Gulf plastics conversion industry ripe for growth

09 May 2011

Rising demand for plastics products in the Middle East along with the need to create jobs has made developing a plastics conversion industry a top priority for Gulf governments

In numbers

1.8 million t/y: Planned ethylene production at the Saudi Aramco/Dow Jubail joint venture

35,000 t/y: Capacity of Tasnee’s polypropylene compounding unit

t/y=Tonnes a year. Source: MEED

For GCC governments, the conversion industry is a vital part of the value chain that links oil production to the manufacture of finished products. Exploiting the ready access to raw materials by establishing a production base for every step of the upstream-downstream ladder is crucial for larger countries. As populations increase, citizens must be provided with both employment and products to satisfy their increasing demand for consumer goods.

What attracts us to this region is the growth dynamics of the Middle East and nearby Africa and India

Tony Frencham, Aramco/Dow Jubail joint venture

The GCC has made rapid progress in the development of its petrochemicals industry and already exports base chemicals in large quantities. From this feedstock platform, the plastics industry must now provide the materials to support a manufacturing sector.

Governments in Saudi Arabia and the UAE have already laid the ground work for this development. The resins needed for plastics output, primarily polymers, are produced in industrial parks and cities in the region. These centres often have space designated for the production of plastics.

Dedicated plastics parks will facilitate the growth of the conversion industry, such as Abu Dhabi Basic Industries Corporation’s (Adbic) Polymer Park. Saudi Arabia, a regional leader in petrochemicals production, is developing similar facilities.

Cost advantages in the Gulf

An industry based on ready access to hydrocarbons will have a competitive advantage to counterparts elsewhere in the world, not least since the power needed for production is priced at very attractive rates.

“The close proximity to producers of raw materials means you don’t have to build a big inventory,” says Abdulwahab al-Sadoun, secretary general of Dubai-based Gulf Petrochemicals & Chemicals Association (GPCA), a regional trade body.

The automotive sector is an important industry and we are positioning ourselves to be one of the feeders to it

Moayyed al-Qurtas, Tasnee

At the same time, government help is wide ranging and the benefits offered by the conversion parks are extensive. “Incentives are being offered in different forms, such as the availability of land in the form of plastic conversion parks, which come with shared utilities and logistics, innovation centres and customs waivers for imports or exports,” says Vishnu Sankaran, industry manager for chemicals and materials at UK consultancy Frost & Sullivan.

While competitively priced feedstock is the biggest advantage for regional producers, this alone might not suffice. “Some of those initiatives and incentives might be crucial to foster growth and remain competitive internationally,” says Sankaran.

Firms in the conversion industry are looking to regional demand to stimulate growth. The consumption of plastic goods in the wider region is well below that of established markets in absolute terms and per capita terms.

GCC thermoplastics production capacity (million tonnes)
Saudi Arabia10.2315.6
Note: Thermoplastics includes PE/PET/PP/PVC/PS. Source: GPCA

“What attracts us to this region is the growth dynamics of the Middle East and nearby Africa and India,” says Tony Frencham, commercial director for the Saudi Aramco/US’ Dow petrochemicals and plastics joint venture in Jubail, Saudi Arabia. “As an example, per capita consumption of polyurethanes in North America and Europe is seven to nine times higher than in the Middle East and Africa. That growth potential is hugely attractive.”

The project, which is currently in the front-end engineering and design stage, will produce 1.8 million tonnes a year (t/y) of ethylene from naphtha and ethane feedstock and make chlorine, polyvinyl chloride and other products.

“The standard of living and the aspirations of people are increasing, so the demand for goods and services will become more substantial,” says Moayyed al-Qurtas, chief executive and vice-president of Saudi petrochemicals and plastics producer Tasnee.

Automotive industry in Saudi Arabia

Tasnee is one of the companies positioning itself to supply a growing industrial base in the kingdom. The automotive industry, in particular, has been on the minds of decision-makers for a while. Seen as a prestigious industry, the announcement that Japanese truck maker Isuzu Motors will be establishing a factory in Saudi Arabia was widely welcomed.

While the vehicle manufacturing is still very much in its infancy in the GCC, Isuzu is unlikely to remain the only producer for very long. “There are, as we speak, extensive discussions with other auto-players to follow suit,” says Al-Sadoun.

To facilitate the development of this industry, Saudi Arabia is developing an automotive cluster. Qatar also recently announced its plans for the Qatar Automotive Gateway.

Car manufacturers would find themselves well-supplied in Saudi Arabia. The government drive to expand the petrochemicals industry has created production facilities for polymers, which are essential for automotive manufacturing. To cater for future demand, Tasnee has added a 35,000-t/y polypropylene compounding plant to its portfolio.

Job creation is seen as one of the primary drivers towards developing the conversion industry

Vishnu Sankaran, Frost & Sullivan

“The automotive sector is an important industry and we are positioning ourselves to be one of the feeders to it,” says Al-Qurtas. The plant is already operational and is currently exporting its production abroad until it finds regional clients.

Al-Qurtas, whose company produces many of the key chemicals used by the conversion industry, is keen to see foreign players come to the kingdom.

It is not only the automotive industry that would benefit from such a move, according to Al-Qurtas. “Now is a very good opportunity for converters to move into the region, because now more and more molecules are becoming available,” he says.

Foreign investors

Having foreign converters set up shop in the GCC would benefit the industry, agrees Al-Sadoun. Regional governments would welcome any opportunity for foreign direct investment and companies coming in can accelerate the growth of the domestic industry.

But the GPCA secretary general thinks that the real value addition would lie in the access to export markets. As there is no proprietary technology in the conversion industry, foreign investors are not needed broaden the technological base.

“Having foreign investors would help, but it would only help if those foreign, international converters set up production units in the region as part of their expansion strategy, and take part of the output to sell in their own markets,” says Al-Sadoun.

The conversion industry is not destined to become a supplier for regional demand alone. Al-Sadoun is keen to see the share of exports grow, mirroring the success of the petrochemicals industry. “We would like to see that all the converters not only consider the regional markets, but also the international markets,” he says.

His views are reflected in the industry’s ambition. “For the conversion industry, mostly the market is local and regional. But we are looking to increase our exports all the time,” says Al-Qurtas.

Exports to markets such as the EU, China and India have become a sensitive issue for the petrochemicals industry, which could also affect the conversion industry. Competitors have taken issue with the cheap feedstock and energy prices that regional producers benefit from, which has resulted in various anti-dumping cases.

The GPCA and Tasnee are adamant that they are operating within World Trade Organisation rules, and believe that outstanding disputes will be resolved in their favour.

Gulf competition

With the conversion industry ready to take on the competition from other parts of the world, it remains to be seen to what extent GCC countries will compete with each other.

Saudi Arabia, and to a lesser extent Abu Dhabi, are poised to take the lead in developing the industry.

Al-Sadoun says these countries will benefit from first mover advantage. “Whoever takes the lead in developing a specific segment of the industry will benefit from being the pioneer in this area,” he says.

But since the technological barriers to the industry are not high, this should not form an insurmountable obstacle for other countries looking to push in, especially as those producers will be feeding into strong domestic demand.

Other than rising regional demand for plastics products, the need to create jobs in countries with high levels of unemployment is driving GCC governments to promoting the conversion industry.

“Job creation is seen as one of the primary drivers towards developing the conversion industry, in addition to catering to domestic demand,” says Sankaran.

The industry lends itself well to such policies. “The job creation potential of the conversion industry is substantially higher than that of the basic industries, which are investment intensive rather than labour intensive,” says Al-Qurtas.

The Washington-based American Chemistry Council estimates that for every direct job created in the petrochemicals industry, there are five to six indirect jobs created in the downstream conversion industries and the service sector supporting it.

A key challenge is providing the workforce with the requisite skills and governments have set out to establish vocational training centres to support the industry. The creation of a higher institute for plastic fabrication in Riyadh is one example of this.

Yet skilled workers are still in short supply, according to Al-Sadoun. “We need to see more specialised vocational institutions that train and develop the local skills to make sure that industry requirements are met,” he says.

Fragmented conversion market

The GPCA general secretary says the high level of fragmentation is a further challenge facing the sector. “To be able to compete in the global market you need more large-scale producers that benefit from the economics of scale and have their products delivered to the export markets at a very competitive price,” says Al-Sadoun.

Industry experts, such as Al-Qurtas, anticipate some degree of consolidation. The small and medium enterprises in the conversion industry are not unique to the region, so although having more big players would help, the GCC is not suffering from a competitive disadvantage either.

Others are concerned that margins in the conversion industry are being squeezed by resin suppliers on the one hand and end customers on the other. “Since the GCC region is rich in feedstock and competitively priced, governments should look at ironing out these concerns to make sure that converted plastic products attain the level of dominance achieved by polyolefins and basic polymers,” says Sankaran.

Whatever the challenges ahead, the rise of the conversion industry in the GCC will be inevitable.

Q&A Abdulwahab al-Sadoun, secretary general, Gulf Petrochemicals & Chemicals Association (gpca)

What is the GPCA’s role in fostering the growth of petrochemicals and conversion industry?

Several of our members such as Adbic (Abu Dhabi Basic Industries Corporation) a full GPCA member, Sabic (Saudi Basic Industries Corporation) a founding member, and PetroRabigh, a full member, are actively involved in initiatives to develop dedicated plastics conversion parks. In addition, through our Plastic Committees, we are exploring further initiatives to assist in accelerating this drive. For example, we have recently launched the plastic innovation awards to stimulate innovation in the conversion industry.

Such initiatives will lead to more innovative products and approaches in developing the plastic conversion industry in the region. We are actively involved in leveraging the full potential of the industry by exploring export opportunities in the Indian subcontinent, the European markets, and the Middle East and North Africa region.

What competitive advantages do regional petrochemicals producers benefit from?

The competitive advantage in downstream is derived from either locating next to the source of raw material or next to the markets, in each case you have an advantage and a disadvantage. In the traditional markets, such as Europe, many petrochemical plants are closing down because they lost competitiveness vis-a-vis the Gulf and Middle Eastern players. This has created a trend in the plastic conversion industry, with European converters exploring opportunities to move to the Middle East and be located next to the raw material producers.

Governments in Saudi Arabia and the UAE are promoting the growth of the conversion industry. How significant is this for job creation?

It is very important, that’s why governments are very keen to oversee the rapid expansion of plastic conversion in the region. The multiplier effect is to the tune of 1:7; one job opportunity is created in the upstream, when you go down the value chain you create seven new job opportunities.

Where does the output go?

Upstream petrochemicals producers such as Sabic, Tasnee, Equate, Borouge are export orientated. Almost 80 per cent of output goes to the global market, largely China and the Asian countries, and to a lesser extent to Europe. In the downstream, the plastic conversion industries are mostly regional and focus on meeting local demand.

Lately, we have seen some successful converters exporting to global markets, the US, Canada, Europe, and capturing a sizeable market share. We see a potential for this industry to flourish.

Will the petrochemicals industry in the GCC develop into a huge regional cluster?

That’s difficult to envisage for a simple reason. Most of the GCC players are producing almost the same products, so there is no complementarity, so to speak. But I am not ruling out that there will be cooperation between the GCC countries in developing downstream products.

What more should governments in the GCC do to encourage the petrochemicals and the conversion industry?

In Saudi Arabia, we have seen the National Industrial Cluster Programme taking shape by approaching the major original equipment manufacturers to set up production facilities in the kingdom. The challenge associated with this initiative is the lack of market or customers, such as the auto assembly units, in the region.

I think this is coming. Earlier this year, it was announced that Japan’s Isuzu is setting up an assembly unit in Saudi Arabia. There are, as we speak, extensive discussions with other auto players to follow suit.

What are the biggest challenges facing the GCC petrochemicals industry?

One of the biggest challenges we face is associated with the global economic recession, during which trade remedies and anti-dumping cases had been raised against producers in this part of the world. We came through some cases in China and India, now there are some cases in Europe involving PET (polyethylene terephthalate).

There are some truly baseless claims about subsidies because the feedstock is sold to local producers at prices that reflect the cost of production, which are significantly lower in this part of the world. That is the competitive advantage the region has. As most of the gas is associated gas there is no real cost involved in the cost of production, it is a by-product. So most of these cases are baseless, and I am 100 per cent certain they will be resolved in our favour.

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