been analyzed and a number of ratios were calculated for the 2 years for analysis purpose. The current ratio increased in year 2008 to 3.6 times from 2.9 in year 2007. This increase is due to rise in investment in debt securities and decrease in accrual expenses. The acid test ratio of the company also depicts the same picture. It increased from 2.3 times to 2.7 in the same period. These ratios show that liquidity improves substantially during 2007 and 2008. Cash to assets and working capital stand at 0.46 and 0.19 percent respectively in the year 2008. While in the year 2007 it is 0.51 and 0.18 respectively. This is the same trend that is shown. Cash is not major part of current assets of the company. The improvement in current ratio during the year 2008 is due to substantial investment in debt securities. The reason why these are so high during this year is due low investment in debt security which the company then increases steadily in the subsequent years. Working capital amount is quite adequate which increase consistently during the past five years. It shows that company is in good position to finance its short term financial needs.

Trend of liquidity ratios

Activity ratios: The turnover ratios give the speed of conversion of current assets into cash in the above way. Receivable turnover ratio increased during the past 2 years. It saw its highest turnover during the years 2008 which result in day sales in receivable of 39 days only. Inventory turnover improved greatly during this period which was as high as 4.3 during year 2008 that is 85 days from 105 days or 3.5 times. It shows that company improves its performance in terms of converting its inventory into sales resulting in higher sales figure during the year 2008. Overall conversion period shows improvement and stand at 85 days during the year 2008. Company’s day purchase in account payable show a steady increase. It shows that company is converting its inventory into receivables and receivable into cash quite efficiently. This operational efficiency of the company is evident as cash provided by operations. The inventory turnover ratio measures how much was sold off, or turned over in the course of one year.

Financial Leverage Ratios: – This ratios gives the solvency of the firm. They indicate the extent of non-owner claims on the firm’s profits as well as the firm’s operating capability to meet its obligation. Gearing is the long-term debt to equity ratio which assesses the balance between liabilities and equity in the firm’s long term resource structure. Another is the interest coverage ratio which measures the extent to which earnings cover the interest obligation of the company. The table given below shows the different formulae used in the computation of the aforementioned financial leverage ratios.

Capital structure of the company show how much of the company assets are financed by the company through debt and how much from equity. The calculations have shows that company is decreasing its reliance on creditor financing steadily starting from 1.3 times from 2007 to 1.2 times during 2008 for debt to equity. At the same time the company is building equity finance during the same last 2 years. This increase in equity finance came mostly from an increase in retained earning of the company. The company paid no dividend to its outside shareholders. Instead it has decided to reinvest its annual profit into the business instead of relying on outside financing. The decrease in total liabilities seems to be due to equal decrease in current liabilities of the company. This decrease in current liabilities of the company, therefore, results in improved current and acid test ratio for the year 2008.

Profitability:- From its fiscal years ending 2007 and 2008, SABIC showed increasing net income figures available to common shareholders. The increase in net income the 2008 net income was amidst an increase in the company’s sales. The increase in profitability was exacerbated by a non-parallel increase in selling, general and administrative expenses and resulted to an increase in operating income.

As to the ability of the company to continue showing profitability in the years to come depends on how fast the world economy will recover from the economic crisis. Another ratio is the turnover ratio which shows to what extent the company uses its assets to produce revenue.

Financial statements must be accompanied by notes to the account and these notes to the account play an important role to the users of financial statements. The notes to the accounts are integral because they provide data on the subject which is covered in the main financial statements. This data helps the user of the accounts to understand the contents of each element in financial statements. Notes to the accounts are actually a requirement by both generally accounting principles and financial accounting standards board and other regulatory bodies. They provide information about the accounting method employed by the company, the assumptions made while preparing the financial accounts and the estimates tat are made by the management in preparing the accounts or financial statements. The assist the users of financial statements improve their assessments of the performance of the company; It also helps the users of financial statements to understand the timing of the data used in the financial statements.

The notes to the accounts play an important role and exclusion from representing the financial statements will be of great disservice to the users of such accounts. The notes explain all necessary material information which cannot be explained in the main statements. They contain schedules such as depreciation, assets schedules which are of great value to the users of the financial statements.

Risks

Now it is necessary to look at the major challenges that are being faced by all the petrochemical industries across the world. However, before moving on to analyze the challenges that the global petrochemical industry is facing at present, it would be a better option to look first at the opportunities of the petrochemical industry under current economic situation as well as the factors that will be helpful in achieving success.

It has been mentioned earlier that Saudi Arabia enjoys competitive advantages for its petrochemical products in the international market. But analysts fears about the sustainability of this competitive advantages. To examine how far Saudi Arabia will be able to sustain its competitive advantages, it is necessary to look into the important issues and challenges that the petrochemical industry of Saudi Arabia is facing or may face in future.

Feed stock availability: – Feed stock availability has become one of the major concerns for Saudi Arabia’s petrochemical industry. One important factor that has been giving significant competitive advantages to the petrochemical industry of Middle East including that of Saudi Arabia is the availability of cheap feedstock which results in reducing costs of production. Very often economies of scale that the industry of petrochemicals of Saudi enjoys is said to be based cheap feedstock. The concern is that Saudi Arabia is not completely immune to the challenges relating to availability and pricing of feedstock.

The petrochemical industry of the country is expanding at a rapid pace. Some times it is argued that the rate of growth of the industry will outpace the ability of the industry to meet the requirement of ethane which is one of the cheapest and easily available feedstock that the industry uses. Apart from this, the government owned oil companies like SABIC are planning to charge more for feedstock to ensure its availability to it. This will increase the price of feedstock. Not only that, other industries are also competing severely for the feedstock of conventional types. Since the feedstock is limited, this increases huge concerns for the petrochemical industry of Saudi Arabia. If these challenges regarding the availability and pricing of feedstock are not addressed in proper way, in near future the petrochemical industry of the country will face serious problem which might deteriorate its competitive advantage in the international market of petrochemical products. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 5).

Overcapacity: – Overcapacity is another major issue of the petrochemical industry of Saudi Arabia. As mentioned earlier in this chapter, the country has launched a number of projects regarding expansion of the existing companies as well as establishment of new firms in the sector of petrochemical. In the next 2 or three years there will be a huge rush for the start up of the new facilities in this industrial sector of the country. The petrochemical industry of Saudi Arabia has a history of over production. Looking at this type of history some analysts are now predicting that there could be a downturn in the level of production which will result in nothing but spare capacity of the industry. It could be that the new projects that are being expected to start up there operation between 2010 and 2013 will not operate at their full capacity. Therefore, there is now arising a huge concern regarding the reduction in the level of lower rate of operation of the petrochemical industry of the country. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 7; Layman, 35)

This challenge of overcapacity facing the petrochemical industry of Saudi seems to be very acute. This is mainly because the most of the new capacity that will generate in this sector is mainly intended to cater to the lucrative market of Far East. To be more specific, the most of the new projects have been undertaken to capture the market of China. But the problem here is that the production of petrochemical products in Far East nations, particularly in China is increasing quite rapidly. Hence it can well be expected that most of the demand for petrochemical products in the Chinese market will be meet domestically resulting in reduction in the level of imports from countries like Saudi Arabia. If the demand for the products declines, there will be no requirement to use the new capacity at their full potential. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 7)

To address this issue effectively, the necessary step would be to look for additional market for the petrochemical products so that the surplus capacity gets absorbed. The time has come to look for non-conventional market. Realizing the need for additional market for its petrochemical products, the government owned petrochemical company SABIC is now devising a plan of opening up its market in African countries.

Shortage of Qualified Manpower: – Lack of qualified manpower is another serious issue that the petrochemical industry is dealing with. Looking at the state of skills of the labors in the labor market of Saudi, serious concern has been raised regarding whether these laborers will be appropriate for the Saudi’s petrochemical industry. The industry is dubious about the existing marketing, engineering as well as technical skills of the domestic man power of Saudi. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 7)

To improve the skills of manpower it is necessary to provide them with adequate training. Realizing this need, the government owned petrochemical company SABIC are extensively working on skill development projects. SABIC is trying to provide their existing as well as potential workers with adequate training and education programs so that their skills get enhances. But the efforts of SABIC are not sufficient enough to augment the skill of entire labor force(Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 8). SABIC has been able to realize this issue and trying to address it by making some serious efforts to become a learning organization. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 12; Layman, 35)

As part of its initiative to make it’s a learning organization, SABIC has set up a learning Center. The training center created by the company has a vision of producing the best employees for the company.

Contractor Constraints: – The petrochemical industry is also facing a major challenge raging the availability of good contractors. One major problem of this industry is that the industry is not being able to access to adequate capabilities in the areas of construction, management as well as engineering procurement. Easy access to these factors is very essential for meeting current as well as future expansion requirements of the petrochemical sector. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 12; Knott, 42)

It is now being found that with increase in the size and number of expansion in the petrochemical sector of the country, the contractor costs have increased. Not only that, there is also lack of skill and capacity among the existing contractors for meting the increasing demand.

Huge surge in the level of global demand for Saudi’s petrochemical products has resulted in increase in prices of construction materials. Today, the industry is in great need of multi-source contractors. But the problem associated with multi-source contractor is that for the purpose of multi-sourcing effectively the contractors need to generate skills in the process of management. But the existing contractors seriously lack these skills which have raised the level of risks associated with the issues of construction. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 2)

For the purpose of addressing this issue, SABIC has developed a very dedicated engineering and procurement system which has adequate experience in the areas of managing big projects.

Finance: – Under current economic scenario, the lenders are increasingly becoming risk averse and adopting a more strict view regarding market risk. As a result, gathering finance for petrochemical projects is becoming more difficult. Under such situation, the immediate need to solve the problem of financing is to look for other sources of financing. Looking at the difficulties associating with lending issue, SABIC is considering other options. It has undertaken the method of IPO for gathering finance in case of YANSAB. Not only that the company has also been utilizing Islamic lending options. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 18).

As far as the success factors of the industry are concerned, it can be said that the petrochemical industry have been able to meet the demand by expanding the production adequately. The factors that have helped in the process of expansions are availability of cheap feedstock’s, low costs labor, particularly in Middle East nations, technological innovations, and huge reserves of oil and natural gas. The industry has been successful in effectively combing all these factors.

Doha Trade Round: – The trade related decisions taken in the Doha Trade Round seems to be of immense importance for the global petrochemical industry. According to the decisions taken in Doha Trade Round, the volume of world trade of petrochemical products will increase significantly. The talks in Doha trade Round is also being expected to provide a right path for increasing the level of prosperity and reducing the level of global poverty which will in turn cause increase in demands. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 7).

The entire world is becoming more and more concern about the issue of global warming. In a number of regions efforts have been taken to reduce the level of man made CO2 emission. In near future this might impact the petrochemical industry as the industry emits huge level of CO2 in the air. Hence, the petrochemical plants have to be made in such a way that they can properly respond to this issue and undertake sufficient measure to reduce the level of CO2 emission and take other positive steps to protect the climate. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 20)

Recommendation

In view of all the challenges that the petrochemical industry faces, SABIC has undertaken certain steps to meet all these challenges. A number of strategies have been devised and they include;

  • The idea of globalization is supported by all corporate stakeholders as they increase company’s opportunities.
  • All companies should exploit internal market to optimal point before going global.
  • Each company must generate its own a large and skilled workforce.
  • Each company should generate the capability of handling global workforce simultaneously with indigenous work force.
  • A global marking network must be formed.
  • Technological innovation should be given higher priority to maintain high standard and lower costs. (Putting the Middle East at the Center of the Petrochemical Industry: Strategies for Long-term Success, 14)

I would advise these investors to keep looking into this stock until they see a positive change in its market pattern and that would be when I would advise them to purchase the stock; before its price increases higher than the average market price. My recommendation for investors holding the share of the company would be to hold on to it until they can see for certain if SABIC stocks will continue to go down and become a loss or maybe potential go back up and become profitable as they once were. After conducting my research, I believe the SABIC stock will eventually start going up again after they put into effect their plans for the upcoming year. This stock is definitely a valuable one that I would not let goes of if I owned shares in it.

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