Saudi Arabia is the GCC’s largest contributor. Its economic and industry indicators confirm that the economy shows good signs of resilience and recovery in terms of manufacturing production dynamics and consumer confidence. It is important to note that the production indices and consumer indices exhibited a stagnant to declining trend from 2019, and the 2020 pandemic further added to the trend. A positive note for the chemical industry has been the relative position of the Chemical Production Index, which dropped by 11.9% YoY, compared to the overall Manufacturing Index drop of 19.4% during the same period. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) curves were nearly flat from January 2019 through June 2020, post which they saw an increase. This increase is expected to be further consolidated due to the introduction of increased VAT to 15% from 5%.

Overall chemical capacity in the GCC region is expected to close near 177.5 million MT in 2020, an increase of less than 1% CAGR from the 2019 capacity of 176.2 million MT.

The GCC region operating rates in 2020 were lower than the traditionally high levels of 90%-95%. However, it was still higher than the global estimated average of 82%-85%. Price and margin realization was lower than in previous years due to the falling oil prices and reduction in demand across major end markets.

On average, the GCC region is expected to add 1-2 million MT per year of petrochemical capacity until 2025-2026. Based on the 2020 scenario, most of this capacity should come on-stream closer to 2025.

OQ Liwa Plastic project in Oman is one of the key ongoing projects to have entered the commissioning phase in Q2 2020, and full production commenced in Q4 2020. The Liwa project will add 1 million MT of polyethylene and polypropylene capacity in the region and takes OQ’s total polyolefins capacity to 1.5 million MT. New capacity additions in 2021 will include Borouge’s 480,000 MT polypropylene project. The overall Borouge 4 project is worth noting, with a total ethylene output of 1.8 million MT per year and total olefins and aromatics capacity of 3.3 million MT per year. The petrochemicals project within the Duqm integrated complex (including polyethylene, polypropylene, ethylene glycol and butadiene) is undergoing a re-evaluation and faces uncertainty. The refinery complex of the Duqm project is expected to come onstream by Q4 2021, adding 230,000 bpd of refining capacity. Other project delays include Kuwait’s Al Zour complex with polyethylene, polypropylene and para-xylene mix.

Chemicals end-sector performance – expect temporary recovery in 2021 from 2020 levels, followed by a slow growth period until 2023. Packaging will be the key growth enabler, while the automotive market will follow a sluggish recovery path until 2024. Significant efforts will be required to revive the construction sector, which was already witnessing sluggish growth since 2018.

Construction

The construction sector continues to show sluggish growth from well before the pandemic. The construction activities in the GCC have a strong correlation with the oil dynamics, and the sector can expect some positives with the projected oil output and prices showing signs of recovery from Q3 2020. Another growth spike is expected post-Q1 2021.

In its November 2020 commentary, OPEC pegged its 2021 crude output at 27.4 million bpd, up by 27% from the 2020 figure of 22.1 million bpd.

The significant impact on the GCC construction sector can be seen with fewer new contract awards and numerous delays in ongoing/announced projects.

Packaging

The GCC total plastic packaging consumption in 2020 is expected to close at 2,570 KT, an increase of 2.6% from 2019 levels of 2,505 KT. Continuing the momentum, the overall plastic packaging consumption in 2021 could reach close to 2,650 KT.

Flexible packaging has gained higher growth momentum with CAGR volume growth of close to 4%—nearly double that of rigid plastics—since 2019.

This momentum is part of an ongoing shift in preference from packagers and consumers. It is further aided by the surge in demand for single-use flexible packaging in consumer goods and medical applications during the pandemic.

Key trends to watch in the GCC packaging industry over the long term with the shift toward flexibles:

• Brand image and consumer appeal: A greater visual impact of flexible packaging in consumer products regarding design, look and feel is needed.
• Convenience: Flexible packaging offers greater ease of use in terms of weight of the package and form.
• Innovative design possibilities and intellectual property management for packagers: Packaging companies realize greater freedom of design to tackle multiple areas of customer convenience, sustainability and waste management. A classic example is the introduction of innovative stand-up pouches within flexibles.

Automotive

The GCC auto industry was hit hard in 2020, with new vehicle sales expected to clock 750,000 units—a dip of close to 24% from 2019 levels. Although 2021 is expected to see low single-digit positive growth compared to 2020, achieving the pre-pandemic levels will take 2-3 years.

New vehicle sales figures for KSA and the UAE indicate drops of 21% and 23%, respectively. New vehicle sales in KSA are expected to close at USD 6.2 billion in 2020, while the UAE stands at USD 4.2 billion during the same period.

Along with the decrease in consumer buying confidence and social restrictions, the new value-added tax (VAT) measure introduced in KSA in July 2020 is expected to dampen the outlook of the auto industry. KSA has increased its VAT by three times to 15% from the earlier level of 5% for this discretionary buying sector.

GCC trade with China: Standing at the crossroads of a major change in dynamics?

Perhaps it is apt to say that the GCC region has been the most important trading partner to China in recent years. The dynamics, however, are poised for a major change as in the ‘90s, when fertilizers, then a major trade segment between the GCC and China, got wiped out from the trade map due to China’s self-sufficiency.

The GCC region has since evolved into the more value-added petrochemicals space; however, is it time for the cycle to repeat itself?

Consider the following two factors:

1. China’s self-sufficiency plans: Announced in 2014-2015 by the Chinese government, the plan is expected to realize full fruition during the first half of the new decade. Most impacted will be the BTX chain, followed by the C3 and C4 chains.
2. Threat from low-cost, shale-based US ethane: Another critical factor to consider is the US-China trade war. This is not expected to have any impact in the immediate future as trade tensions could continue in the short term as the US looks to bring in strategic trade reforms for the long term.

Key areas to consider for GCC chemicals industry in 2021 and beyond

Without a doubt, the GCC chemical industry should harness the slow but positive outlook of the global economy, especially China, in 2021. Along with closely monitoring supply-demand balance in key regions and maintaining high operating rates, the chemical producers have to focus on increasing the efficiency of their operations to minimize cost and realize a healthy bottom line. However, the industry should not forget its medium- to long-term action items to de-risk itself from the ever-evolving macro-economic, geopolitical, regulatory and business dynamics. Below are the key factors to consider for creating a sustainable future for the GCC chemical industry:

Polyolefins promise to be the steady growth segment, buoyed by robust demand for various grades of polyethylene, especially in flexible packaging, to cater to the increased needs of consumers and high hygiene consciousness. Polypropylene is exhibiting mixed growth, with declining demand from the auto and durables space offset by increased demand from the medical and packaging industry. China will continue to add polyolefins capacity until 2025 by 10%-12% per year. However, under-utilization of capacity and domestic demand growth could sustain imports from the GCC region.

Ethylene glycol could face a negative impact in the coming years, with China expected to add up to 15% additional capacity in 2021 and continue the trend until 2025.

Aromatics could be a tricky space for GCC producers, with China already having significant domestic overcapacity in para-xylene and benzene chains. This can hamper GCC export volumes for para-xylene and benzene and also styrene monomer, a derivative of benzene. The overcapacity in China’s aromatics segment, coupled with low downstream demand for Purified Terephthalic Acid (PTA) and polyesters, has resulted in weak prices for these products. Gulf producers should look for alternate export destinations for the aromatics segment and strengthen the downstream development strategy.

Key areas to consider for GCC chemicals industry in 2021 and beyond

Without a doubt, the GCC chemical industry should harness the slow but positive outlook of the global economy, especially China, in 2021. Along with closely monitoring supply-demand balance in key regions and maintaining high operating rates, the chemical producers have to focus on increasing the efficiency of their operations to minimize cost and realize a healthy bottom line. However, the industry should not forget its medium- to long-term action items to de-risk itself from the ever-evolving macro-economic, geopolitical, regulatory and business dynamics. Below are the key factors to consider for creating a sustainable future for the GCC chemical industry:

A – Efficient portfolio management and diversification: An efficient scenario analysis is required to understand the long-term supply-demand dynamics of traditional chemical segments such as C1 and C2 chains. The results from the scenario analysis need to be carefully examined to prioritize portfolio chemistries and grades and also develop efficient supply chains to improve new market access potential. Additionally, a move toward a value-based business model, as opposed to cost based, is essential to secure a profit and reduce dependence on oil-and-gas-based volatilities.

B – R&D investments and move toward downstream specialty chemicals: A key step to ensure the evolution and competitiveness of the GCC region will be developing technologies for portfolio diversification into specialty chemicals. Suitable opportunities need to be created for inviting technology leaders into the region, followed by a robust planning- and implementation-based approach. Development of second- and third-generation Crude Oil to Chemicals (CoTC) technologies to tune in the downstream chemicals mix up to 60%-70% will also act as a transformative step toward the value-addition journey.

C – Creating a self-sufficient ecosystem: One of the key trends emerging from the pandemic is a changing taste toward localization as opposed to globalization. The GCC region needs to strategically develop a long-term, self-sustainable ecosystem for the chemical industry. This will require true collaboration between governments, chemical producers, consumers and other key value chain actors.

D – Adoption of sustainability and circular measures: The continued focus should be retained on long-term sustainable goals of carbon neutrality and circular economy. The region should further enable green/renewable chemistry and waste reduction/optimization, re-use and recycling measures.

E – Adopting digitalization as a game-changing enabler of transformation: The chemical industry, in general, has a long way to go in terms of adopting best-in-class digital tools and ecosystem to accelerate the Industry 4.0 vision. GCC actors should prioritize improving operational efficiency to achieve manufacturing and supply chain excellence. The focus needs to be on analytics-enabled through-put gains, efficient MRO operations, connected plants, AR/VR for HSE improvement and training, etc. Digital solutions such as AI and blockchain can also act as transformative tools to accelerate the adoption of sustainability and circular economy practices. Commercial excellence could be another area targeted toward developing specialty downstream segments through digital marketing tools, e-commerce technologies and sales analytics.