DUBAI (Bloomberg) -- Record energy prices and rising construction costs will hurt chemical companies’ profits next year, giving advantage to low-cost producers in the Middle East, the heads of Saudi Basic Industries Corp. and Reliance Industries Ltd. said yesterday.

The Middle East will become home to petrochemicals “super sites” that use economies of scale and cheap energy to build a “silk route” of supply to Asia, India-based Reliance Chairman Mukesh Ambani told a chemical conference in Dubai. Indian chemicals demand will quadruple in the next ten years, he said.
Increased chemicals use in developing economies is spurring construction of plants in the Middle East to turn gas and refined oil products into ethylene, the building block for plastics. Saudi Basic, the world’s biggest chemicals maker by market value, gets feedstock from state-owned Saudi Aramco, the biggest oil company, giving it cheaper raw materials than European and U.S. rivals such as Dow Chemical Co.
Ethane, a gas produced in association with oil, is used to make as much as 70 percent of the ethylene made in Saudi Arabia, according to Mizuho Securities Co. research. The ethane price in Saudi Arabia has been capped at 75 cents per million British thermal units since 1998, Samuel Liew, a consultant at Chemical Market Associates, said Nov. 13. That translates into a production cost of between $150 and $200 per ton of ethylene.
Plants that use naphtha as feedstock in Asia, Western Europe and North America had production costs of between $580 and $650 for each ton of ethylene last year, according to Liew.
----------------------------- U.S. can’t compete
“I don’t see how the American and European chemicals companies can compete,” said Peter Huntsman, chief executive officer of Huntsman Corp., when asked in Dubai yesterday about the impact of the widening difference in naphtha and ethane costs on petrochemicals companies.
Salt Lake City, Utah-based Huntsman is the world’s biggest producer of polyetheramine, a specialty chemical used to make epoxy coatings, fuel additives, and herbicides. It sold its commodity chemicals business to Apollo Management LP for $6.54 billion in October.
Chemicals companies are building too much new capacity as costs go “through the roof”, making it more difficult for them to earn “acceptable returns,” Saudi Basic Chief Executive Officer Mohamed al-Mady said at the Dubai conference.
Reliance Industries, India’s largest company by market value, plans to spend $24 billion over the next ten years on petrochemicals projects in the Middle East, Dubai-based Gulf News reported yesterday, citing Ambani.
“The feedstock advantage will continue in this region,” Hamad al-Terkait, chief executive officer of Equate Petrochemical Co., said in an interview in Dubai yesterday.