Distribution in the Middle East
The Gulf Cooperation Council Member States offer a Wealth of Opportunities
The Gulf area of the Middle East offers opportunities for international chemical distributors because of its strong economic growth derived from oil wealth. But many multinational chemical distributors, especially those based in Europe, have been steering clear of an area comprising six thriving oil- and gas-producing countries - Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain and Oman.
Instead much of the chemicals distribution is done by regional or national companies. Despite the sharp drop in oil prices, they are confident they will continue to benefit from strong demand for chemicals for the next several years.
"Low oil prices are not making much difference to chemicals demand," said Farooq Quaraishi, business development manager at Altek International, Dubai, a manufacturer and distributor of adhesives, emulsion and dispersions. "We are very optimistic about the future and expect good growth across all industries."
Protection From Prices
The fall in oil prices could affect revenues of the governments of the six countries, which maintain a regional union called the Gulf Cooperation Council (GCC). Within the GCC, governments are a vital source of funds for infrastructure, construction and industrial development projects, which are the main drivers of economic growth.
However, most of them are considered to have enough cash reserves to maintain relatively robust growth - at least in the short term before oil prices are likely to rise again.
Gas-rich Qatar is predicted to record growth of 6% this year, while most of the rest of the GCC countries, including Saudi Arabia, are expected to achieve growth of 3%-4% in 2015.
In the longer term, the attraction of the region to outside investors is not so much its large hydrocarbon reserves but its plans to diversify its economies, so that they are no longer so financially dependent on oil and gas and bulk petrochemicals.
All the GCC states have moved or are moving their economies downstream into the manufacture of industrial products, many of which are based on petrochemical-derived raw materials.
Dubai, part of the United Arab Emirates, and Bahrain have already been diversifying for many years, so much of their gross domestic products are now coming from non-oil products and services.
Now the rest, in particular Saudi Arabia and Abu Dhabi, the largest of the United Arab Emirates in terms of wealth, are also transforming themselves into much more broadly industrialized economies.
Saudi Arabia has the most ambitious plans for downstream industrialization driven by expansions to its big production complexes at Jubail and Yanbu on its eastern and western coasts respectively.
Sadara, a joint venture between Saudi Aramco, the state oil company, and Dow Chemical, is scheduled to start producing this year the first of 3 million tons a year of a range of petrochemicals, such as engineering plastics and other high-performance polymers. Some of these will be used as raw materials for downstream Saudi-based manufacturers.
Adjacent to Sadara is PlasChem, an industrial park that will be making plastics and chemicals for the manufacture of automotive components, pharmaceuticals, water treatment materials and chemicals, construction materials and specialty films.
At Yanbu, which is already one of the world's biggest refining sites, Saudi Basic Industries Corporation (SABIC) is planning an enormous oil-to-chemicals project. It will create around 100,000 jobs through the downstream manufacture of products for future priority sectors in Saudi Arabia including electrical equipment, automobiles and their accessories, medical products, and packaging.
The conversion of the Saudi and the other GCC hydrocarbons-reliant economies to ones with a relatively wide manufacturing base will inevitably stimulate a growing demand for specialty and high-value chemicals, many of them produced outside the region.
Yet multinational chemicals distributors, even those with strategies to expand in emerging economies, are continuing to avoid investing in a significant presence in the GCC.
Some Predict Slow Growth
Germany-based Brenntag, the world's No.1 chemical distributor, has a presence in most of the major regions in the world, so around a third of its sales come from emerging economies. Brenntag has only a representative office covering the GCC countries, although it is considering a larger operation in the area.
"(We have) a long history of customer and supplier relationships in the region, initially as an export market and for purchasing products which are often distributed into our worldwide network," said Steven Holland, Brenntag's chief executive. "In the last two years we have established a representative office, which can be interpreted as the first step to a longer-term expansion in the region."
Biesterfeld, in Hamburg, a leading international distributor of specialty and high performance chemicals also with emerging countries accounting for a third of its sales, has recently postponed opening a GCC office after thinking for a few years about moving into the region.
"The area is still interesting for us, but there are other regions, which are more interesting and fit better into our strategy," Thomas Arnold, Biesterfeld's chief executive, told CHEManager International. "For us, it's important to find the right partner and to build up new business combined with the support by our suppliers. We believe in the long-term growth of the Gulf region, but we do not see it in the next few years. In the near- and middle-term we expect still a stronger sale of commodities, while there will be a slow increasing demand for specialty chemicals."
Global Versus Local
Among the top international distributors, Univar is one with a large presence in the region with an office and laboratories in Dubai's Jebel Ali Free Zone (Jafza), the world's largest free zone with over 7,000 companies. Many of these are re-exporting products to GCC countries coming through the adjacent Jebel Ali port, the Middle East's largest, whose expansion plans could make it the world's biggest port.
Manuchar, Antwerp, and Jebsen & Jessen, Singapore, are among other multinational distributors with a base in Dubai, now well-established as a strategic hub serving not just the GCC area but also the wider Middle East, southern Asia and eastern Africa.
With international distributors having a relatively small share of the GCC chemicals market, many of the local companies dominating the chemicals distribution sector are manufacturers with distribution businesses.
The biggest dedicated distributor in the region is the Dubai-based Petrochem Middle East (PME), which handles 700,000 tons of products annually with sales of around $600 million. These are mainly commodity petrochemicals but also include specialty chemicals such as pharmaceuticals, coatings and colorants.
Another major regional distributor is REDA Group of Saudi Arabia, which has been expanding internationally into specialty sectors such as oilfield chemicals.
A barrier for non-GCC international distributors is the legal requirement that outside companies, other than those based in free zones like Jafza, must operate through local partners.
Another possible difficulty is the necessity for close ties with local customers, which is a reason why a lot of GCC chemicals distribution is done by manufacturers. "Distribution here is different to that in Europe," Quaraishi said. "The distributor needs to get close to the customer, and being a manufacturer as well helps him do that."
U.S.-based Univar is both a distributor and formulator of chemicals in the area after opening a laboratory two years ago in Dubai for making personal care and industrial cleaning products. "Being a formulator differentiates us from other distributors because our relationship with customers is targeted on selling them solutions," said Matthew Howard, manager of Univar's Dubai-based operation. "We can develop products to suit their specific needs, which saves them a lot of development time."
Univar last year formed a joint venture with E.A. Juffali & Brothers, a Saudi conglomerate that is both a manufacturer and distributor. The business, based in Saudi Arabia, will be selling not only personal care and cleaner products but also chemicals for oil and gas and food and coatings production.
Poor inland logistics is considered by some international distributors to be another obstacle to expansion in the region. Logistics are centered on the area's ports so that products tend to be transported by sea from one GCC country to another. Until recently it was cheaper and easier to ship bulk chemicals from Saudi Arabia's western coast for re-export from Europe to a location on the country's eastern coast.
However, these deficiencies are being put right by the construction of roads and significantly by the building of both domestic and cross-border rail networks. The United Arab Emirates is building a 1,200-kilometer network across its emirates, which will link up with networks in Saudi Arabia and Oman. Saudi Arabia is planning to invest $45 billion on a network that will include a north-south railway connecting its inland industrial areas with its ports.
Ultimately the region's governments hope there will be a GCC rail network run by a GCC rail company. But like with many of the plans for industrial diversification, this will be a long-term objective, which multinational chemical distributors will have to wait patiently to be realized.