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Chemicals in the Middle East

The Drive Towards Downstream Expansion

Nov. 15, 2013
Unlike other petro chemical producing regions, the GCC is not co-located on a major market, making its dependence on its supply chain unique.  (C) Picture: Guenter Hamich  /
Unlike other petro chemical producing regions, the GCC is not co-located on a major market, making ... more
Unlike other petro chemical producing regions, the GCC is not co-located on a major market, making ...  Vir Lakshman, head of Chemicals and Pharmaceuticals, Germany, KPMG Milestones in the development of the Gulf chemical industry Global Ethylene cost curve Regional strengths in the global chemical sector Emerging-market growth by region 

Leveraging Feedstocks' Advantage - Behind the Arabian Gulf petrochemical and chemical industry lies three decades of exceptional growth: leveraging advantaged feedstocks, economies of scale, integration and world-leading process technology to build a vibrant, influential and highly profitable petrochemical industry that is the envy of many other regions.

With almost 30% of the world's oil reserves and 23% of all natural gas reserves, the Gulf Cooperation Council (GCC) states - made up of Saudi Arabia, Bahrain, the United Arab Emirates (UAE), Oman, Qatar and Kuwait - have benefitted from compelling cost economics and the export of low-cost petrochemical commodities to rapidly growing Asian markets.

Unlike other petrochemical producing regions, the GCC is not co-located on a major market. It is ideally situated close to either Europe or Asia but it is unique in its dependence on its supply chain. The infrastructure has been developed in a relatively short period of time during which petrochemical exports had built up dramatically.

From an embryonic beginning in 1981, the first exports of polyethylene were shipped from Qatar followed by Saudi Arabia and Bahrain in the 1980s.

The region has longstanding relationships with downstream producers in Europe, Japan and the U.S. Additionally, on the World Bank's Ease of Doing Business 2013 Index, all GCC states outrank the key emerging chemical producing countries of China, India and Brazil.

Over the decades, the GCC has developed talented petrochemical leaders. Many of these CEOs have astutely developed global positions through acquisitions and alliances, and have made the GCC a pivotal player in the global petrochemical sector.

The GCC petrochemicals production capacity reached 127.8 million tons in 2012. The petrochemical industry in the region is currently concentrated in Saudi Arabia. It is the leading petrochemical producer across the region and home to SABIC, a global top-10 chemical producer by revenue. Saudi Arabia accounted for about two-thirds of the region's production capacity with annual petrochemical output reaching 86.4 million tons in 2012.

The region is continuing its focus on developing its infrastructure, supply chain and logistics as capacity limits are being reached.

A series of investments are underway throughout the region. Over the next decade, Saudi Arabia alone intends to invest more than $367 billion in developing its infrastructure including petrochemicals. After Saudi Arabia, Qatar has the next largest GCC petrochemical plans. It plans to finance more than $10 billion worth of petrochemical projects next year and up to $34 billion on projects in the five years thereafter.

The growth of the region's petrochemical industry has been on the back of significant cost-advantageous feedstock, compared with other regions such as the U.S. and Europe. As per ICIS, Middle East crackers enjoy about 46% cost advantage relative to U.S. ethane crackers.

Moving Downstream

As per estimates by Gulf Petrochemical & Chemicals Association, the annual petrochemical production capacity in the GCC region is set to reach 191.2 million tons by 2020 (growing by 50% from 2012). Saudi Arabia, followed by Qatar and UAE will drive the growth, expected to add 40.6, 10 and 8.3 million tons respectively of additional capacity by 2020.

Gulf producers will be competing more intensively to successfully capture downstream demand in the emerging markets. Gulf producers will continue to focus on Asian markets, particularly China and India - markets driven by high demand for middle class products.

The GCC petrochemical industry is expected to face several regional and global challenges in coming years.

On the global level, shale gas discoveries in North America are reinvigorating North American petrochemical producers. In 2017, when the U.S. capacity starts coming on stream, a lot of low cost product will be supplying Asia as well. Furthermore, the development of coal-based technologies such as methanol-to-olefins (MTO) in Asia may also fundamentally influence their import needs. These new sources of supply will affect price and profitability margins. GCC producers will face a strategic dilemma - stay in Asia, competing alongside the U.S., or switch their export focus to Europe.

In a post-stimulus world, geopolitical tensions are high with greater risk of protectionism and uncertain confidence. This volatility plagues the certainty sought by financial investors. Furthermore, attempts to rein in inflation in overly stimulated economies could lead to a hard landing in some of the largest chemical markets in the world.

On the local front, the biggest threat the industry is expected to face is that of declining cost advantage due to the switch from light to mixed/heavy feed, resulting from the gas shortage. As per a report by ICIS, this can lead to a 24% disadvantage to U.S. ethane crackers. The feedstock scarcity in the Middle East region has forced the regional chemical producers to switch their strategies to focus on downstream manufacturing projects. The region will continue to expand downstream with clusters playing an increasingly important role in the manufacturing of specialty chemicals. Conversion parks will consume and add value to locally produced petrochemicals. The downstream expansion is considered to be less cyclical and is expected to provide stable returns in the long run.

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Keywords : Arabian Gulf Bahrain chemical industry downstream expansion GCC Gulf Cooperation Council KPMG Kuwait Middle East Oman Qatar Rita Duran Rita Duran KPMG Sabic Saudi Arabia the United Arab Emirates UAE Vir Lakshman Vir Lakshman KPMG

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