- By Region
It is one of the world’s biggest companies, and one of the Gulf’s few global corporate players. But few users of products made by Saudi Arabian Basic Industries Company would know, or care, of the workings of the state-backed petrochemicals conglomerate.
Tapping away on their BlackBerry phone or cruising in a Range Rover, most are oblivious to the fact that the plastics, metals and chemicals used to create their favourite toys can be traced to the Riyadh-based company known as Sabic
. From the luxurious to the banal, its products are used for everything from the majority of milk cartons in the UK to fertilisers in India.
And beyond its size and reach, Sabic represents one of the largest and most ambitious experiments by Gulf states to transform the use of vast energy reserves in a broader and deeper economy. While its smaller neighbours develop gleaming hotels and financial centres, Saudi Arabia is making what many onlookers consider a shrewd move with Sabic.
“Diversification is more than diversifying out of the hydrocarbon industry; it’s also about diversifying within it,” says Farouk Soussa, the chief regional economist at Citigroup in Dubai. “It’s become increasingly clear that not everyone can be the financial hub, the tourism hub, the travel hub.”
While success in attracting luxury hotels, corporate offices or international events is easily understood by domestic and international audiences, building a global producer of chemicals and plastics has less public allure. Sabic, as it seeks to develop its public profile, aims to address that with a relaunched brand, built around the tagline “Chemistry that matters”.
The slogan, which tries to emphasise the importance of its products in everyday life, replaced “Sharing our futures”, a phrase that sufficed for Sabic’s acquisitive period of the past decade. That in turn succeeded “Power to provide” as the company sought to prove it could become an international player.
Since its formation by royal decree in 1976 as a venture tasked with using the natural gas created as a byproduct of oil production, Sabic’s growth has been impressive. With total assets of about $89bn and 40,000 employees, it is the 88th largest company in the world, according to Forbes, with a market capitalisation of more than $73bn.
The government owns 70 per cent of the company’s shares, which are traded on the Saudi stock exchange, open to ownership by private investors from Saudi Arabia and the Gulf states. The kingdom’s stock market is closed to the rest of the world, but discussions are under way to change this.
In that transition, Sabic, the largest public company in the Arab world, will probably tickle the fancy of international institutional investors, analysts say. When that happens, its image and brand will take on a new significance.
This year, the company’s shares have fallen 6 per cent to SR92 ($24.5). Sabic posted a SR7.3bn profit in the first quarter, a 5 per cent decrease from the same period a year ago.
The drop was caused by lower demand from China, highlighting that as the company has grown geographically, its exposure to global demand fluctuations has increased, making its performance closely connected to that of the world economy. Although prices also affect profits, it is rising production volumes that remain the focus for equity analysts.
Those analysts point to a fresh challenge. As domestic gas consumption increases in Saudi Arabia and competition for the gas becomes tougher, Sabic will have to look further afield or develop more efficient ways to use it. Dow Chemical, a US competitor, signed a $20bn deal with Saudi Arabia’s Aramco last year to build a petrochemical complex in the industrial city of Jubail.
“The mandate was to convert gas into cash – the question going forward is what next, now that the gas is spoken for?” asks Sriharsha Pappu, director of chemical research at HSBC in Dubai.
Analysts wonder whether Sabic will respond with a spending spree abroad, adding to its three leading international acquisitions over the past 10 years. They also say the company may look to invest more in the US, where the shale gas revolution offers good prospects.
With three large projects recently coming online, Sabic could end up searching for new opportunities to invest its growing cash pile in. “Every chemical banker in the world has probably gone to Riyadh and pitched deals to them,” says Mr Pappu.
Sabic started its significant international acquisitions in 2002 with the purchase of DSM Petrochemicals, expanding its business into Germany and the Netherlands. It then went on to acquire Huntsman’s European base chemical business.
In 2007 the company captured international attention with the $11.6bn acquisition of GE Plastics, one of the biggest acquisition deals from the region. More recently Sabic has expanded in China through a joint venture with Sinopec.
With the government as the main shareholder, how Sabic’s state mandate develops will be crucial to the company’s next decade. How it looks to secure its future feedstock will determine where its tentacles are likely to spread, particularly in an era when natural gas is becoming abundant in parts of the world barely on the production map when the company was founded.
Citi’s Mr Soussa adds: “There’s a real risk there, that the Gulf doesn’t have such a great gas advantage that it thought it did.”