Middle East polyolefins set for robust future
By Kaushik Mitra, Executive Director, Polyolefins, EMEA, Chemical Market Analytics
The global polyethylene (PE) and polypropylene (PP) markets are witnessing severe headwinds, due to macroeconomic, geopolitical and inflation developments. Worldwide consumers and businesses are cutting discretionary expenditure, all capital cost is being scrutinized and cost optimization is the norm. In some markets, companies are even weighing rationalization as well. Some markets are drawing parallels between the current crisis with the 2008 post-recession scene. The Middle East region, in particular Gulf countries, are not wholly immune from the crisis and are seeing demand compression, supply glut and margin squeeze.
However, the region has shown resilience in the face of solid headwinds and looks poised for a robust future. Even as variable cost inflation has recently exacerbated cost disadvantage of regions like Europe and Northeast Asia, feedstock cost advantage due to supply of attractively priced feedstocks, has cushioned the Gulf players and allowed them to gain market share, while keeping their balance sheet somewhat insulated. We have also seen that the regional policy makers, despite record revenue from hydrocarbon resources are cautious and diligent about spending. Unlike in the past when such revenue windfall would be spent on social upliftment projects, the focus is now on building capabilities and preparation for the future. The region looks ready to play a bigger role in the Polyolefin World market order.
Megatrends are pro-growth for the region
As advanced, developed markets like Europe and North America plateau due to aging and saturation, future growth of polyolefins will be led by emerging and developing regions like the Middle East/ GCC. Demographic dividend of growing age population, burgeoning Middle East and urbanization will fuel significant growth momentum in the region. Moreover, as the region develops human capital and aims to diversify economies away from dependence on crude oil, polyolefins offer a tremendous pathway for growth and development. As the chart on the left shows, the Middle East is lagging behind China, developed Europe, and North America in terms of per-capita consumption of polyethylene. As China slows, and advanced markets flatline or decline, the Middle East with a feedstock advantage can become an outsourcing hub of manufacturing activity not only for resin production, but also for downstream conversion and processing.
A case for GCC becoming a manufacturing outsourcing hub
The GCC strategic position at the intersection of East and West gives it a tremendous logistical advantage. GCC countries are taking steps to widen and deepen the downstream base like creating integrated clusters and providing special incentives which attract OEMs and brand owners to invest. These steps in turn leads to developing trained manpower and reforming regulatory frameworks. However, more needs to be done to leapfrog into the top of the league.
Possible areas of focus include:
1. Improvement in supply chains to cut transit time significantly to major regions like Europe, North America, and Asia
2. Widening manufactured product base especially of the differentiated and value-added products to offer latest ranges to buyers.
3. Attracting downstream machinery manufacturers to set-up base and offer services locally.
4. Investing in establishing “made in GCC” branding, at present there is very little branding effort while a strong brand image will promote consumer connection and loyalty.
Recently a few resin manufacturers have started making advanced PE and PP grades in the region by diversifying from commodity production. This action will promote supply driven growth, increasing self-sufficiency and less dependence on imports.
Stimulating domestic demand will insulate the region from trade volatility
Domestic consumption needs to be boosted if the growth momentum is to be sustained and dependence on trade to be reduced. In order for this to happen, converters and processors in collaboration with brand owners, need to develop products fit for local needs and taste. The region also must bridge the gap in circularity and sustainability if it wants to build a modern resilient industry. Currently, there is limited investment in waste management and conversion of waste into secondary raw materials. Circularity and sustainability is important not only for development of local industry, but in view of shadow energy trading schemes like Carbon Border Adjustment mechanisms being considered in Europe, such steps would be necessary to maintain continued market access. Global brand owners are adopting eco-designs, therefore, the GCC needs to adopt these principles to be compliant.
Capacity growth key to sustain leadership
From a modest base, the Middle East jumped in the capacity ranking when the region witnessed strong investment in polyolefin capacities since the 2000s especially in the period 2008-2014. Such investment was stimulated as governments in the region offered attractively priced feedstocks, and other financial and commercial incentives which drew international companies, who in partnership with local units, set up world scale units. Since more than 70% of the production was exported, due to low local consumption base, considerable effort was spent on developing supply chains, markets, products, and manpower. However, since peaking in 2018, capacity share of the region is slipping due to a pause in investment but also as China seeks to become more self-sufficient. However, things are about to change, as the region embarks on a capacity addition plan that will start to materialize from the late 2020s. Such capacity addition is tied to the energy transition strategy of the region, that aims to maximize the chemical value chain by moderating exposure to the energy space. We estimate that the region will regain past market share by the end of the decade which will create the right ecosystem for local as well as export business in the future.