Short-Term challenges prevail, long-term outlook remains positive

Short-Term challenges prevail, long-term outlook remains positive

9:41 AM, 16th May 2018
Short-Term challenges prevail, long-term outlook remains positive
A representative image of chemical Industry. (File photo)

By Mahesh Hegde

The chemical sector in the Middle East is likely to perceive stability, amid robust demand for construction chemicals. Spearheading the competition among the firms is Dow Chemical Company that accomplished its merger with DuPont in 2017. The combined entity currently operates as a holding company, called DowDuPont, which leverages its high caliber materials science division to boost sales of construction chemicals. Demand for methyl cellulosics is a primary growth determinant of the construction chemicals industry in the Middle East.

To Witness a Dampening Effect

According to the Gulf Cooperation Council, over 70 percent of the petrochemical industries in the Middle East use natural gas as a raw material. The prevailing low oil prices in the region have induced a spike in gas prices in UAE, Bahrain, Oman and Saudi Arabia. Surging gas prices, combined with declining oil prices in the region, can have a possible dampening effect on chemical industries in the region. Leading chemical giants in the region are now focusing on reducing the natural gas utilization in petrochemicals. SABIC and Saudi Aramco have recently launched a joint project, called crude oil to chemicals (COTC), for processing light & extra light crude oil. A new wave of investments is in the offing for petrochemical companies in the region. Saudi Arabia perceives to push the limits of its petrochemical supply chain beyond oil by banking on this project.

Product Diversification & Specialization to Remain Key Strategies

The lucrative phase of surplus, highly affordable feedstocks, and paramount competitive advantage for chemical companies in the Middle East is drawing to a close. Recognizing the concern, chemical leaders in the region are gearing up to combat the challenges, with product diversification and specialization as key strategies to tap new markets and reduce dependence on the commodity production.

Inclination toward naphtha feedstocks for huge projects such as Sadara, joint venture between Dow Chemical and Saudi Aramco, has enabled this diversification. At the 2017 GPCA conference, CEO of SABIC illustrated the requirement for transformative and swift change by emphasizing transformation to be the radical change needed for delivering a quantum leap in the performance of chemical industries. Chemical companies are expected to thrive in the upcoming years by taking part in the portfolio management via M&A activities, in a bid to divest their non-core assets and streamline their operations. Through acquisition of the petrochemical businesses of DSM, SABIC successfully gained access to the European market, and to the US through acquisition of GE Plastics, in the past decade. SABIC’s current projects, that includes the joint venture with the US-based ExxonMobil further demonstrates its plans to expand in the global markets. 

Focusing on Downstream Business Models

Majority of the chemical companies in the Middle East have been making huge investments and focusing on their business model downstream across the value chain. For example, Saudi Aramco entered into a partnership with Dow in Sadara joint venture for investing nearly EUR 20 billion, in a bid to develop the region’s largest integrated chemicals complex. A fair amount of success has been witnessed with downstream activities through local production of fertilizers and standard plastics.

Several companies are still operating under their old business models and massive plants with enormous investments and small workforces. These companies lag by leaps and bounds from achieving high margin production, primarily influenced by absence of customer industries for integrating into the supply chains of the Middle East chemical sector.

Iran’s Preeminence Growing

Iran stands out from other Middle Eastern countries, with a thriving chemical industry, ranging from varnish & paint manufacturers to active pharmaceutical ingredients producers. Years of sanctions on Iran have made the chemical companies in the country to lag in terms of technology and investment. However, Iran boasts to have an array of distinct and significant cultural factors, which include a pool of high caliber engineers and a mature university structure. Chemical industry experts in Iran have a relatively greater expertise on the way supply chain works in the chemical sector. All these factors point at the emergence of a more differentiated chemical landscape in Iran compared to other Middle Eastern nations.

According to leaders in the Middle East chemical sector, there is greater possibility of private equity investments from Russia, Europe, and China in Iran’s chemical industry. Iran is expected to become a lucrative market, which would offer higher growth opportunities post-completion of embargo compared to other markets in the region. With the availability of well-trained and quality workforce, Iran is now considered to be a remunerative option for SMEs that are inactive in the US market and devoid of bank financing.

Initiatives Dedicated toward Economic Expansion to Create Opportunities

In the throes of fundamental economic restructuring, declined oil prices have led Middle Eastern countries to emphasize more on diversifying their economies, and reducing the dependence on fossil fuels.

This, in fact, has provided an impetus to the far-reaching program, Saudi Vision 2030, which aims at increasing non-oil exports of Saudi Arabia, contributing to over half share of the nation’s GDP. Such initiatives being taken by governments in the Middle East will encourage higher local production of business and consumer goods for both export and domestic markets.

Chemical companies in the region are focusing on formulating strategies to take part in these initiatives. Facilitating and supporting the localization and diversification aspirations are expected to remain key efforts among these companies. With the success of Middle East downstream integration, emergence of newer supply chain and manufacturing concepts is being witnessed. A prime example of this starlike asset network configurations that blends manufacturing hub for intermediate chemicals and raw materials for leveraging economies of scale having advanced production facilities.

In order to resolve complexities that result in time and cost overruns in chemical industry projects, leading companies in the Middle East, such as ABB Group, are focusing on employing a collaborative approach. By combining intelligent infrastructure & services, applications, and engineering, these companies covet curtailing risk, and minimizing costs. Digital technologies, driving innovation and opportunities, have potential to improve yield and enhance safety of chemical industries, provided with protection against cyber security threats.

Overall the Middle East chemical sector is likely to witness a steady stream of opportunities, as the focus shifts to reducing the dependence on oil exports. Innovative strategies being employed by prominent manufacturers, and favourable initiatives being taken by governments imply a promising future for the chemical industries in the region.

Author: Mahesh Hegde is Features Writer at Future Market Insights.

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