New additions to capacity are set to send Middle East ethylene volumes soaring over the next two years. Philip Leighton says there is a market for the new capacity but it is going to be a more competitive one, increasing the incentives to produce more sophisticated grades

The next two years will see a wave of new petrochemicals capacity in the Gulf region. The major new investments are large integrated complexes built around ethylene plants - also known as steam crackers. The ethylene plant provides the basic petrochemical raw material, ethylene, which is the building block for a host of other petrochemicals. Ethylene is the major petrochemical produced globally with consumption exceeding 83 million tonnes in 1999.

At present, six ethylene complexes are under construction in the region, of which three are in Saudi Arabia. Together these will add almost 4 million tonnes to the region's ethylene capacity. This will be a dramatic step change in capacity for the entire Middle East region, raising ethylene capacity from just over 6 million tonnes at the end of 1999 to over 10 million tonnes by the end of 2002. Plans exist for further capacity additions in most of these countries.

In Saudi Arabia, Saudi Basic Industries Corporation (Sabic) has recently announced plans for two further steam crackers: one at Jubail and one at Yanbu. These are each expected to have the capacity to produce at least 800,000 tonnes a year of ethylene. Qatar General Petroleum Corporation has plans for a new ethylene centre at Ras Laffan and has had joint venture discussions with Nova Corporation of Canada. In Iran, the eighth olefins centre looks set to include Shell and Elenac, its polyethylene joint venture with BASF, and there are discussions for creating a ninth olefins centre. In Kuwait, there are also tentative plans for a new cracker. All of these projects are scheduled, if they proceed, to come on line by 2004/05.

The justification for all of this investment remains the Middle East's pre-eminent position as the world's lowest production cost region for ethylene and ethylene derivatives. The low production cost is mostly based on the availability of ethane feedstock from associated gas production. This ethane has a low alternative value and can be attractively priced to petrochemical producers.

Additionally, Saudi Arabia has provided a further incentive to petrochemical production by granting a 30 per cent discount from the lowest quarterly export price for natural gas liquids (NGL) - propane, butane and condensate - used for petrochemical production in the country. This has led to the building of four ethylene crackers - the three in construction plus Petrokemya II - based on NGL feed. The first three crackers in Saudi Arabia and the crackers in Qatar, Kuwait and the UAE all use, or will use, ethane feedstock only.

It is important to realise that the Middle East exports almost all of its ethylene in the form of derivatives rather than directly as ethylene. This is because ethylene is difficult to transport over large distances, requiring cryogenic import and export facilities and dedicated ethylene ships. The market for shipments of ethylene is therefore relatively small.

While there is expected to be some increase in ethylene trade, this is expected not to exceed 200,000 tonnes, which is around 5 per cent of the capacity being added. Around 95 per cent of the ethylene will be converted into ethylene derivatives, which in turn will be exported.

Almost 70 per cent of the ethylene produced on these new complexes will be converted to polyethylene for export. However, polyethylene will only account for 55 per cent of actual export tonnes, as the other ethylene derivatives are produced by combining ethylene with other chemicals.

Nevertheless, it is clear that overall the success or otherwise of these new investments depends on finding markets for the increased exports of polyethylene. This is particularly the case for Abu Dhabi National Oil Company (ADNOC) in Abu Dhabi. It recently cancelled its ethylene dichloride (EDC) project, leaving its entire petrochemicals strategy to rest on the Borouge ethylene/polyethylene joint venture. Following this cancellation, Borouge is expected to expand its polyethylene capacity to absorb the ethylene capacity originally intended for EDC production.

Polyethylene is by far the most important plastic in use today. The world market in 2000 is estimated at over 50 million tonnes, and this is expected to increase to over 65 million tonnes by 2005. The polyethylene market is roughly double the size of the second largest plastic market, polypropylene. The market for polyethylene consists of three main types:

Low density polyethylene (LDPE) - the original polyethylene discovered by ICI in 1933. LDPE is a clear flexible plastic highly suited to use in packaging film. Its production requires the use of very high pressures

Linear low density polyethylene (LLDPE) - developed as a substitute for LDPE, compared to which it has both advantages and disadvantages. LLDPE was commercialised in the late 1970s. LLDPE is produced by a much lower pressure process than LDPE. LLDPE has the highest growth of the three polymer types, but has still only captured 42 per cent of the total low density (LDPE plus LLDPE) market

High density polyethylene (HDPE) - discovered by Phillips in the 1950s. HDPE is a much stiffer plastic than LDPE and is more versatile having a wide range of end uses in moulded goods - such as bottles and crates - woven sacks, pipes and thin films. HDPE is produced by low pressure polymerisation

The Middle East produces all three types of polyethylene. However, as the development of the original Saudi petrochemical complexes in the mid- 1980s coincided with the wider scale commercialisation of LLDPE, Saudi Arabia rode this wave to become a major exporter of LLDPE. As a result, the largest polyethylene exports from the Middle East have been LLDPE and some HDPE.

LDPE net exports have been small, despite the large exports from Qatar, as there are other importing markets in the wider Middle East region. This pattern of trade flows is set to change as the new Yanpet complex in Saudi Arabia, Q-Chem in Qatar and Borouge in Abu Dhabi will each produce large volumes of HDPE for export. By 2003, Middle East polyethylene exports will increase to over 250 per cent of the 1999 level with a roughly equal mix of HDPE and LLDPE.

Traditionally, the Middle East has targeted its polyethylene exports at two main markets: Asia and Western Europe. China is the dominant importer in Asia and the importance of this key export market has been steadily increasing: first South-East Asia moved towards self-sufficiency in polyethylene and, more recently, India has followed suit. Indeed, some of these countries have now moved beyond self-sufficiency to a net export position themselves - for the next few years India is expected to be in surplus. The very large deficits in China - over four million tonnes of plastics - ensures that Asia is a net importer overall.

However, access to the large Chinese import market comes at a price. China has become well aware of its status as the sole remaining major buyer in Asia and plays the market extremely effectively to ensure the maximum competition and the minimum price for its purchases.

In Western Europe, Saudi LLDPE and HDPE have become a structural feature of the polyethylene market, occupying the commodity end of the market while domestic producers have concentrated on more added value grades. Indeed, for HDPE, Western Europe has generally maintained a small trade surplus by exporting higher added value grades.

For LLDPE, the large Chinese import demand, together with a continued structural deficit in Western Europe for commodity - butene film - grade, means that the growth in Middle East exports will be readily absorbed.

For HDPE, the situation is more difficult. Asia has not traditionally been a large HDPE importer, and while demand growth in Asia is projected to be high, at 8.6 per cent a year to 2003, Asian investment has also been high. The projected deficit in Asia is much less than the anticipated growth in Middle East exports.

There is undoubtedly scope to expand trade with other markets, notably Western Europe. In the case of Western Europe, however, Middle East exporters will have to penetrate other market sectors than hitherto. This appears likely to be the strategy adopted by Borouge in Abu Dhabi and Q-Chem in Qatar whose joint venture partners - Borealis and Phillips - are both strong in added value sectors of the HDPE business.

However, allowing for a higher penetration of the Western European HDPE market, Middle East exporters may have to look further than their traditional markets to find markets for all of the new production. Latin America is the only large polymer importing market not supplied by Middle East exporters. This market has traditionally been supplied by North American exporters. Furthermore, the freight costs to Latin America have made it an unattractive market for the Middle East.

There is undoubtedly a market for the future Middle East petrochemicals production but it will be an increasingly tough and competitive one. China's role as the monopsony buyer in Asia means that Middle East producers will increasingly have to seek out other markets. Western Europe is a very large polyethylene market - expected to be almost 14 million tonnes in 2000 - but the Middle East has been only a low cost supplier of commodities. To gain a larger share of this market, the Middle East will have to offer a more sophisticated range of grades. In terms of new export horizons, Latin America is to date an untapped market, but with higher freight costs and competition from US and Canadian exporters, it will be a challenging market to enter.

Philip Leighton is a consultant with Chem Systems