Chemical Week Magazine :: Cover Story
Sabic Grows and Diversifies
2:36 PM EST | December 3, 2010 | Natasha Alperowicz
Next year will mark the 35th anniversary of the foundation of Saudi Basic Industries Corp. (Sabic; Riyadh), a company established to add value to Saudi Arabia’s natural resources and make the Kingdom less dependent on oil exports. Until Sabic’s first petrochemical plants came onstream in the early 1980s, natural gas produced in Saudi Arabia, in association with crude oil, was flared or re-injected.
Sabic has enjoyed a meteoric rise in the relatively short period since its creation, and it ranks today among the top 10 global chemical industry players in sales terms. It is one of the fastest-growing and most profitable companies in the worldwide chemical industry. “Sabic has grown tremendously in the last three decades, from a regional Middle Eastern company to become a global leader,” vice chairman and CEO Mohamed H. Al Mady says. “Depending on whose ranking you take and which plants are included, we are between the 6th and 7th largest on a global basis.” Al Mady has led Sabic for more than 12 years.
Sabic is also the world’s largest chemical company by market capitalization, totaling SR300.75 billion ($82.4 billion) at CW press time. It overtook Reliance Industries recently to take the top position and outranks such long-established industry giants as BASF, Bayer, and DuPont.
Sabic is a public company listed on the Tadawul Stock Exchange (Riyadh). The Saudi government owns 70% of the company’s shares, and private investors in Saudi Arabia and the Gulf Cooperation Council (GCC) countries hold the rest. Its sales last year reached SR103 billion and net income topped SR9 billion. Net profits in the third quarter of 2010 soared almost 50%, to SR5.33 billion.
Sabic’s growth was initially based on manufacturing joint ventures in Saudi Arabia with Western and Japanese partners including ExxonMobil, Shell, and Mitsubishi Corp. These plants continue to benefit from attractively priced feedstock, mainly ethane, and Sabic’s partners have over the years generated high levels of profitability via their participation in the jv’s. Sabic has been increasingly striking out on its own in basic chemical markets but, as part of a previously announced diversification strategy, continues to seek partnerships with technology providers that have market expertise in downstream sectors. The company’s recent agreement with Mitsubishi Rayon to build a methyl methacrylate and polymethyl methacrylate complex in Saudi Arabia is an example of this policy.
Sabic’s long-term vision focuses on further profitable and sustainable growth, based on a doubling of sales to $60 billion/year by 2020. The company, as part of this strategy, has made major investments at home, acquired businesses in Europe and the U.S., and invested in China, and it is now in the process of diversifying its portfolio. Sabic’s diversification plans include a planned entry into the polyurethanes (PU), nylon, and rubber and elastomer businesses. The company is examining additional investment opportunities, including cooperation in selected projects with state-owned energy firm Saudi Aramco.
Major overseas investments included the 2002 acquisition of DSM’s petrochemicals business, and the purchase of Huntsman’s U.K. petrochemical assets in 2006. These two acquisitions extended Sabic’s reach into Europe through ownership of manufacturing assets at Geleen, the Netherlands; Gelsenkirchen, Germany; and Wilton, U.K.
Crew: Expanding market reach by building new polycarbonate facilities.
Sabic’s third, and by far largest overseas acquisition, was the $11.6-billion takeover of GE Plastics, since renamed Sabic Innovative Plastics, in 2007. This deal transformed Sabic into a leading producer of engineering plastics.
Sabic also ranks among the world’s leading producers of polyethylene (PE), polypropylene (PP), glycols, methanol, and fertilizers. Its major domestic manufacturing sites are at Jubail and Yanbu, Saudi Arabia, which Al Mady refers to as “our mini- Verbund,” referring to BASF’s Verbund integration concept. Sabic comprises six strategic business units (SBU): chemicals, engineering plastics, fertilizers, metals, performance chemicals, and polymers. Performance chemicals, the youngest SBU, is the main driver of Sabic’s diversification strategy. It plans to introduce more than 40 new performance products over the coming years, and by 2020 is expected to account for almost 10% of Sabic’s revenues. The performance chemicals SBU is headed by Jacobus Van Haasteren, who says that the task is a unique opportunity. “Creating growth from where we are today to that goal in 2020 is a challenging and interesting task,” he says.
Organic growth initiatives include two recently completed petrochemical complexes in Saudi Arabia and a 50-50 jv with Sinopec at Tianjin, China. The YanSab petrochemical complex came online at Yanbu last year, and earlier this year Sabic and its Japanese partners, led by Mitsubishi Corp., brought onstream an expansion of their Sharq petrochemical complex at Jubail. Sabic is also in the process of starting up the massive Saudi Kayan complex at Jubail, scheduled to be fully onstream at the end of 2011 or beginning of 2012, Al Mady says. Kayan, in which Sabic has a 35% stake, will be Saudi Arabia’s most diversified petrochemical complex and include products so far not manufactured in the Kingdom. “The first to come onstream at Kayan was the utilities plant, followed by the glycols unit, and we are finalizing the start-up of the polyethylene and polypropylene plants,” Al Mady says. Cumene, phenol, and polycarbonate (PC) units are next in line. “So we are moving in a step-wise approach where the smaller plants will be onstream toward the end of the project,” he says.
van Haasteren: Growing performance chemicals.
Construction of the Kayan complex was impacted by an overheated engineering and construction market in the last few years, which led to delays and cost overruns. Sabic has arranged loans to cover a 24% rise in construction costs on top of the original SR35.4-billion budget.
Sinopec and Sabic began commercial production earlier this year at the Tianjin jv, dubbed Sinopec Sabic Tianjin Petrochemical Co. The complex is based on a 1-million m.t./year ethylene plant and includes eight downstream facilities. The partners are already planning a further expansion. “We are contemplating adding to that complex a polycarbonate plant and are now finalizing the negotiations with Sinopec,” Al Mady says. Sabic ties with Bayer MaterialScience as the leading manufacturer of PC. The new plant in China will use Sabic’s own technology, says Charlie Crew, executive v.p. and CEO at Sabic Innovative Plastics. It will most likely be designed to produce 240,000 m.t./year of PC. “Polycarbonate is a product that is going to be very important for us as we penetrate more of the Asian market and will be able to supply product from Kayan in Jubail,” Crew says. The company is also looking for growth in PC in the Mideast, Crew says. “We will be very strategically positioned with our polycarbonate facility in the Kingdom of Saudi Arabia, which will allow us to expand our market reach in [the Mideast and] other emerging regions”.
Sabic’s 2020 growth plan, approved by the company’s board three years ago, is progressing well, Al Mady says. “The program focuses on continuous growth in the Kingdom and other countries through both organic growth and acquisitions,” he says. Sabic is focused on improving its operations through manufacturing excellence, reliability, and investing in downstream projects, he says.
The target of doubling sales by 2020 could lead to Sabic overtaking some of the current industry leaders in sales terms, depending on how those companies progress during the same period. However, size in itself is not important, Al Mady says. “The most important thing for us is to have profitable growth and to make sure that we stay focused on our vision to produce the right chemicals, sustainable chemicals…and whatever happens with the ranking, happens,” he says.
Analysts view Sabic’s growth plans positively but they say that the company will find it difficult to double in size by organic growth alone. “Until now, barring a few acquisitions, much of the growth came from capacity additions in Saudi Arabia, which relied on cheap natural gas,” says Hassan Ahmed, an analyst with Alembic Global Advisors (New York). But no new gas has been allocated to the chemical industry in Saudi Arabia since 2006 because of a shortage in the Kingdom and Sabic needs more acquisitions if it is to hit its 2020 targets, Ahmed says.
Al Mady is reluctant to discuss Sabic’s acquisition plans. “We always, through our acquisition department, review our gaps and look for possible fits, and continue to examine the right moment [to acquire businesses],” he says.
No new investments in basic chemical projects have been announced since the completion of YanSab, Sharq, and Kayan due in part to the Kingdom’s declining feedstock availability. But Sabic is “in contact with the relevant ministry for our future feedstock allocations,” Al Mady says. Sabic has to compete for feedstock against other producers and their technologies and materials, he says. “The ministry is always evaluating us vis-à-vis the competition,” Al Mady says.
Uncertainty over future basic chemical feedstock supplies means that the only way Sabic can grow is “to diversify along product and geographic lines, and diversification is the prudent strategy,” Ahmed says. The performance chemicals SBU is looking to add higher-value chemicals and polymers to the company’s product slate. Sadaf, the jv with Shell at Jubail; Kayan; and Petrokemya, a wholly owned Sabic subsidiary at Jubail, are being considered as possible sites for the PU project, which will be implemented by the performance chemicals SBU, Al Mady says. The final choice will depend on the availability of raw materials, including toluene and chlorine, both of which are available at Sadaf, for example, he says. The project, expected to be implemented as a jv with a technology provider, will comprise isocyanates and polyols manufacturing facilities and a PU systems house. “Polyurethane is important for Sabic and we are in the process of finalizing the project’s details,” Al Mady says.
The Sadaf jv is the first and one of the largest original Sabic complexes, and the partners are seeking growth opportunities on several fronts, Al Mady says. “The leadership at Shell is very keen to grow the company and I have no doubt that this is in their strategic plans, and we are working together to find the right opportunity for us to grow Sadaf,” he says. “We are studying with them polyurethanes, alpha-olefins, and other chemical projects.”
Sabic is also eager to cooperate with Aramco. Before Aramco selected Dow Chemical as its partner in the Ras Tanura petrochemicals mega-project, since relocated to Jubail, Sabic expressed an interest in participating in the complex. “We continue to discuss with Saudi Aramco opportunities for integrating our skills in petrochemicals with their skills in refining on a worldwide basis and complementing each other in this arena,” Al Mady says. Aramco selected Sabic as the marketer of Aramco’s share of polyolefins from the recently completed Fujian Refining and Petrochemicals complex at Quanzhou, China. The complex is a jv among Sinopec, Aramco, and ExxonMobil.
There are possibly two additional opportunities for Sabic to cooperate with Aramco. They are an export-oriented refinery project at Yanbu, which ConocoPhillips exited earlier this year and a proposed refinery at Jizan in the south of Saudi Arabia, which originally included a PP plant. However, Sabic has not discussed the Yanbu refinery with Aramco and it would not be interested in venturing outside its Jubail or Yanbu hubs to a location such as Jizan, Al Mady says. “We are strong in the Jubail and Yanbu areas because of the existing infrastructure,” he says. “Once you depart from those cities, you pay a premium.”
Sabic’s elastomers project would be a jv with ExxonMobil. The companies are finalizing details of the elastomers project, which has been delayed, and they are due to make a final decision early next year on whether to proceed. “It is a huge complex and has yet to be approved by the boards of directors of ExxonMobil and Sabic,” Al Mady says. The delay has allowed the project to be optimized and engineering, procurement, and construction costs reduced.
Sabic is pursuing other growth opportunities outside Saudi Arabia, including in China and Europe. “We have introduced our high-density bi-modal PE at a plant at Gelsenkirchen, and have commissioned a low-density polyethylene plant at Wilton,” Al Mady says. Sabic Innovative Plastics opened its second polyetherimide resin plant at Cartagena, Spain recently. Sabic is planning to build compounding facilities for PP and PC in China.
Diversification will make Sabic less vulnerable to commodity chemical market cyclicality, analysts say. “The main strength that Sabic has, apart from a global distribution network and scale, is its access to very cheap feedstock, which makes it among the lowest-cost commodity chemical producers,” Ahmed says. “The way to address cyclicality is to start delving into high-margin and less cyclical specialty chemical product areas.” Ahmed sees two main challenges facing Sabic: achieving its growth targets while not overpaying for acquisitions, and expanding its commodity chemical footprint without sacrificing its low-cost position.
Sustainability has a major role to play in Sabic’s expansion plans. “As part of our innovation and growth, we are introducing products that will not only help Sabic but also its customers sell products that are sustainable,” Al Mady says. “We are also reducing our carbon footprint around the world.” These innovative products include fuel-efficient and recyclable materials, as well as weight-reducing products, particularly for automotive applications. “Our innovative materials and our design support help customers reduce weight and enable systems integration for lower cost.”
Sabic’s emphasis on natural gas feedstock also helps the company to reduce its environmental footprint, Al Mady says. Natural gas is “better than using coal or oil in the first place,” he says. “Secondly, we are reviewing all our manufacturing steps and identifying areas for improvement.” Sabic has new technology to convert CO2emissions from glycol manufacture and is using CO2 emissions from fertilizer plants to make other products. “There are many things we have done in the past, which make Sabic one of the most sustainable companies, in the [Mideast] area at least,” Al Mady says. “But we aspire to continue with our sustainable growth through profitable, sustainable projects.”
Several of Sabic’s targets for 2020 are still being defined, but the company has a clear path covering the next five years, Al Mady says. “We will continue our growth in performance chemicals and with debottlenecking our plants; and at the same time look for opportunities in and outside the Kingdom,” he says. “We hope we can maintain our growth that we have demonstrated in the last few years.”
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