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Will entry in WTO compel Saudi Arabia high cost producers to exit from the petrochemical b ...
After 12 years of waiting, Saudi Arabia will finally become a part of WTO very soon.Overall, the WTO membership requires for a lowering of tariffs and subsidies on a wide range of goods and services.

It is largely believed that the Saudi accession to the WTO will further enhance the competitive advantages enjoyed by the Saudi petrochemical industry and strengthen its position in the international market. However, the full impact of WTO on the industry will not be observed immediately.

On the benefits side, the removal of trade barriers called for by WTO bylaws will allow Saudi petrochemical producers to offer lower prices to tariff-protected markets, such as the EU, US and Japanese markets. The tariff reduction in these economies may induce a sizeable increase in Saudi petrochemical exports to those economies, depending on the response of supply and demand to the lower prices resulting from tariff reduction. For instance, tariffs on polymers (polyethylene, polystyrene, poly vinyl chloride, polypropylene) in the EU are to be slashed to half, from 12.5% to 6.5%. As a result, it will be difficult for high-cost producers in these economies to meet lower market prices caused by the tariff reductions. In the short-run, they may reduce production levels and possibly sell at a lower profit margin or at a loss. The petrochemical output in these economies may thus decline less proportionately than prices. In the long run, high-cost producers will exit the industry and thereby reduce the number of producers. Inversely, the increase in demand caused by lower prices will benefit Saudi petrochemical exports.

In return, Saudi Arabia has to lower its own tariffs and open its market to imported petrochemical products. The tariffs on key secondary petrochemicals, such as polyethylene, polypropylene and polystyrene, are at present set at 12%, with a provision that it be reduced to 8% within an interim period ending in the year 2008, followed by a second interim period ending in year 2010, by which time the tariff will drop to 6.5%. Though the volume of imported polymers is small, the tariff reduction may induce a strong competition among petrochemical producers as they seek to secure a share in the domestic market.
This may result in a pricing ramification leading to narrow profit margins on local sales. The petrochemical producers may thus need to focus attention on regularly reducing their production costs and ensuring that their product qualities match or exceed the world standards. Given the strong competitive advantage enjoyed by the Saudi producers, it is likely that they will meet the competitive challenges and retain their market share in the domestic market.

The downstream petrochemical industries in the Kingdom stand to benefit from the expanded markets caused by lower prices. However, the Kingdom is committed to reduce the tariffs on processed plastic imports, from a ceiling of 20% to 6.5% over an interim period ending in 2010. This may increase the imports of finished plastic products from lower cost Asian producers, including China. However, the WTO provisions allow the developing countries to restrict their imports in order to protect their infant industries if imports from particular countries increase disproportionately. The downstream industries will need to restructure, with the small players consolidating and merging to reach a critical mass, which is essential for competitiveness in domestic and global markets alike.

The key accomplishment of Saudi Arabia with respect to the accession to the WTO of its petrochemical industry is perhaps the fact that the accession has been achieved without compromising on the current feedstock pricing, which underlies its strong competitive advantage.
This accomplishment is by far more important to the petrochemical industry than the impact of tariff-reduction in protected economies for two main reasons, namely - more than 50% of the Saudi petrochemical exports are destined to non-tariff-protected Asian markets and that the competitiveness of the Saudi petrochemicals industry depends primarily on competitively priced feedstock, which represent as much as 60% of the integrated cash cost in the industry.

This will expedite the pace of the on-going shift in the center of gravity of the global petrochemical industry toward the most cost efficient areas with close proximity to markets. Saudi Arabia is rapidly emerging as a global petrochemical hub and the premier location for future investment in the petrochemical industry.

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