The Gulf’s petrochemical producers continue to benefit from the availability of oil and natural gas feedstock, but in its desire to rapidly increase capacity, the region faces oversupplied markets, low utilisation rates and poor margins for less-competitive companies.
About 50 per cent of new global capacity for ethane (C2) based chemicals will be located in the GCC. Much of this new production is for the fast-growing Asian markets, leaving the sector exposed if growth in Asia slows, according to a study by US management consultants, Alix Partners published on 13 December. The study highlights the problems ahead for petrochemicals companies in the region.
The use of polystyrene, for example could drop to half the current demand, while polyvinyl chloride (PVC) could drop from 80 per cent to only 60 per cent.
Gulf petrochemical firms have a cost advantage of as much as 90 per cent in ethane production over their European and Asian rivals, and up to 35 per cent in liquefied petroleum gas (LPG) production.
However, ethane has proved to be limited in the region, which meant capacity growth has had to be based on other feedstocks, namely naphtha. Here the cost advantage is between 10-15 per cent. Changing market dynamics will, therefore, exert additional competitive pressure on Middle East chemicals producers. Producers will have to learn from older producers, integrating backwards to refineries and forwards to downstream derivatives and specialities.
“Chemical companies in the region will need to improve operational efficiency, especially in light of a potential further downturn in the global economy. This is a highly competitive and extremely cost sensitive industry,” says Jörg Fabri, director of Alix Partners.
While regional producers benefit from integration and scale, Fabri argues that many could do more to achieve “integration excellence” as a result of acquisitions and organic growth. Large industrial clusters, such as Jubail in Saudi Arabia, have been built in a matter of years and are still some way off the model of integration seen at the giant Ludwigshafen complex in Germany, which was achieved over decades.
“In our view, it will be the management and operations that will mark the difference between winners and losers,” says Fabri.
Moving further downstream, a goal expressed by many state-owned producers, could make sense, but will come with its own challenges. Apart from diminishing the feedstock advantage that keeps the region competitive, producing speciality chemicals will require a range of skill sets the GCC is yet to acquire, including highly qualified production staff and a strong research and development base.
It is also essential to understand the markets downstream of petrochemicals, such as the construction and automotive sectors that will drive demand. Construction, for example, drives 27 per cent of plastics and polymer sales, but has seen a sharp downturn. Understanding these trends can help to avoid sinking investments into declining sectors.
“The GCC is not yet in an ideal position to meet these. This may change over time, as education improves and more client industries for chemical products locate closer to chemical sites,” says Fabri.