Rabigh Refining & Petrochemical Co. (2380.SE)

The Chinese government has undertaken certain initiatives to revive the industry. During January2009, China’s state council approved a stimulus package of approximately RMB 500 billion (USD 73billion) to ensure scheduled commission of planned capacity additions, in order to revive the localindustry. This initiative will likely reduce chemical imports to 17 mmt in 2011 from 20 mmt in 2007.CompanySinopec (includingjoint ventures)Fujian UnitedPetrochemicalShanghai SeccoPetrochemicalChina Cracker Expansion Plans, ’000 tonnes2009 2010Project locationexpansion expansion2011expansionStart-uptimeFujian, SouthChina800 - - 1H 2009Shanghai, EastChina300 - - Aug-09Tianjin PetrochemicalTianjin, NorthChina1,000 - - Sep-09Zhenhai Refinery and Zhejiang, EastPetrochemical China1,000 - - Oct-09GuangzhouGuangdong, EastPlanning- - 1,000Petrochemical ChinaboardWuhanHubei, CentralPlanning- - 800Petrochemical ChinaboardPetroChinaDushanziXinjiang,Petrochemical Northwest China1,000 - - 1Q 2009Panjin PetrochemicalLiaoning,Northeast China450 - - Oct-09FushunLiaoning,Planning- 800 -Petrochemical Northeast ChinaboardSichuanSichuan,Planning- - 800Petrochemical Southwest ChinaboardDaqingHeilongjiang,Planning- 600 -Petrochemical Northeast ChinaboardTotal New Capacity 4,550 1,400 2,600Source: CBI Research & ConsultingGlobal turmoil leads toweak demand, overcapacity aggravatessituationThe demand for petrochemicals has remained weak given the ongoing financial turmoil. This in turnhas led to the closure of production facilities, delays in capacity addition plans and industry-widemerger and acquisition activity. Capacity additions have been facing delays or postponement mainly inthe financing and engineering stages with tightened credit availability. The liquidity crunch has alreadyforced Qatar Petroleum and Korea-based Honam Petrochemical to defer a joint cracker andderivatives project. Saudi Aramco and Dow Chemical-operated Ras Tanura project, estimated at USD26 billion and touted as the biggest petrochemical project in the sector is faced with apprehensionsregarding the scheduled completion in 2014. While decline in feedstock costs has improvedprofitability for producers, the weak demand scenario has kept a check on the volumes of businessgenerated. However, on a positive note, the demand situation is expected to improve in the mediumterm. Petrochemical prices, which have already seen multi-year lows, have been slowly, but definitely,recovering.On the other hand, with a decline in construction costs, petrochemical players are renegotiatingcontracts with their engineering partners. Saudi Aramco decided to renegotiate contracts for its giantManifa oilfield development project towards the end of 2008. Apart from this, the present situation isbelieved to be throwing up an array of consolidation and merger opportunities with the Middle Eastbeing considered a potential buyer for distressed assets across Asian and European petrochemicalcompanies. In February 2009, Abu Dhabi’s sovereign wealth fund IPIC agreed to acquire CanadabasedNOVA Chemicals for USD 2.3 billion, including the debt assumption. In another development,Sabic and Sipchem have signed an MoU to work together on new projects worth USD 4 billion usingSipchem’s government allocation of feedstock ethane. Further, the companies are also takingpreparatory steps towards streamlining operational efficiencies, enhancing vertical integration,reducing capacity and realigning portfolios to focus on core businesses and see through this globalturmoil.