Deepening GCC-Asia petrochemical ties
Hetain Mistry, Managing Analyst—Petrochemicals at S&P Global Platts, suggests a rapid re-think of the playbook for Gulf exporters to sustain a competitive edge.
Ring-fencing coveted business in Asia’s petrochemical order book is keeping Gulf producers on their toes as competition in the $3 trillion-plus global industry intensifies. US and Iran are equally keen on building eastern alliances—unsurprising considering the demand growth forecasts.
Petrochemicals are used to make plastic, nylon and other materials for consumer products, manufacturing, aviation and nearly every commercial industry—each crucial to facilitating Asia’s rapid population growth. China and India’s population will each reach 1.4 billion by 2024, with China’s population then stabilising while India’s grows to account for 17 per cent of the global population at 1.6 billion by 2050, according to the UN. Overall, Asia Pacific is home to a staggering 60 per cent of the world’s population.
China and India led the economic growth profile. In India, growth of polyethylene and polypropylene demand could be 1.3 times GDP, while for China, future growth should certainly be in step with GDP over the next decade, according to Platts Analytics. Looking at demand growth solely for polyethylene, the world’s most common plastic, China’s CAGR demand growth rate over the next ten years is projected to be 5.7 per cent and India’s is around eight per cent, our data shows. This supports our belief that India’s demand for plastics has a lot more potential, in line with its continually rising population up to 2050. But remember that India’s growth is from a considerably smaller base than China.
According to our data, China’s current consumption of 27 million metric tonnes (mt) of polyethylene a year, versus India’s 4.7 million mt a year, is expected to increase to 47 million mt by 2027. Beijing is ramping up local feedstock and manufacturing capacity to boost self-sufficiency, but demand will almost certainly outpace the behemoth’s rate of local production—good news for those who have strong export ties with China. More than 80 per cent of volume from Saudi Arabia, the Middle East’s biggest petrochemicals exporter, is shipped to China, for example.
But China’s capacity expansion highlights Gulf producers’ need to spread their petrochemical wings to encompass both established and budding export markets. While a slow burn compared to China and India, Africa’s potential is also highly valuable. Efforts to improve elementary or non-existent infrastructure are helping accelerate the evolution of middle class economies on the continent, with its population of 1.25 billion today expected to reach 2.56 billion by 2050.
Can the Gulf expand its advisory role to help craft strategies and policies that the UN Economic Commission for Africa Regional Integration and Trade Division (RITD) said are key to achieving the continent’s industrialisation ambitions? The Gulf would benefit from an early mover advantage in a promising market and ‘exporting’ know-how reaffirms Gulf countries’ bid to transform themselves into knowledge-based economies.
Gulf producers’ market acumen so far has been lauded. The Arabian Gulf’s petrochemical industry grew by 3.7 per cent to 150 million mt of capacity last year, which outpaced the global average growth of 2.2 per cent, according to the Gulf Petrochemicals and Chemicals Association (GPCA). The second largest manufacturing sector in the GCC, the chemicals industry represents 2.9 per cent of the region’s GDP with a value of $97.3 billion. But the US threatens the region’s role as the world’s cheapest petrochemical-producing region with the lowest feedstock costs in the world. A rapid re-think of the playbook is required—business as usual will no longer sustain the Gulf’s competitive edge.
The US’ shale boom and subsequent cheap access to ethane feedstock means it is enjoying a position that the Middle East, especially Saudi Arabia, have long benefitted from. The US currently accounts for 18 per cent of global ethylene capacity according to our data. This will rise to 21 per cent by 2025 if projects come online as planned. The US’ polyethylene surplus of about 4.4 million mt during 2017 will reach 7.54 million mt in 2020—a 70 per cent increase in just three years, our analysis shows. Closer to home, Tehran’s calls to global investors to help leverage feedstock from its giant South Pars field and expand its petrochemicals industry are being answered. Total may invest up to $2 billion, for example. This would mark a relatively small but significant step forward in Tehran’s bid to attract the $85 billion that its industry is expected to require over the coming decade.
As competition ramps up, savvy Gulf producers are investing in innovation and collaboration. Petrochemical companies in the GCC spent $700 million on research and development in 2016, which was 40 per cent higher than in 2015 and more than double the $300 million in 2010, GPCA data showed. Proactively diversifying the product offering is essential. Sadara, the $20 billion joint venture of Saudi Aramco and US' Dow Chemical at Jubail on the Persian Gulf, is creating chemicals new to the region using heavier feedstock, for example. Cross-border alliances are also paying off. One of the world’s largest petrochemical companies, Riyadh-based Sabic, signed a strategic cooperation agreement with China’s state-owned Sinopec Group in March to explore joint venture petrochemical projects in both countries.
Gulf producers must also leverage the UAE’s Port of Fujairah, a ‘maritime doorstep’ of the New Silk Road, which stretches from Beijing to East Africa. The Port, the world’s second largest bunkering hub, can enhance its offering with specialised chemicals, including high-end plastics. And Gulf countries can make it as easy as possible for Beijing to base on Arab soil the manufacturing units required to send petrochemicals directly back to China. Gulf producers’ new reality of having to fight harder to retain precious market share is a permanent one—the sooner producers master the new game plan, the better.