Be selective in identifying deals: GPCA

Gulf petrochemical plant producers should become selective in identifying deals that are more like to go ahead and should focus on deals marked by transparency and "reduced debtor delays", the Gulf Petrochemical Association (GPCA) has said.

Gulf petrochemical firms, like their counterparts in the rest of the world, are grappling with a slowdown in demand even as they make strides for acquisitions in India and China.

The entire petrochemicals industry is waiting for the Chinese new year in February which could lead to a spurt in demand, industry insiders said.

"Actions can be taken by project owners and contractors in the Middle East to alleviate some of the effects of the financial crisis. Contractors can focus on cash flow earnings by reducing debtor days, and ensuring that the claims are transparent so that project owners can settle them easily. Contractors can focus on cash flow earnings by achieving higher productivity, reducing debtor days and ensuring that the claims are transparent so that the project owners can settle them easily," GPCA said.

Industry insiders in the Gulf have accepted that they face an economic slowdown but have asserted that the impact is more on their Europe-based operations than in the Gulf. Energy constitutes almost 70 per cent of the cost of petrochemicals production and almost all the hydrocarbon-rich Gulf states have petrochemical industries in which the government is a majority shareholder. Besides, there are numerous private players in the sector.

"Expectations are for a significant slowdown in global economic growth going into 2009. This is likely to result in excess capacity in many industries including the petrochemical industry and will lead to consolidation, reduced product demand, softer pricing and lower profitability. The petrochemical industry is facing a difficult 2009," Mohamed H Al Mady, the Chairman of GPCA and the CEO of Saudi Arabia Basic Industries Corporation, said recently. Sabic's annual turnover stands at $900 million (Dh3.3 billion).

Hassan I Ahmed, a senior petrochemicals analyst, had earlier told Emirates Business that the petrochemical producers should avoid taking any major business decision till March 2009. He had particularly advised smaller petrochemical producers to be careful.

As the global financial crisis makes project financing increasingly difficult to secure, Gulf petrochemicals producers' plans to bring additional capacity on line will have to be delayed, according to London-based MEED magazine.

Prioritising of projects remains important, GPCA said. "Contractors can also focus on identifying the projects that are most likely to go ahead, and prioritise them based on the quality of the owner."

GPCA had special advice for industry leaders. "Owners, meanwhile, should focus on gaining market knowledge of their EPC contractors and subcontractors to understand fully their strengths, weakness and drivers in the turbulent market.

"They should focus on gaining market knowledge of their EPC contractors and subcontractors to understand fully their strengths, weaknesses and drivers in the turbulent market. Owners should also revalidate and focus on the projects that are most likely to go ahead in the current difficult market situations," the report said.

The crisis brings opportunities for companies with healthy balance sheets, GPCA said. "There should be extraordinary opportunities for companies that survive the crisis and maintain liquidity. Assets will be sold at attractive prices to keep less liquid parties in a solvent state. Project owners and contractors in the Middle East may be able to capitalise on the current environment through rigorous and creative identification of opportunities and proactive mitigation risk."

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