The proposed stake sale of Sabic, the region's biggest chemicals manufacturer, to the world's top oil producing company Saudi Aramco is expected to set into motion more consolidation in the regional industry, analysts said.
"If Aramco acquires a substantial stake in Sabic, a new consolidation will emerge in the Saudi petrochemicals sector," said Ehsan Khoman, head of Mena research and strategy at Japan's MUFG Bank. "In turn, there will be a requirement to revisit the existing Aramco and Sabic joint ventures currently prevailing, as these will be impacted by reassessments or ongoing amendments.”
Aramco last month said it was in talks to acquire a stake in Sabic as the state-owned oil company looks to become a more integrated energy player. Aramco, the primary feedstock supplier for Sabic, has already partnered with it to develop a $20 billion venture to process oil into chemicals on the kingdom's Red Sea coast.
Aramco, whose domestic petchems ventures include partnerships with Dow Chemicals as well as with France's Total in Jubail, has increasingly looked to streamline its downstream portfolio in the country.
The acquisition comes at a time when Aramco's earlier plans to float 5 per cent of its shares has taken a back seat to successfully integrate Sabic, Saudi Arabia's largest listed company.
MUFG has placed the value of an acquisition of a Sabic stake at about $70bn, establishing Aramco as a "strong downstream entity" with considerable implications for the petchems space and upcoming projects, said Mr Khoman.
The deal will also allow Aramco access to Sabic’s European market base and is viewed as a “a direct support for the ongoing market share consolidation in Europe”, he said.
Banks interested in the Aramco IPO, touted to be the world's largest with an estimated listing value of $100bn, are expected to take interest in assets under Aramco and Sabic, as well as the larger regional chemicals sector.
The integration of the region’s biggest upstream and downstream players is likely to whet the appetite of financiers towards the Arabian Gulf’s petchems sector, said Mazen Al Sudairi, head of research at Al Rajhi Capital, the investment arm of Al Rajhi bank, the kingdom's biggest lender by market value.
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“Many banks would like to open doors with Aramco and invest in petrochemicals,” said Mr Al Sudairi.
“Big investments in petrochemicals are few. The reason is that it takes time to build, so every year we have two to three projects and some of them are delayed, so many banks keep following [the sector],” he said.
The payback time for the petchems sector was lower than for the mining industry, translating into more sustained earnings for banks, said Mr Al Sudairi.
The integration of Sabic with Aramco, which analysts expect to close before the end of the year, is likely to spur the merger of downstream players with national oil companies across the GCC, according to analysts.
Petchems contributed to about $43.8bn (Dh161bn) to GCC economies in 2016 alone, according to the Gulf Petrochemicals and Chemicals Association, the sector's regional representative body.
Development of petchem projects has accelerated in the GCC over the past couple of years as national oil companies fine-tune plans to generate more value from their crude grades.
“In the near and long term, regional players have started to invest in developing large-scale integrated plants both domestically and abroad, in order to diversify their product offering and compete with global players, predominantly in the US and Europe,” said Mr Khoman.
“As such, regional petrochemicals firms are currently shifting their strategies towards producing high-value products in order to meet changing market demands."