GCC faces threat of chemicals glut

Massive expansion projects will sharply boost the petrochemicals output capacity in Gulf hydrocarbon producers and this will ally with a possible slowdown in demand to result in a large surplus, a global business consulting firm said.

While chemical companies in the region have benefited significantly from the availability of oil and natural gas feedstock, the output of many petrochemical products will exceed demand significantly over the next few years, said AlixPartners , which has offices worldwide.

“This will lead to low utilization rates and poor margins for less-competitive companies,” it said in a study.

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% of the new build global capacity for C2 based chemicals will be located in the GCC.”

It said 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% to only 60%, it added.

“To address this issue, 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,” said Jörg Fabri, AlixPartners director and author of the study.“

A number of regional producers benefit from synergies achieved thanks to integration and scale. 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 said hat the emergence of shale gas in North America is structurally benefiting 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, it said.

“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,” the study warned.“

Moving production further downstream could make sense for many GCC chemical companies, but only if some requirements are fulfilled. Key success factors for commodity and specialty chemicals are different, including availability of highly qualified production staff and sales engineers, a strong research and development and technology base and close interaction and cooperation with client industries…. 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.”

Citing data from Deutsche Bank, AlixPartners found that chemicals companies in the Middle East have a cost advantage of as much as 90% in ethane production over those in Europe or Asia, and up to 35%in liquefied petroleum gas (LPG) production. But it noted that the cost advantage in producing naphtha is only as high as 10% to 15% depending on the transfer process and logistics, meaning that changing market dynamics will exert additional competitive pressure on Middle East chemicals producers.

The study proposed an integrated value enhancement program for GCC chemical firms involving 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.

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