At its 1997 regional planning seminar, the UK's Chem Systems forecast that the global petrochemical industry would suffer one of its cyclical slowdowns in the next two years. It argued that the buoyant market conditions, brought about by limited capacity increments, strong economic growth and falling feedstock prices, simply could not last.

Twelve months on, the prediction has come true, even though the catalyst for the latest slump has come from an unexpected source. 'We expected a downturn in 1998/99, but the trigger was not clear,' Chem Systems' managing director John Philpot said at the company's latest annual conference in Dubai on 19 May.* 'Now it is: the Asian crisis.'

The economic slump in Asia dominated proceedings at the conference. The message given out by the UK consultancy firm was two-fold. The price outlook over the short term will remain weak. 'We expect that 1998 and 1999 will see much lower prices for many petrochemical and polymers, influenced by surpluses generated in Asia and resulting in displacement of exports from other regions, primarily into Europe,' Philpot said.

At the same time, lower profitability will result in delays being encountered by many global petrochemical projects, due to the reluctance of the banking community to finance more marginal investments. This, coupled with a projected return of Asian demand, will result in a tightening of the market and a strong recovery taking place, possibly in 2002 or 2003. 'Over the coming 10 years, we believe that the overall performance of the business will be good, although there will be continuing downward pressure on margins,' Philpot explained. This will accelerate restructuring in established markets such as Europe and force leading producers to develop and adopt new technologies to improve efficiencies.

A common thread throughout the two-day conference was that however bad the market gets over the next two years, regional producers are still in a much better position to ride out the slump than their international counterparts. 'We think the Middle East will continue to sail through to the next upswing,' Philpot contended. The cost of adding new Middle East capacity has dropped significantly over the past two decades as a result of the associated infrastructure in place in areas such as Jubail in Saudi Arabia, Qatar's Umm Said and Shuaiba in Kuwait. The result is that many new projects in the Gulf now have similar capital costs to those planned in Europe or the US.

More significantly, regional producers will continue to enjoy a significant feedstock advantage, which will far outweigh the higher costs of transporting products to target markets and if applicable, tariffs levied on products entering certain trading blocs. At the seminar, Chem Systems presented a series of cost comparisons for product deliveries into East Asia and Western Europe by 2000. Based on an oil price of $17 a barrel, the forecasts take into account raw materials, fixed costs, utilities, freight and packaging, as well as tariff charges for Western Europe. For each product and each market, the cost to Middle East suppliers works out well under their rivals' in the US, South Korea and Western Europe.

For example, the cost of Middle East high density polyethylene (HDPE) going into East Asia will be about $300 a tonne, compared with $500 a tonne from other supply sources. Even into Europe, where tariffs prevail, the Middle East will have a cost advantage of between

$100-200 a tonne.

'Delivered cost comparisons show the Middle East to be the low cost supplier into both Asia and Europe for products based heavily on ethylene...These cost advantages provide the incentive for projects to be developed,' Philpot explained. 'While investors expect long-term oil price levels significantly in excess of $10 a barrel, ethane-based projects in the Middle East will look attractive.'

The Middle East's position in the global market will also grow over the coming three years as new ethane crackers and ethylene derivative capacity come on stream. By 2001, its global capacity share will be 7-8 per cent for ethylene and polyethylenes, and almost 20 per cent for ethylene glycol. Since most derivatives are exported, the region is expected to be able to claim a 40-60 per cent share for some products, such as linear polyethylenes, entering inter-regional trade.

Philpot acknowledged that moving further downstream into fabricated plastics or performance products presents its own challenges for the region. 'This is not an easy target, since although the primary petrochemicals may have global competitive advantages, they are already shipped to world markets and are therefore not necessarily available at much below world prices to local consumers.' Such projects can work in the Middle East, provided they have a local market focus, appropriate partners and technology, he said.

A number of key issues will determine the future development of regional petrochemicals. These include ethane availability, feedstock discounts and other incentives, tariff reductions and technological advances. 'These add up to powerful competitive advantages that will continue well into the future. The current downturn in Asian imports will greatly increase pressure on Europe and the US in the short term, but it is unlikely to reduce the Middle East's global share of future investment. Many Western and Asian companies have found it appropriate to include Middle Eastern joint ventures as part of their ongoing global sourcing strategies beyond 2000. We believe they will continue to do so,' Philpot concluded.

* Middle East Petrochemicals: Creating Value. Chem Systems, 19-20 May, Dubai.