INDUSTRY INSIGHTThought Leadership

The changing dynamics of global investment in chemicals: Implications for the Middle East

By Dr. Yahya Anouti, Partner with Strategy& ME and the Sustainability leader at PwC ME, and Devesh Katiyar, Principal with Strategy& Middle East

The investment landscape for the chemical sector globally is shifting rapidly, as a “deglobalization” trend takes hold: while capital spending overall is stable, announced foreign direct investment (FDI) is down sharply and, in its place, there are strong localization tendencies as companies look to strengthen their supply-chain resilience. This shift is creating clear winners and losers, with FDI leaving Europe and heading to Asia. The Middle East is, perhaps surprisingly, not touched by this trend. What can the region do to remain a key player amid this new wave of capital investment? This article examines global investment trends and focuses on ways for the Middle East to strengthen its attractiveness for chemical investments.

1. Global foreign direct investment flows in chemicals have declined in the past three years

Global FDI flows (announced) in chemicals have substantially decreased since the outbreak of COVID-19. The average announced FDI flows since 2021 are approximately 50% lower than the average from 2015–20 (Figure 1). At the same time, capital spending has remained relatively stable, estimated at $239 billion in 2023. This slowdown of global FDI flows highlights changing dynamics in the industry as companies switch from investing abroad to investing domestically to bolster their supply-chain resilience.

2. FDI in the chemicals sector has shifted markedly from Europe to Asia.

While FDI overall is down, it is also shifting geographically. The biggest shifts are the net outflows of FDI out of Western Europe, amounting to $20 billion in the past three years, and a net inflow of FDI into Asia–Pacific of $11 billion. Africa has also seen a sizeable net inflow of $5 billion. The figures are almost unchanged in the United States, where investors focus on the domestic market. In the Middle East, there is also stability, with net FDI inflows up by about $1 billion (Figure 2).

3. North America and Asia are attracting much of the FDI outflow from Europe.

The FDI flows out of Europe are going primarily to North America and Asia. Economic growth in the destination regions is one of the main drivers, together with cost competitiveness, particularly relating to energy. The need to be closer to customers is also a factor, for example, for specialty chemicals. Incentives are also playing a role, such as the US Inflation Reduction, which earmarks billions in clean tech investments and provides subsidies and government support for a battery supply chain. More than one-third of the announced manufacturing FDI outflows from Western Europe are in clean hydrogen or ammonia (36%) and specialty chemicals (36 %), with battery supply chain and industrial gases making up 8% and 6% (Figure 3).

4. How the Middle East can insert itself into the global investment shifts

Our region is conspicuously absent from these global shifts in FDI. Key investment decisions about the future of the chemicals sector are being taken globally, and the Middle East is not on the map for them—and this, despite having the lowest cost of energy.

We see three opportunities for the Middle East to insert itself into the shifting landscape. Each of them is closely aligned with the green transition in the region. The opportunities are, first, to launch flagship green investment attraction programs; second, to leverage global economic corridors and government-to-government partnerships; and third, to strengthen investment facilitation and investor protection.

Launching green investment attraction programs like the US IRA or Europe’s Green New Deal would complement other initiatives already underway, including the commitment by countries in our region to achieve net-zero global emissions and plans already announced, such as Qatar’s National Environment and Climate Change Strategy, the Saudi Green Initiative, and the UAE Net Zero by 2050 strategic initiative. Green investment attraction programs could focus on energy-intensive value chains, playing up the major cost advantage that the Middle East has in renewable energies, including the world’s lowest levelized electricity cost. This, in turn, can spur the growth of clean hydrogen and ammonia.

Leveraging global economic corridors and government-to-government partnerships would make use of the region’s geographic position. Most recently, the proposed India-Middle East-Europe Economic Corridor (IMEC) aims to connect the European Union and seven other countries, including Saudi Arabia and the UAE. Doing so would link both continents to important commercial hubs and further facilitate the development and export of clean energy. Partnerships with other governments could focus on building multilateral value chains that capitalize on each country’s competitive advantages. For example, in the solar-PV-panel value chain, one GCC country could develop energy-intensive segments (such as polysilicon) while another focuses on labour-intensive production steps (for example, module assembly).

Finally, strengthening investment facilitation and investor protection implies implementing transparent and consistent investment regulations. This includes clear rules around property rights, dispute resolution, and repatriation of profits. In addition, investment facilitation and intellectual property protection laws can be strengthened and enforced to safeguard the interests of foreign investors.

The time to act is now. Even in a volatile global environment, petrochemical and chemical companies in the Middle East region are well placed to become leading players in a more sustainable global economy. Efforts to make the region more attractive and competitive will put it back on the map for global investment flows.