Sumitomo Chemical bets big on Saudi petrochemical complex

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Mar. 23 -- The petrochemical complex Sumitomo Chemical Co. is building in Saudi Arabia represents the Japanese firm's biggest project in a quarter century and a risky move to stake out an independent future based on global operations, according to media reports.

The complex, due to come on stream at the end of March, is a joint venture with Saudi Aramco, the Nikkei Business Daily reported.

Sharply rising prices for raw materials has swollen the project's total cost to ¥1 trillion from the original estimate 5 years ago of ¥500 billion, the paper reported Mar. 23.

Despite the deepening global recession, Sumitomo Chemical decided to build another large petrochemical complex adjacent to the one due to start operations.

Some industry executives are skeptical about the project's long-term viability, pointing to the region's geopolitical risks, but Sumitomo sees it as a means to secure its survival amid a shrinking domestic market and intensifying international competition.

The complex, operated by the Sumitomo-Saudi joint venture Petro Rabigh Co., manufactures polyethylene and other commodity chemicals from the raw material-stage up to finished products.

The products will be exported to China, India, and Europe. Sumitomo Chemical President Hiromasa Yonekura is confident the plants will be at full capacity within 6 months.

But it has been far from smooth sailing. In addition to higher materials prices, shoddy welding was discovered on some 600 pipes, forcing a 3-month delay and costing ¥30 billion for in additional spending for repairs.

The business environment has changed dramatically. The Rabigh complex's competitive edge lies in its use of cheap ethane produced as a byproduct at oil fields as a base material, instead of naphtha.

The price difference between naphtha and ethane, however, has narrowed sharply with the collapse in oil prices to a 10:1 ratio from 30:1.

Hiroshi Hirose, Sumitomo Chemical's executive vice-president who takes the helm of the firm in April, remains unfazed by changes in the business environment, however. "Rabigh is a long-term undertaking based on a strategy looking to a future 20-30 years from now, and we don't swing between optimism and pessimism about the project," he said.

The petrochemical complex Sumitomo plans to build next will manufacture more sophisticated products after additional investment estimated at ¥300-500 billion.

A raft of new chemical complexes in the Middle East is scheduled to supplying cheap chemical products to China and other Asian markets, which currently absorb 20% of Japanese chemical exports.

Sumitomo is betting its investments in Saudi Arabia will help it survive such threats and craft a future less dependent on the domestic market.

Contact Eric Watkins at hippalus@yahoo.com.

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