Petrochemical producers in Saudi Arabia are set to face higher production costs as state-owned refiner Saudi Aramco has raised domestic ethane feedstock and fuel prices.
Aramco has raised domestic ethane prices by 43pc from $1.75/mn btu to 2.50/mn btu. The price changes took effect on 1 January. The last change in ethane prices was in December 2015 when Aramco more than doubled prices from $0.75/mn btu to 1.75/mn btu.
The rise in feedstock and fuel prices will lead to a shrinking in margins. Saudi petrochemical producers listed on Saudi Arabia's stock exchange announced the expected financial impact arising from the increase in feedstock and fuel prices. Producers reported a 0.9-3.4pc expected increase in annual costs.
Further price increments are expected. Major petrochemical producers expect ethane prices to eventually settle at either $3.50/mn btu or $1/mn btu below US ethane prices. Prices will stay below US ethane prices to give Middle East producers a feedstock cost advantage, market participants said. Many are mixed about when the next price increase will happen. Some producers expect it to happen in as soon as six months. Others expect it to be a couple of years from now. But there have not been any official indications on this.
Saudi petrochemical producers raised concerns that this could reduce their competitive advantage in export markets. A polyethylene (PE) producer said that it may no longer be able to offer cargoes at competitive prices without having its margins compromised significantly.
US PE producers have been a major competitor for Saudi PE producers in export markets. Ethane-based PE producers in the US currently have low feedstock costs as ethane extracted from shale gas has been cost-effective. The gap in offer prices for PE cargoes from Saudi Arabia and PE cargoes from the US could narrow because of this. But the effect will most likely be delayed as low water levels in the Panama Canal have limited export options for US PE producers.
Double whammy
Besides ethane, Aramco has also raised domestic diesel prices by 53pc to $0.3067/litre ($48.70/bl) effective from 1 January. It is unclear when the last price change was. Both price hikes come at an unfortunate time as tensions in the Red Sea have resulted in higher shipping costs out of Saudi Arabia. Petrochemical producers along the Red Sea have been unable to export cargoes from ports there.
To circumvent this, PE and polypropylene (PP) producers have started shipping resin via trucks from the west coast of Saudi Arabia to ports on the east coast to be exported. Trucking delivery costs have shot up sharply because of increased demand and higher diesel prices. Prices of new trucks have also sharply increased on the back of increased demand from delivery companies looking to expand their fleet, some market participants said.
Saudi producers' margins will be challenged by increased logistical costs in the kingdom, increased feedstock prices and increased shipping prices. Major shipping lines have levied war premiums on vessels entering the Red Sea, with some completely cancelling sailings through there. Freight rates for voyages from the Persian Gulf to the western hemisphere have also risen sharply. Shipping lines are diverting vessels to use the Cape of Good Hope instead of the Suez Canal. The diversion will result in longer voyage times and higher fuel costs, bolstering freight rates.
Global PE and PP demand has been tepid in recent months as macroeconomic challenges continue to keep consumer spending at bay. Saudi PE and PP producers will face difficulties in raising export prices as buyers will find it difficult to stomach. Saudi producers will have to brace themselves for squeezed margins.
