2021 GCC chemical industry outlook
By Nuriya Ismagilova, Research and Studies Specialist, GPCA
The Covid-19 pandemic dealt an unprecedented blow to the GCC economy, causing it to contract by 6% in 2020. The economic decline was caused by measures associated with pandemic, national lockdowns, and the collapse in crude oil prices, which turned negative for the first time in history in April 2020. The chemical industry in the region is closely linked to economic activity, demand and supply headwinds, fluctuations in feedstock prices, and growth in end-user industries which naturally meant that the regional sector too experienced the negative implications of the coronavirus pandemic and the overall economic situation. The GCC chemical industry is one of the most important contributors to the manufacturing value added in addition to the indirect and direct impact it has on other sectors of the economy. Therefore, the performance of the chemical industry has a significant effect on economic development, especially the non-oil sector.
“The chemical industry in the region is closely linked to economic activity, demand and supply headwinds, fluctuations in feedstock prices, and growth in end-user industries.”
Here it’s important to note that the GCC’s chemical industry’s performance is also closely linked to trends on the international markets. The global industry was already facing pressure in the form of global overcapacity, pricing pressure, trade uncertainty, deteriorating competitive advantage and a global pandemic which accelerated many of these challenges even further, especially for GCC producers. As the industry moves into 2021, the economic, political, environmental, and social issues which directly impact its development and performance are expected to play an important role in shaping its future.
In this piece, we take a look at some of the key factors that will play a role in the regional industry’s performance over the coming year and provide a forecast for key indicators including output, revenue and trade.
“As the industry moves into 2021, the economic, political, environmental, and social issues which directly impact its development and performance are expected to play an important role in shaping its future.”
1- GCC economy will recover, but gradually
The GCC countries will see a modest economic recovery over 2021-2023, with real GDP growth of 2.5%, after a contraction of about 6% in 2020. Like many other countries worldwide, GCC states were hit hard due to the impact of the coronavirus pandemic as well as weakening oil demand and crude oil prices. The economic contraction was split relatively evenly between the hydrocarbon (oil and gas production) and non-hydrocarbon sectors. And the recovery during 2021-2022 will be felt across both the hydrocarbon and non-hydrocarbon sectors.
“Like many other countries worldwide, GCC states were hit hard due to the impact of the coronavirus pandemic as well as weakening oil demand and crude oil prices.”
Figure: GCC GDP Growth Forecast
Source: IMF October 2020, S&P, 2020
Figure: Brent crude oil prices
Source: Oxford Economics, Haver Analytics, 2020
2- Crude oil prices will increase, but remain under pressure
The oil-price decline in 2020 dealt a major shock on the global chemical industry. Crude oil is a major cost driver in the petrochemical sector and its derivatives such as – aromatics, ethylene, and propylene – serve as an important building block for key chemicals. In addition, some chemicals are produced through highly energy-intensive manufacturing routes and have a strong link to oil prices. Changes in oil prices have an immediate and significant impact on the cost structures of the chemical industry.
Brent oil prices declined by more than 40% during 2020 and chemical producers were not prepared for both the magnitude and speed of the impact on their business. In the GCC, chemical sales declined by more than 20% compared with 2019. When looking at 2021, consensus among agencies is that the oil price is not expected to see a dramatic recovery and is predicted to be at the USD 40-50 range in the coming two years.
“Brent oil prices declined by more than 40% during 2020 and chemical producers were not prepared for both the magnitude and speed of the impact on their business.”
3- Chemical output will rebound unevenly across geographies
Global markets are expected to recover at a healthy pace which is expected to strengthen as the infection rate declines and vaccinations are rolled out throughout the year. As forecasted by the American Chemistry Council (ACC), global chemical output volume is expected to grow by 3.9% in 2021, following a decline of 2.6% in 2020, which was the largest decline in the last 40 years. Chemical performance in 2021 among different regions will vary but all are expected to recover. China and India will lead the recovery in global chemical output, with expectations for strong growth prospects of 5.4% and 7.5% in 2021, respectively. Overall, chemical output in the Asia region is set to rise by 4.4% next year, followed by North America, with 4.1%, and Latin America, with 4.6%. MENA’s chemical output is expected to rise by 3.6%, and by about 1.2% in the GCC in specific. The GCC’s lower than usual growth in 2021 is driven by no major capacity coming on stream in 2021 and the industry operating at a high-capacity utilization rate.
“As forecasted by the American Chemistry Council (ACC), global chemical output volume is expected to grow by 3.9% in 2021.”
Figure: World chemicals output growth (%)
Source: American Chemistry Council, 2020
Figure: Trade Growth Forecast
Source: WTO, GPCA Estimates, 2020
4- International trade will recover but challenges remain
World trade will continue to dominate the headlines in 2021. It will still bear the scars from the trade wars at the height of 2018, and the effects of future trade restrictions in the years to come. However, despite the challenges and risks, there is some cautious optimism about trade this year, as economies are set for recovery and international trade becomes more robust. As forecasted by the World Trade Organization, global merchandise trade is expected to bounce back by 7.2% in 2021, although this would still be below the pre-crisis trend. The current trade forecast of 7.2% for 2021 appears to be closer to the “weak recovery” scenario than to a “quick return to the pre-pandemic growth trend”. Whether a recovery can be sustained over the medium term will depend on the strength of investment and employment. We forecast GCC chemical trade to grow by up to 10% in terms of volume in 2021 vs. an up to 20% decline in 2020.
“As forecasted by the World Trade Organization, global merchandise trade is expected to bounce back by 7.2% in 2021.”
5- Chemical revenue will improve but it won’t return to pre-pandemic levels
The chemical industry’s revenue is expected to improve in 2021, supported by higher oil prices and a rebound in demand in end-user industries. Commodity chemicals saw the sharpest revenue decline in 2020 and are expected to see a strong recovery next year. However, we don’t expect revenue to return to pre-pandemic levels. In the GCC region, chemical revenue is forecasted to range between USD 60-63 billion which is a 15- 20% increase over the previous year. However, this is still 25-30% lower than the pre-pandemic average of USD 80 billion generated by GCC producers annually since 2011. A critical aspect of dealing with revenue generation in 2021 will be to understand which end-user customer industries trends are temporary and which are permanent, as recovery will likely be uneven across end-markets and geographies.
“The chemical industry’s revenue is expected to improve in 2021, supported by higher oil prices and a rebound in demand in end-user industries.”
Figure: GCC Chemical Industry Revenue (USD billion and Y-O-Y growth)
Source: GPCA, 2021
The chemical industry was facing market headwinds even before the pandemic started. However, coronavirus has accelerated a multitude of these challenges, making 2020 a truly testing year for the chemical sector and businesses in general. Pivoting towards a new future will be difficult and many companies will be required to make bold choices. We see a number of GCC players going in the right direction. However, many more still need to make their strategic moves. GCC chemical companies can utilize the Covid-driven disruptions as opportunities to build a resilient and future-proof business. In the coming year, chemical companies would need to watch the trends that are shaping the end-markets landscape, focus on new growth opportunities and extract more value from their existing assets.
“GCC chemical companies can utilize the Covid-driven disruptions as opportunities to build a resilient and future-proof business.”