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State of the GCC chemical industry in 2021

GPCA Analysis

The GCC chemical industry appears to be on the recovery path and witnessed a rebound in growth in 2021, though at a gradual pace. The World Bank estimated GCC economies to return to an aggregate growth of 2.6% in 2021, buoyed by global economic recovery, due to stronger oil prices and the growth of non-oil sectors. Brent crude prices rose to their highest levels in November 2021 since October 2018, reaching $86.04 per barrel[1]. We expect the current positive momentum to carry into 2022, thanks to stronger oil exports, public expenditure, and credit growth. This acceleration can be attributed to the phased-out OPEC+ mandated oil production cuts. Moreover, higher oil prices attract additional investment and improve business attitude due to favorable oil market conditions. However, the outlook in the medium-term is bound by risks from slower global recovery, potential new coronavirus outbreaks, and oil market instability.

COVID-19 remains a threat both regionally and globally and continues to disarrange the global prospects as countries are in different phases of recovery, with diverse growth and policy margins. Chemical producers have been under great pressure to provide safe working environments, as well as operational and supply chain continuity, while facing higher restrictions at ports, supply constraints, global container shortages and elevated freight rates, and new pressure from stakeholders to enhance their sustainability performances.

The chemical industry performance

Output growth: 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[2]. Chemical performance in 2021 across different geographies shall 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% respectively, in 2021. 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[2]. The GCC’s lower than usual growth in 2021 is largely due to no major capacity coming onstream in 2021.

Revenue growth: In the GCC region, chemical revenue is forecasted to range between USD 60-63 billion in 2021. However, this is still lower than the pre-pandemic average of USD 82 billion generated by GCC producers annually since 2011. As the chemical industry progresses into 2022, strong demand for both commodity and specialty chemicals should keep prices robust throughout the year, according to Deloitte[3]. Understanding end-user customer industries’ trends remains a critical aspect for positioning a strong rebound in key end markets amid rising costs.

Trade growth: Despite the challenges and risks, the WTO is now predicting global merchandise trade volume growth of 10.8% in 2021, followed by a 4.7% rise in 2022, and the growth should moderate as market trade approaches its pre-pandemic long-run trend[4]. The GCC chemical industry is primed for growth in 2021-2022, propped up by the economic recovery. GCC’s chemical trade will have grown by up to 10%, in terms of volume in 2021 versus a 20% decline in 2020.

Investments: Despite considerable reductions in global investments, there are about USD 71 billion of planned and committed investments for 2020-2024 in the GCC chemical industry. However, there are concerns that petrochemical companies in the region may hold on from bringing additional capacity before the demand for chemical products completely recovers.

Adopting new agendas

Regional petrochemical players are pouring great efforts towards sustainability and value creation to achieve long term preservation and resilience against unforeseen risks and disruptions through shifting their agendas towards:

Circular economy: UAE has set ambitious goals and vision for waste management, deployment of renewable energy and wastewater recycling, all contributing towards a more circular economy. For example, the emirate of Dubai seeks to augment recycling rates and reach 75% waste diversion from landfills. SABIC in Saudi Arabia was named as the global company of the year 2021 for its contribution towards a circular economy for plastics recognizing their leadership and innovation in the TRUCIRCLE® successful initiative announced in early 2020 providing circular materials and technologies including certified circular polymers, certified bio-based renewable polymers, new polycarbonate (PC) based on certified renewable feedstock, and mechanical recycled polymers. Another 2021 initiative is EQUATE expanding its PET product portfolio to include Viridis 30, which includes 30% recycled content, and Borouge replacing the PE/PET multi-layer food packaging to a PE/PE laminate, mono-material packaging, thus enhancing its recyclability.

Hydrogen and renewable energy: GCC chemical companies are pivoting towards renewable energy to secure clean, reliable, and competitive power sources. Green hydrogen produced by using renewable energy sources (wind or solar) with no carbon emissions is gaining attraction in the GCC region thanks to its strong potential to provide clean power for manufacturing.

During the past year we saw the rise of announcements within green hydrogen, green hydrogen-based ammonia, and renewable energy segments in the GCC of many promising projects in collaboration with international partners. For example, ADNOC announced joint study agreement with Japanese companies to explore the commercial potential of blue ammonia production in the United Arab Emirates (UAE). OQ as well is at the forefront of the development of the hydrogen economy in Oman. They have announced the development of three large green hydrogen projects with renowned international partners.

Leveraging digitalization: The 2021 digital focus was on improving structures and processes for ease of communications and ensuring access to all required information for decision making, planning, and support. This will call for greater adoption of emerging technologies such as robotic automation, artificial intelligence, machine learning, and natural language processing. In the GCC region, companies are increasingly using digital technologies. They have acknowledged the economic and social benefits that “going digital” can bring and have developed ambitious plans and strategies[5]. Some of the GCC chemical industry projects in digitalization: ADNOC and Group 24 JV to develop and commercialize AI products and applications in the UAE, Saudi Aramco and SAP alliance to expand the digitalization system, and SABIC’s fully digitized trade transaction solution.

Industry restructuring: A variety of the biggest chemical companies have been diversifying, notably because of past mergers and acquisitions, in order to expand their portfolios, become more resilient and access new markets and technologies. In April 2021, Aramco streamlined the downstream petrochemicals business and SABIC will now be responsible for the sales and marketing rights of an additional 5.4 million tons of chemical and polymer products. Earlier, in March 2021, Sadara announced SABIC and US petrochemical producer Dow will begin marketing its products in the Middle East from 1st of July. SABIC also began marketing the petrochemical products of Rabigh Refining and Petrochemical Company (Petro Rabigh) from 1st of October. This is forging a strategic move to be closer to the market and creating a one-stop-shop approach embedding customer-centricity.

Elevated ESG goals: ESG is growing rapidly, and the chemical industry specifically is under high scrutiny and pressure from all stakeholders to improve Environment, Social, and Governance (ESG)

practices across their entire value chain and to adhere to increasingly stringent regulations and concerned local communities. This will mainly be accomplished through the supply of sustainably produced products into downstream industries, decarbonization, renewable energy, and circular plastics. Most prominently, climate change is driving sustainability efforts in the GCC chemical industry, where UAE is paving the way for a bold COP28.

Four out of the six founders of the One Planet Sovereign Wealth Fund (SWF) group are from the GCC; namely Abu Dhabi Investment Authority, Kuwait Investment Authority, Qatar Investment Authority and Saudi Arabic’s Public Investment Fund[6]. In addition, the Sharia-compliant green bond issuance doubled in 2021 to that of 2020, in which Saudi Arabia and the United Arab Emirates hold $1.3 billion worth of green sukuk and $1.2 billion floated, respectively[7][8].

 

Final thoughts

2021 has been a year of challenges and new opportunities for major petrochemical players and the chemical industry proved to be resilient and resourceful in the face of adversity as economy heads into 2022 on a stronger footing. The recovery will continue to follow a mixed trend given different growth strategies and different policies. We see several GCC players going in the right direction, utilizing the Covid-driven disruptions as opportunities to build a resilient and future-proof business. In the coming year, chemical companies would need to observe the trends that are forming the end- markets landscape, spotlight new growth opportunities and extract more value from their existing resources.