According to a study released by AlixPartners - the Gulf Cooperation Council (GCC) chemicals sector is strong but it faces numerous challenges and regional companies must adapt to new feedstock options and changing markets.
The study argued that while chemical companies in the Middle East have benefited significantly from the availability of, and proximity to, oil and natural gas feedstock, production of many petrochemical products in the region will exceed demand significantly over the next few years, leading to low utilisation rates and poor margins for less-competitive companies.
A major driver for this threat is the huge expansion of chemical production capacity in the GCC coming on stream in the next three to five years. For example, approximately 50 per cent of the new build global capacity for C2 based chemicals will be located in the GCC. Much of this new production is for the fast growing Asian markets, leaving the GCC chemicals sector exposed if the growth in Asia slows. Use of polystyrene may drop to only 50% of current demand and use of PVC from 80 per cent to only 60 per cent.
To address this issue, Dr. Jörg Fabri, Director of AlixPartners and author of the study said: “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.”
“A number of regional producers benefit from synergies achieved thanks to integration and scale,” continued Dr. Fabri. “However, many chemicals firms in the GCC region could do more to achieve ‘integration excellence’ as a result of acquisitions and organic growth. In our view it will be the management and operations that will mark the difference between winners and losers.”
The study further states that the ascendancy of shale gas is structurally benefitting natural gas-based derivatives, principally Fischer-Tropsch based synthetic higher hydrocarbons or methanol based chemicals, over some naphtha/crude oil-based derivatives. This, in turn, is helping restore competitiveness to the U.S. oil-and-gas sector and might also change customer preferences. This could impact the demand for conventional derivatives, like higher olefins used as a basis for surfactants or synthetic fuels, produced by Middle East chemicals companies.
“Moving production further downstream could make sense for many GCC chemical companies, but only if some requirements are fulfilled,” said Dr. Fabri.
Using figures sourced from Deutsche Bank, AlixPartners found that chemicals companies in the Middle East have a cost advantage of as much as 90 per cent in ethane production over those in Europe or Asia, and up to 35%in liquefied petroleum gas (LPG) production. However, the cost advantage in producing naphtha is only as high as 10 per cent to 15 per cent depending on the transfer process and logistics, meaning that changing market dynamics will exert additional competitive pressure on Middle East chemicals producers.
The study proposes an integrated value enhancement program for GCC chemical companies which involves the identification and evaluation of strategic growth options, understanding the trends of second and third markets of chemical client industries, developing best-in-class project development and management processes and improving performance through identifying improvement potential and measures to eventually achieve operational excellence.
