INDUSTRY INSIGHTThought Leadership

GCC specialty chemicals: Which markets will drive growth?

By Diya Menon, Senior Consultant-Chemicals, Frost & Sullivan and Aparajith Balan, Practice Leader-Chemicals, Frost & Sullivan  

The chemical industry was already facing issues related to global overcapacities, lower profit margins and trade restrictions, among others in 2019. The COVID-19 pandemic, coupled with the decline in oil prices, resulted in further pressure on the overall sector. The impact, however, was varied across different segments. Specialty chemicals were more resilient compared to commodities given its lower volatility with fluctuations in crude prices. Prior to the pandemic too, specialty chemicals has commanded higher growth and profitability than the chemical sector.

Figure 1: Global Speciality Chemicals: Growth and Profitability Overview

The global specialty chemicals market was estimated at USD 593 billion in 2020, a decline of 3.5% from the previous year. While the market is expected to rebound in 2021, the impact and path to recovery will be different given the plethora of end industries that the segment caters to. End sectors such as cleaning, disinfection, food and beverages and medical devices drove demand with evolving consumer behavior related to the increasing importance given to hygiene and food delivery gaining traction during the pandemic. However, sectors such as automotive and construction that were impacted by country lockdowns witnessed steep declines.

SectorImpact of COVID 19Growth (2020-2025)- Global
AutomotiveHighMuted short-medium term growth owing to dampened consumer sentiment & supply chain challenges
PackagingLowIncreased focus on safety measures, sustainability and hygiene standards will ensure continued growth
ConstructionHighClosely following GDP growth; project delays expected to continue till 2022 before recovery
ElectronicsMediumRising discretionary spending on smart devices and wearables will continue to grow
Consumer GoodsMediumIncreasing disposable income and a rebounding supply chain infrastructure will ensure growth in the sector

 

Overall, the global specialty chemicals market is expected to grow at a CAGR of 3.3% between 2022 and 2025 with electronic chemicals expected to witness the highest growth. China is expected to grow faster than the global average; the country accounted for a quarter of the market in 2020 seeing a significant increase from 2012 when it held a market share of less than 20%. The developed markets like North America, Europe and Japan are expected to see growth limited at 1%-2% between 2022 and 2025, thus witnessing a decline in their market share.

The emerging markets under specialty chemicals have specific USPs and would need to leverage them well to sustain growth and leverage the evolving opportunity areas, some of the key USPs are as mentioned below:

RegionUSP (Specialty Chemicals)
GCCFeedstock advantage, access to established markets, presence of global majors
ChinaEconomies of scale, large-scale integration
IndiaStrong R&D and Innovation capability compared to other markets. Capability of customization
Other Asian countriesLow cost manufacturing, less regulated

 

The GCC specialty chemicals market is comparatively small; however, various government initiatives will catapult growth. A key driver is KSA’s Vision 2030 based on which multiple strategies are being implemented such as IKTVA, Invest Saudi and the National Industrial Development and Logistics Programme that have identified priority specialty chemical segments for investment.

In addition to this, regional leaders are acting as catalysts to support the expansion for downstream specialty segments. The impact is being seen through multiple large scale and differentiated product investments such as Baker Hughes and Halliburtons oilfield chemical plants in KSA and Ta’ziz which would be leading the development of Ruwais Derivatives Park, among others.

Priority segments for the GCC region:

1- Paints and coatings is an established market with multiple local and foreign manufacturers operating in the region. The market, estimated at 3.5 MMT, was estimated to grow at over 3% between 2020 and 2025. However, the decline in 2020 on account of COVID-19 and a slowing construction sector has resulted in limiting growth to 2%-2.5% over the mentioned period.

Key trends in this segment include:

    • Green/ eco-friendly products, low VOC products
    • Smart paints in decorative
    • Collaborative innovation
    • New chemistries such as corrosion under insulation, glass flake epoxies, and vinyl esters for protective coatings

 

2- Construction chemicals accounted for ~ 0.8 MMT in 2020 and are expected to reach 0.9-1.0 MMT by 2025 in the GCC. The market is mainly driven by megaprojects such as NEOM, growing investments in the tourism sector as well as rising adoption of public-private partnership (PPP) models.

Key trends in this segment include:

    • Advancement in formulations to increase longevity, strength and durability
    • Focus on minimizing environmental impact including reducing cement and water use

 

3- Polyurethane market in the GCC totaled to over 315 KT in 2020 and is expected to increase to over 360 KT by 2025 driven by the growing packaging sector and increasing use in building and construction. Localization potential exists across the value chain including intermediates such as polyester polyol, PU conversion and finished products such as flexible foam.

Key trends in this segment include:

    • Material combinations with superior functional benefits are a key requirement

4- Plastic additives: Growth in flexible packaging and packaging as a brand statement calls for increased investment in additives to suit changing design and materials requirement. GCC’s market is expected to increase from USD 1 billion in 2020 to USD 1.5 billion in 2025 mainly driven by growing packaging sector and focus on localization of the entire plastics value chain through government initiatives and value add programmes.

Key trends in this segment include:

    • Replacement of conventional materials by plastic across applications
    • Improved food packaging property requirements
    • Green additives, especially in primary food, pharmaceutical packaging
    • Intelligent and smart packaging

 

5- Food additives: Increasing importance of health and wellness is expected to drive market growth from USD 1.1 billion in 2020 to USD 1.5 billion in 2025. Existence of multiple cuisines drives the need for multiple food additives in the region. While demand for sweeteners would be higher than other segments, taxes limits attractiveness for investments and expansion.

Key trends in this segment include:

    • Minimization of unhealthy food additives
    • Inclusion of value-added functional ingredient
    • Dietary food supplements and portion controlled serving sizes
    • New business models to transform food retail

 

6- The Active Pharmaceutical Ingredients (APIs) market in the GCC is estimated to increase from over USD 13.2 billion in 2020 to USD 18.6 billion in 2025. Currently, the market is majorly import driven with the share of imported pharmaceutical products close to 80% and generics accounting for ~40%. However, pharmaceuticals are a key focus area for Vision 2030 strategy resulting in government initiatives being a key driver to increase local manufacturing. The focus is on cost containment and pending patent expirations.

Key trends in this segment include:

    • Opportunities created by patent expiry of biologics in next five years and inclusion of value-added functional ingredients in formulations
    • Payers becoming major influencers
    • Targeting diseased cells more precisely and selectively
    • Antibody drug conjugates, and nanobodies are a key focus area for biologics R&D

Conclusion

With COVID-19, companies are now looking to control costs, revise large investment plans and optimize their portfolio. Specialty chemicals provide an opportunity to overcome profitability challenges in the GCC, especially given the low crude price environment and at the same time mitigate China’s increasing self-sufficiency in commodity products. While the region is well poised to take advantage of evolving dynamics, it would be critical to overcome some of the inherent challenges that are being faced, including, access to technology, localization of end industries and investment in specialized R&D.

The development of an overall ecosystem would be critical for the region’s specialty chemicals sector’s success. With increased investment in end sector industries such as packaging, electronics, and automotive, the attractiveness of investing in intermediates used by these industries would rise.

Additionally, there would be a shift required from price-based to value-based marketing since the industry is mainly driven by technological expertise and performance differentiation, thus requiring skill enhancement to compete with global leaders.

On the whole, the specialty chemical sector has tremendous potential for multi-fold growth in the GCC region. The sector has largely been underdeveloped and should be looked at as a key focus area of growth. Large chemical companies in the GCC are well-positioned to leverage their experience in the value chain to develop new and innovative ways to expand their downstream presence. This will involve working closely with existing end-user segments and making products that are perfectly suited for the local market – both from an efficacy and pricing standpoint. Companies should look at technical support, collaborative formulations, and developing the right capabilities to meet specific customer requirements across high growth end-use segments mentioned above. Specialty chemicals could well be the sector that unlocks the next level in the GCC chemicals growth story.