Saudi Arabia's $35 bil of petchem investments in China may be affected by coronavirus: GPCA

Saudi Arabia's plan to go ahead with $35 billion of petrochemicals investments in China "remains to be seen" as the world's second largest economy is only starting to resume business after the outbreak of the coronavirus pandemic, the secretary general of the Gulf Petrochemicals and Chemicals Association told S&P Global Platts.

"Saudi Arabia has invested or is planning to invest about $35 billion in projects in China, with production capacity reaching 7.5 million tons in chemicals, which accounts for 45% of total overseas production capacity of Saudi producers overseas," Abdulwahab al-Sadoun of the Dubai-based GPCA said in response to written questions. "It remains to be seen how these investments will be affected, as the impact of the virus evolves. What remains to be seen is whether there will be a secondary wave of infections when the country fully gets back to work."

Several Saudi companies, including Saudi Aramco and Saudi Basic Industries Corp. (SABIC) have petrochemical investments in China, where demand for these products was set to rise before the coronavirus epidemic.

Aramco, which already has a joint venture refining and petrochemical complex in China in partnership with ExxonMobil and Fujian Petrochemical Co., in February last year signed two deals for further petrochemical investments in China.

One agreement was to form a $10 billion joint venture with China North Industries Group (Norinco) and Panjin Sincen to develop a refining and petrochemical complex, located in the city of Panjin. Aramco also inked a deal to acquire a 9% stake in Zhejiang Petrochemical's 800,000 b/d refinery and petrochemical complex, located in the city of Zhoushan.

SABIC, which is being acquired by Aramco, generates at least 20% of its global sales revenue from China, where it has a petrochemical joint venture with Sinopec in Tianjin.

Slowing industries

Chinese industries, including those using petrochemicals, were being hit as the virus spread. China's industrial production in the January-February period slumped 13.5% year-on-year to a 30-year low, according to the National Bureau of Statistics. China's exports of key finished or semi-finished petrochemical products to the US made from polyester, polyethylene, polystyrene and acrylonitrile butadiene styrene, or ABS, will fall in the first quarter, according to trade data from Panjiva.

Shipment estimates for Q1 suggest polyester goods from China to the US will fall an estimated 30% year-on-year, after adjusting for typical seasonal lulls during the Lunar New Year, according to the data. ABS goods are also set to fall 30% over the same period, while polyethylene goods, which were on an uptrend in Q4 of last year before coronavirus began to spread, will dip 10%.

All of this downturn will hurt Saudi and other Gulf petrochemical production, the majority of which goes to Asia.

The six countries in the Gulf Cooperation Council (Saudi Arabia, UAE, Bahrain, Kuwait, Qatar and Oman) are forecast to have petrochemicals production capacity of 177 million mt/year this year vs 175.1 million mt/year in 2019, according to GPCA.

"Output growth has already slowed down in 2019 and is not expected to witness any new major projects coming on stream during 2020," Sadoun said. "This is driven by a gradual shift of producers' focus from capacity expansions towards cash reservation and optimization of operations."

Competitive edge

GCC petrochemical producers are expected to keep their edge in Asia for some of their products despite the narrowing of prices between ethane, the feedstock for Gulf firms, and naphtha, the feedstock for their Asian and European peers, he said.

Lower oil prices mean that crude byproduct naphtha is cheap now, compared with ethane, the use of which has made Gulf petrochemical makers low-cost producers.

"Although the cost advantage of ethane-based producers is narrowing, I still see GCC producers maintain their cost competitiveness on key petrochemical products in Asia in the near future," Sadoun said.

The products that Gulf producers might have a competitive edge in Asia include ethylene derivatives, he said.

Lower feedstock prices will be coupled with low petrochemical prices, which typically mimic oil prices.

Sadoun is forecasting petrochemical prices will be lower in 2020, compared with 2019 prices, because demand will take time to recover to pre-coronavirus levels.

"The global chemical sector should prepare for an extended downturn along with lower-for-longer oil prices," Sadoun said. "I see global petrochemical prices in 2020 to be on average about 40-50% lower than prices in the previous year. Although recovery will eventually start, I do not foresee prices to come back to the pre-COVID-19 period and will remain about 30% lower [than 2019 prices] throughout 2021."

(Corrects year when prices will drop.)