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PetrochemicalsCost advantage fuelling growthKSA’s petrochemical industry, concentrated mainly in the industrial cities of Jubail and Yanbu, isone of the heavy weight sectors of the KSA economy. The Saudi petrochemical sector hasgrown from one company (KSA Fertilizers) in 1965 to 13 listed companies in 2008. At present,Saudi Basic Industries Co (SABIC) is the largest petrochemical company in the sector with anestimated capacity of approximately 44mn tons (mt) per annum (as of 2008). Historically, robustdemand for petrochemical products has helped the sector sustain growth. Since inception, theSaudi petrochemicals industry has received several incentives from the Government; the mostimportant being low-cost raw material, giving KSA companies an edge over their global peers.KSA operates from a position of significant strength in the GCC petrochemical industry,accounting for majority of the region’s petrochemical production. By 2010-end, KSA, whichholds close to 21% of the world’s proven oil reserves, is expected to meet around 13% ofthe global demand for petrochemical products, increasing from 8% in 2006. KSA alsopossesses gas reserves of 253 trillion cubic feet and ranks fourth in the world after Russia, Iranand Qatar. Natural gas produced in KSA is priced at USD0.75 per mmbtu, much lower than theglobal price of USD4-5 per mmbtu, and the Kingdom benefits from its low feedstock cost.Saudi petrochemical sectorenjoys an absolute feedstockadvantage, relatively youngcracker fleet and economies ofscaleTo capitalize on the feedstock advantage, GCC petrochemical players undertook significantcapacity expansion plans. Total petrochemical projects worth USD114bn are currently underprogressor planned in the GCC, of which, 54% are in KSA (MEED Projects). Some of theseprojects are under renegotiation, due to the decline in commodity prices in 2H-08.Petrochemical companies in KSA also enjoy a dual pricing system under the country’sagreement with the WTO. This has helped these companies to get superior prices for theirproducts in the international market, thus lifting overall profitability.However, the global petrochemical sector is currently facing a downtrend. Lower demand forpetrochemical products in both developed and developing nations has depressed utilizationrates. We believe that the Saudi petrochemical sector is on a better platform, compared withglobal peers, due to its absolute feedstock advantage, relatively young cracker fleet, and anexpanded production base offering economies of scale.Exhibit 52 shows the 13 companies comprising the petrochemical sub-index of TadawulExhibit 52: Sector details% weight inIndex as onDec 2008*Avg. NPM (%),1Q05 – 4Q08*Avg. RoE (%),2005 – 2008*Saudi Basic Industries Corp (SABIC) 16.71 20.8 29.9KSA Fertilizers Co (SAFCO) 2.43 65.0 37.9Saudi Industrial Investment Group (SIIG) 0.49 33.7 14.5Sahara Petrochemical 0.24 NM 5.5Yanbu National Petrochemical Company (YANSAB) 0.90 NM 7.4Nama Chemicals 0.12 5.7 3.1Saudi International Petrochemical Co (Sipchem) 0.56 37.3 20.6National Industrialization Co (NIC) 0.65 17.4 15.4Alujain Corporation 0.08 NM (4.0)Advanced Polypropylene Company 0.24 12.6 7.0Saudi Kayan Petrochemical Company 1.58 NM 1.1Rabigh Refining and Petrochemical Co 1.47 NM (16.5)Chemanol 0.15 5.8 3.7Source: Bloomberg, Saudi Stock Exchange (Tadawul), Reuters* start period may differ based on availability of dataJUNE 2009SAUDI ARABIA FACTBOOK46