GCC CHEMICAL SECTOR: THE ECONOMIC IMPACT
Regional and global megatrends are shaping wider growth and diversification, while also creating new threats and opportunities for the GCC’s chemical industry
The chemical sector in the GCC region creates huge value for all the Gulf economies, with regional and global megatrends shaping wider growth and encouraging diversification strategies, while also creating both new threats and opportunities.
Hamilton Galloway, head of consultancy/Americas at Oxford Economics and Scott Livermore, managing director/macroconsulting at Oxford Economics both participated in the ‘Economic Impact Assessment of the GCC chemical industry’ masterclass session on day zero at the Annual GPCA Forum.
The forum also saw the release of GPCA’s report entitled ‘Beyond Petroleum: The Impact of the Chemical Industry on the Arabian Gulf Economy’, the findings of which are presented in this article.
According to Galloway and Livermore, Oxford Economics has identified five key global megatrends that will provide threats and opportunities to the GCC chemical industry:
- Diversification of the GCC economies away from oil—this is focused on sectors such as tourism, as well as oil-related sectors such as chemicals. Rising competitive pressures will provide impetus for diversification in the Middle East, with the GCC chemical industry expected to move further down the supply chain and away from its focus on basic chemicals. This is, for example, emphasized in Saudi Arabia’s 2030 Vision goals.
- The US shale gas boom led to a near five-fold increase in chemical-related construction between 2010-2015, and levels have picked up further recently as chemical firms continue to take advantage of lower feedstock costs. With US production expected to increase considerably over the next five years as new plants open, the chemical industry in the GCC will face increased competition in its traditional export markets.
- Rising middle classes and a shift to a consumer-driven economy in China are key opportunities for the GCC chemical industry, as it attempts to produce higher value-added chemical products. With an additional 100 million Chinese households set to be earning more than USD 35,000 by 2025, GCC chemical firms can position themselves to capture a larger share of this market.
- Feedstock will be the largest growing source of oil demand—driven by rising plastics usage, according to a recent IEA analysis. While the GCC chemical industry could benefit from this, mounting environmental concerns around plastics usage may dampen demand more than anticipated.
- GCC countries are getting serious about sustainability. UAE Vision 2021 includes targets on waste treatment, renewable energy, and water recycling, while Saudi Vision 2030 seeks to increase the efficiency of waste management and establish comprehensive recycling projects. GCC chemical firms appear to be making ground in adjusting towards a circular economy.
In 2018, the chemical industry’s economic impact in the Gulf region was substantial, according to Oxford Economics. “We estimate its total annual contribution to regional GDP was USD 81.6 billion, sustained through a combination of its direct, indirect (supply chain), and induced (wage-related) economic channels. This total impact, which exceeds the annual GDP of Doha, equates to almost 5% of the region’s total GDP in 2018,” says Galloway.
The GCC chemical industry supported a total of 620,000 jobs, both directly and through its “multiplier channels,” in 2018, he says. This is larger than the population of Manama, the largest city in Bahrain.
The Gulf region’s chemical sector invested an estimated USD 488 million in research and development in 2018, according to Oxford Economics. R&D spending generates long-term benefits: the chemical sector’s research boosts the region’s economy through the development of new technology, processes, and products that enhance efficiency and productivity.
Every sector of the Gulf economy benefits from the existence of the chemical industry, says Livermore. “When all channels of impact are accounted for, manufacturing generates the largest proportion of the industry’s total annual GDP contribution (USD 49.9 billion), followed by mining and quarrying (including oil and gas extraction), and wholesale and retail trade, which respectively generate USD 13.9 billion and USD 6.6 billion. The remainder of this economic impact is spread across the rest of the economy, with financial services and transportation also playing important roles,” he says.
- According to Oxford Economics’ forecast model, the overall economic outlook for the six GCC countries is as follows:UAE: While the non-oil economy lost momentum through 2019, there are reasons to be positive. Expo 2020 is expected to boost non-oil activities by as much as 1.5% of UAE’s GDP. Policy is also supportive: both Abu Dhabi and Dubai are implementing fiscal packages, while the recent interest rate cut by the US Federal Reserve should support private sector credit growth, it says.Saudi Arabia: Steep oil production cuts and a modest acceleration in the non-oil sector will see GDP growth slow to 0.5% this year from 2.4% in 2018. Saudi Arabia is aggressively pursuing a diversification strategy encapsulated in Vision 2030: budget spending will be complemented by the private sector stimulus announced in late 2017. This will support non-oil growth in the short- and medium-term, but whether it can make inroads into the stubbornly high unemployment rate remains to be seen.Qatar: Oxford Economics is maintaining its below-consensus GDP growth forecasts for Qatar at 1.3% for 2019 and 2.5% in 2020, as the blockade continues to hurt its economy. The pace of growth should improve in the medium term, amid ongoing investment ahead of World Cup 2022 and a ramp-up in gas production.Kuwait: GDP growth, much influenced by OPEC+ production agreements, is expected to pick up next year when the current oil production agreements expire. Kuwait has made efforts to implement reforms and has risen in the latest World Bank Doing Business ranking, but further structural and institutional reform is needed to encourage diversification and modernization and support non-oil growth.Oman: Amid continued oil output constraints, forecasts for Oman’s GDP growth are only 1.3% this year and 1.7% in 2020, with the outlook for its non-oil sector also looking far from promising. Tourism is the bright spot, showing a significantly higher number of visitors than last year, aided by the opening of the
new Muscat airport terminal in 2018. But domestic demand remains under pressure, with the real estate market facing persistent headwinds.
Bahrain: GDP growth is forecast to slow from 1.8% last year to 1.6% this year (the lowest for almost 25 years), weighed down by multi-year fiscal consolidation measures aimed at addressing wide and persistent government deficits—and with only a modest contribution from the oil sector.
Globally, the US-China trade war and concerns about a worldwide recession are key concerns highlighted by Oxford Economics’ recent Global Risk Survey. But the chemical sector provides goods to a range of sectors further down the supply chain, and some of these are impacted by factors that GCC-based firms should keep in mind.
“The global auto market, a key consumer of chemicals, is currently suffering its worst slump since the global financial crisis. In part this reflects reduced buyer confidence, disruptions in Europe and China from new emission standards, and profitability pressures as manufacturers gear up for new technologies.
“However, the auto market’s weakness also reflects lower demand growth following several years of new car sales outpacing consumer spending, as cheap financing (e.g. in the US) and government tax cuts (e.g. in China from 2016 to 2018) encouraged new vehicle purchases,” says Livermore. ■