An existential crisis

For decades, the GCC region has enjoyed an oil wealth unknown to the rest of the world. The success of the oil market even helped the region build a vibrant chemical industry, driven by favorable conditions, abundance of natural resources, and access to burgeoning Asian markets.

And while the GCC region continues to aspire to extract greater value from its hydrocarbon resources, in the form of chemicals, it does not come without its own set of challenges. Regional chemical producers are faced with the increasing pressure of the powerhouse that is China, and its rise in self-sufficiency. China, the GCC region’s largest chemical export partner, has had a long drive towards increasing its independence from imports. The speed of which is only being accelerated via government policy support.

While we can hope for less volatility in the oil market after such a dramatic 2020, it does pose an almost existential identity crisis for GCC oil producers that has been a long time coming. Regional producers will try to find solace in chemical markets, but then, the biggest question becomes – can it compensate for oil revenues?

The China challenge

According to ICIS analysts, the performance of the polyolefin market in China exceeded expectations in 2020, owing to a combination of rising domestic demand, supported by stimulus policies, and effective control over the spread of the coronavirus across the country. China’s apparent consumption in 2020 surged at double-digit rates of 10% year on year for PE and 12% for PP.

While demand will possibly grow at a reduced pace this year, China will continue to add massive amounts of new capacity, which is indicative of the potential for a rapid decline in the volume intake from foreign suppliers, including GCC producers. According to the planned start-up dates for new PE and PP plants in China, the country’s effective polyolefin capacity will increase by over 8.4m tonnes/year in 2021.

Accordingly, imports are expected to reduce year-on-year, particularly for HDPE (minus 6%) and by double-digit rates for PP. China’s commitment to increase self-sufficiency on petrochemical supply will be particularly effective for PP over the next few years. Following large scale investments, China’s self-sufficiency rate for PP is estimated to approach 90% in 2021.

China’s import reductions, owing to rising self-sufficiency in key chemicals, will pose a threat to GCC producers who have been exporting significant volumes to the country. GCC producers may need to consider new export markets, even in the short term, as this trend is only expected to continue.

Saudi Arabia, the largest chemical producer in the region, accounting for more than 70% of the GCC region’s chemicals output, will have varying degrees of exposure of its product portfolio to China. While Saudi Arabia may be diversified enough in PE and PP exports, it is heavily reliant on China for ethylene glycol (EG), paraxylene (PX), and styrene exports – posing a high dependency risk on its export flows for these commodities.

All eyes on China – Outlook for 2021  

Asia petrochemical markets weathered the pandemic induced storm comparatively well as recovery started early in China.

For 2021, ICIS expects that downstream consumption in the packaging sector could remain steadfast, after having shown significant resilience during the coronavirus pandemic. Similarly, Asia’s construction sector will likely recover at a faster pace in 2021 as countries resume infrastructure activities. China, the largest construction market in the world, will lead the regional recovery as it implements major infrastructure projects. Asia’s automotive industry is also set to grow in 2021, with China leading the way.

Demand in Asia’s packaging sector will stay resilient in 2021

The packaging sector is often regarded as one of the more resilient sectors in times of crisis, given that governments usually take active steps to ensure continuity in food production and related value chains. Even when activity in the automotive and construction sectors came to a halt during the height of the pandemic, downstream consumption in the packaging sector held relatively steady.

Demand for packaging is set to be driven by polyethylene (PE) and polypropylene (PP), which are likely to continue to grow robustly. The spread of the coronavirus pandemic has not only led to greater demand for food packaging in 2020 but has also given rise to newer demand segments that may remain strong in 2021, as the world continues to combat the virus. Demand for single-use PE sheets in hygiene and personal care applications, as well as protective equipment, are some of the new growth areas for PE. Demand for PP in hygiene and medical applications is also poised for expansion in 2021. Polystyrene (PS) is also set to contribute significantly to growth in packaging in 2021, with demand for the commodity expected to strengthen. Polyethylene terephthalate (PET) resin demand is expected to be healthy in 2021. More so, if the Olympic Games go on as scheduled in 2021, it will signal a boost for PET resin demand for bottled beverage packaging.    

Outside of the pandemic induced demand, risks may appear in the form of changing regulations over single-use plastics, including containers and plastic bags. For example, China is looking to restrict or ban single-use plastics bags in shopping malls and supermarkets in provincial capitals this year.

While sentiment is generally optimistic following promising vaccine developments, the tourism sector is unlikely to see a full recovery in the first six months of 2021. However, e-commerce and online retail sales could continue to drive demand in the packaging sector, especially in China, as online retail sales soar.

Asia’s construction sector will recover at a faster pace in 2021

The construction market is a key consumer of chemicals, driving demand for a wide variety of chemicals, resins, and derivative products such as plastic pipes, insulation, paints and coatings, adhesives, and synthetic fibres.

China, the largest construction market in the world, will lead the regional recovery as the fast-tracked implementation of major infrastructure projects, that were severely weighed down by the coronavirus pandemic, continue in 2021. China is expected to spend yuan (CNY) 10tr on advanced infrastructure projects by 2025. The slate of new projects includes high-speed railways, new energy vehicle charging stations, big data, and fifth-generation wireless networks, and is expected to drive more than CNY17tr in related spending.

The polyvinyl chloride (PVC) market, a key construction-linked chemical market, is expected to see a steady recovery in 2021. Demand in northeast Asia is expected to grow by 6% in 2021, primarily driven by high construction activity and real estate investment growth in China. Consumption in the Asia Pacific region is expected to grow by close to 9% in 2021, with India, Malaysia and Vietnam being the main drivers. China’s polyethylene (PE) pipe construction demand is also expected to be stable in 2021, after bouncing back strongly from the pandemic in May-July of 2020.

Asian import prices for both phthalic anhydride (PA) and maleic anhydride (MA) have both risen by 65-70% since September 2020, propelled first by the dramatic rebound of demand from the unsaturated polyester resins (UPR) and alkyd resin sectors in China, then in more recent times by a similar uptick in southeast Asia. Both UPR and alkyd resins have wide usages in the construction sector as ingredients used in the manufacture of various construction materials like quartz stones and piping.

The growth rate of new construction projects is expected to remain in the positive zone in the coming year, many UPR and alkyd resins makers are still ramping up operations to build stocks, and this also means that they will keep their offtake of PA and MA cargoes, cementing a rosy demand outlook for the MA and PA sector for early 2021.

Similarly, Asian epoxy resins prices gained nearly 50% between September and November 2020, as supply tightened on an unexpected plant outage, at a time when demand from the construction sector was picking up in pace. Epoxy resins are ingredients used in the manufacturing of wind turbine blades, besides being typically used as adhesives on metals, coatings, as well as materials for construction. In this regard, demand for epoxy resins is expected to remain firm in China, where the wind energy sector development is well on track. With government subsidies for installation of waterborne windmills expected to run through 2021, market players expect this to keep demand for epoxy supported.

China to drive the automotive sector in 2021

China is the world’s largest automotive market and its strong recovery from the pandemic and robust economic performance is expected to be sustained throughout 2021. This will help drive up demand for various petrochemicals in Asia. Additional tailwinds such as the widespread availability of the coronavirus vaccine and the new U.S. administration, are also expected to bolster market sentiment and lead to a buoyant first half (H1) 2021 in Asia.

The key petrochemicals that will see rising demand due to the growth in the automotive industry include:

• Styrene butadiene rubber (SBR)
• Acrylonitrile butadiene styrene (ABS)
• Polymethyl methacrylate (PMMA)
• Maleic anhydride (MA) and
• Phthalic anhydride (PA)

Pointing to the future 

There are fundamental changes in store for GCC producers, across the hydrocarbon value chain. The pillars of oil demand have undergone a transition, and the downstream petrochemical producers face their own set of challenges, heavily exposed to an export market that is becoming increasingly self-reliant.

To ensure long-term economic viability, a whole new growth model will need to emerge from the region. This will be the defining challenge for the Gulf and its producers, in restructuring the region’s economies and dependencies in an entirely new way.