Middle East regional capacity threatens European chemicals

Rapid expansion of Middle Eastern chemicals industry could mean global overcapacity

Chris Sterling, KPMG.
Chris Sterling, KPMG.

Rapid expansion of Middle Eastern chemicals industry could mean global overcapacity

European chemical companies need to raise their game if they are to compete with their Middle Eastern rivals, according to a KPMG report released in December.

“With an abundant supply of cheap oil and gas reserves, Middle Eastern chemicals companies can access natural resources at greatly discounted prices when compared to their Western neighbours.” says Chris Stirling, European Head of Chemicals at KPMG.

“The Middle East-based companies have made the most of their natural resource and transformed their business from a supply of raw material to heavyweight, global petrochemicals production.  Our research shows that 53 plants could come onstream by 2012 which, if taken together with investment in Asia, could lead to European players being marginalised on the global market. 

The Middle Eastern chemical industry grew at 9% per year during the decade from 1997 to 2007.  We forecast that the region will grow at an average 9.5% per year until 2020; more than twice the global average.”

The chemical industry is the third biggest industrial sector in the EU and yet innovation levels have been falling due to high levels of regulation and difficulties in attracting a sufficient skills base to the industry.  The European market is also highly fragmented and ripe for consolidation.  Stirling went on to say:  

“While the credit crisis has impacted M&A levels in all industries, our research shows that this could act as a catalyst to drive further market consolidation as well-capitalised trade buyers take advantage of the lack of competition from financial investors such as private equity houses.

There are self-help steps that European companies can take to bolster their position in the short-term, such as offshoring, but our challenge to the market is to make the most of an historic upper hand in innovation and team up with Middle Eastern companies to access their resource advantages.”

While M&A may be a difficult path to follow, a more readily accessible partnership is possible through joint ventures.  Middle Eastern and Western companies have announced collaborations which provide expertise, access to technology and process innovation, without the potential increased complexity that a takeover can bring.

“Selecting appropriate partners in the region, establishing symbiotic relationships, and effectively managing the resulting joint ventures will be the key to reaping the rewards now offered by Middle Eastern engagement.” says Stirling.

Feedstock proximity
Speaking at the recent Gulf Petrochemicals and Chemicals Association annual forum in Dubai, Jeffrey Lipton, CEO, Nova Chemicals echoed many of the KPMG sentiments with his address “Managing growth: where are the new global feedstock sources?”

“On the back of such rapid ethylene capacity growth in the Middle East, many analysts are lamenting the oversupply issue in the years to come. Although squarely in the minority, I think ethylene supply will actually fall short of market demand by 2012.”

Lipton estimates that for the period 1990 – 2007 the compound annual growth  rate of demand for Polyethylene has been around 5% - and most importantly constant throughout two global economic downturns.

“In the years ahead there is huge potential for the figure to be much higher in India, Russia, and China – and that supply is going to come from one of two places, the Middle East and the North West USA and Canada.”

Quite simply Lipton says that the access to readily available raw materials will be the mark of the winning formulas. “Successful ventures in the future will be located in the vicinity of the raw materials or markets.

This means there is huge potential for the Middle East. With shipping costs to Europe falling then the geographical advantage of the Middle East means that the capacity coming onstream, the product is well placed to strike both the Asian and European market sectors.”
 

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