Chemical Week - November 4/11
Saudi PP expansion faces headwinds
Jiryes Haddadin 2024-11-08 07:07:50
Weak demand, oversupply dampen short-term prospects for new projects
Saudi Arabia is set to significantly increase its polypropylene (PP) production capacity with three major projects in the pipeline totalling 1.45 million metric tons per year. However, finding a market for the additional capacity seems increasingly difficult given the petrochemical industry’s current global challenges.
The largest of the projects, initially announced in December 2022, is led by Advanced Polyolefins Industry Co., a joint venture between Advanced Global Investment Co. and SK Gas Petrochemical Pte., a subsidiary of South Korea’s SK Gas Co. Located at Jubail, the facility is scheduled to be online by the end of this year. It aims to produce 843,000 metric tons of propylene and 800,000 metric tons of PP annually.
In August this year, Sahara International Petrochemical Co. (Sipchem) announced that its affiliate, Al-Waha Petrochemical Co., would expand the production capacities of its propylene and PP plants by 72,000 metric tons per year and 150,000 metric tons per year, respectively. Also located at Jubail and expected to be completed by the fourth quarter of 2026, the project will increase the affiliate’s total annual production capacity to 537,000 metric tons for propylene and 600,000 metric tons for PP.
A third significant project involves the National Petrochemical Industrial Co. (Natpet) JV between LyondellBasell Industries NV and Alujain National Industrial Co., first announced in May 2023 by Alujain, with an estimated total investment of about $2 billion. The JV plans to build a propane dehydrogenation (PDH) and PP facility at its Yanbu site. The planned facility is expected to produce 600,000 metric tons of propylene and 500,000 metric tons of PP annually.
A front-end engineering and design (FEED) phase by Samsung Engineering Co. was completed earlier this year, with the project targeted for completion by mid-2026, pending a final investment decision.
Alujain confirmed in a Saudi stock exchange announcement on Oct. 31 that the FEED had been completed and that the company expected to start the “initial construction implementation phase” of the PDH and PP project during the fourth quarter of this year. It has so far invested approximately 520 million Saudi riyals ($139 million) in developing the project, it said.
Natpet currently has a nameplate PP production capacity of approximately 400,000 metric tons per year. LyondellBasell’s Spheripol PP technology is used at Natpet’s existing plants.
Despite the wave of new capacity that is due online, global polymer demand — particularly in key export destinations for Saudi Arabia — has been weak throughout the year. A Europe-based producer told S&P Global Commodity Insights that he does not expect demand to recover quickly. He noted that while the market could see an upswing in the first quarter of 2025, traditionally a better period for demand, “the oversupply is here to stay in 2025.”
Export market challenges
Turkey, Saudi Arabia’s top export destination, faces economic challenges with high inflation, elevated interest rates and a depreciating currency.
According to the national statistics office Turkstat, Turkey’s annual inflation rate hit 49.38% in September, down from its 2024 peak of 75.45% in May, but still high enough for it to be “killing” demand, as one trader noted.
Since January, the Turkish lira’s value has depreciated by 16%, reaching 34.12 lira against the dollar in October, eroding purchasing power and increasing import costs. Despite a weaker lira typically boosting exports to Europe, rising inflation has forced manufacturers to raise prices, weakening Turkish products’ competitiveness in Europe, according to a market participant.
On Oct. 17, Turkey’s central bank kept interest rates at 50%, citing ongoing inflationary risks and uncertainty about the pace of improvement. These high rates have strained businesses dependent on credit, according to sources cited by Commodity Insights. Consequently, Turkish PP imports year to date have dropped 8.56%, to 1.27 million metric tons (MMt), compared with 1.39 MMt over the same period last year, according to Turkstat.
In addition to the poor demand in Turkey, Egypt — the third most popular Saudi export destination, according to Commodity Insights data — has faced significant economic challenges, impeding local demand.
Since the start of the year, the Egyptian currency has lost approximately 31% of its value, standing at 48.63 Egyptian pounds against the US dollar. According to Egypt’s Central Agency for Public Mobilization and Statistics, the country’s annual inflation rate stood at 26.4% in September. An Egyptian plastics converter said that the currency depreciation, coupled with high inflation, has eroded consumers’ purchasing power, increased the cost of imports and decreased demand for end products.
Against the global backdrop of oversupply and weak demand, Nigeria’s Dangote Refinery announced that it would start up its new petrochemical complex in October, including 830,000 metric tons of homopolymer PP grades annually. Given the substantial production capacity, it is likely that the new petrochemicals complex will supply other nearby markets in Africa, further increasing competition for Saudi-based polymer producers.
“In terms of new capacity in the Middle East, there will be competition. We see polypropylene in a trough until 2028–29, but after that point we see the rate of investment slow down, which could help operating rates. But for the short term, there is oversupply, although things in the short term can change very quickly,” said Moveed Fazail, director/polymers analytics at Commodity Insights.
Vision 2030 driving expansion
Despite the current market headwinds, Saudi Arabia’s PP expansion aligns with the kingdom’s Vision 2030 objectives of diversifying its economy and reducing dependence on oil revenue.
A key element of the strategy is a recently introduced quota system by the Saudi Ministry of Energy, which mandates that a portion of domestically produced PP be sold at competitive prices to local converters. Introduced in January initially for PP raffia, the quota price has since been adjusted to include other grades such as biaxially oriented PP and PP copolymer. The pricing mechanism is designed to support downstream industries by providing them with affordable raw materials, enabling them to remain competitive locally and internationally.
The purpose of the quota is twofold: to bolster the cost position of domestic converters and to stimulate growth in the kingdom’s downstream manufacturing sector, a key pillar of the Vision 2030 strategy. By ensuring lower costs for domestic consumers, the quota system provides a significant advantage to converters, enabling them to optimize their margins and compete more effectively on a global scale.
However, this comes at a cost to producers, who are required to allocate a fixed amount of their output to the domestic market at prices lower than they might fetch in export markets. Many producers have expressed concerns that fulfilling these quotas limits their ability to sell excess volumes abroad, potentially squeezing margins at a time when they are expanding capacity to meet domestic and international demand.
In the long term, while the quota system may temporarily impact producer profitability, it is expected to strengthen Saudi Arabia’s competitive edge in global manufacturing by nurturing a robust downstream sector and attracting foreign investment — a core objective of Vision 2030.
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