INDUSTRY INSIGHTThought Leadership

A 2024 and beyond outlook for the GCC chemical industry

By Valentina Olabi, Research Specialist, GPCA

Both regionally and globally, 2023 saw the chemical industry face a challenging year. After various factors contributing to slow-moving demand for chemicals globally, including the European recession, US inflation and lower-than-expected chemical demand rebound in China, the global chemical market grew by less than 1% throughout 2023, with many producers experiencing lower output.

As a result of the slow-moving demand in 2023, on a global level, the Fitch Ratings outlook for the chemical sector in 2024 remains relatively ordinary. However, for the GCC, this presents as an advantage. In 2023, China completed over 20 petrochemical projects, which pushed its global share of petrochemical capacity up to 25%.

This caused a global deflation of chemical prices and margins. For regions with heavy reliance on chemical import, such as Europe and South America, this is disadvantageous from a cost perspective. However, for the GCC, who have lower production costs, the coming year could witness the region benefitting from this dynamic due to more competitively priced feedstocks, leading to a higher chemical industry performance for the region throughout 2024.

As a result of the stagnant market growth in 2023, efficiency, resilience, and sustainability are critical components determining the success of the industry in 2024. Economic aspects, including fluctuating oil prices, the continuous effects of inflation, regulations, and changing global market dynamics will all pose as a test to the chemical industry. However, for the GCC, despite challenging economic times, the outlook for 2024 looks prosperous and promising due to a variety of factors projected to make regional chemical supply chains more resilient. These include an expected increase in OPEC+ oil production in 2024, a bounce back in Asian demand for chemicals, sustainability projects and growing demand for sustainable products, the digitalization of regional chemical supply chains, and negotiations and trade agreements.

Oil prices and their impact on the regional industry

GCC countries remained relatively resilient in 2023 despite slow global growth rates. Regional chemical production in 2023 was estimated as equating to approximately 159 million tons, demonstrating a 2% increase in regional production capacity between 2022-2023. Nevertheless, the GCC witnessed a 2.8% contraction in total oil sector activities in 2023 due to the sequential oil production cuts by OPEC+. Owing to OPEC+’s significant global share, that accounts for approximately 40% of total global crude oil production, their respective lower output resulted in higher oil prices, particularly between Q3 and Q4 of 2023, as presented in Figure 1.

This figure also presents a forecast for respective oil prices throughout 2024.  As crude oil and its derivatives serve as feedstocks for petrochemicals, the marginal increase in prices in 2024 could impact the production, investment, and financial decisions of chemical producers. However, for GCC specific producers, a rebound in chemical demand in Asian markets (4.2% China and 6.3% India), and the announcement of the loosening of OPEC+ oil production quotas show promise for the growth of the regional chemical industry in 2024.

Figure 1: Global Brent crude oil prices – historical and forecast (USD per barrel)

Source: IEA (2024), PwC (2024)

Economic diversification and chemical industry growth

GCC GDP growth is expected to strengthen in 2024, projected to grow by 3.7% for the whole region. As the chemical industry constitutes almost 5% of regional GDP, it is a crucial component toward the economic strengthening of the region.

The changing regional dynamics in the olefins and polyolefins industry, particularly highlighted by China’s previously mentioned expansion of petrochemical projects in 2023, are closely linked to sustainability and economic diversification projects in the GCC. By capitalizing on the 2024 market dynamic of being more cost-competitive due to cheaper feedstock, the region is diversifying its revenue streams away from traditional oil and gas exports. However, due to the volatility of oil prices, which directly impact the chemical industry, as well as a changing global tone regarding the importance of sustainability and environmental protection, GCC producers are transitioning toward diversification in the non-oil sector.

GCC growth in 2023 was largely catalyzed by expansion in the non-oil sector, which is estimated to have grown by approximately 4.3% in 2023. This growth was mainly anchored by government investments linked to various economic diversification agendas taking place across the GCC, including renewable energy expansions and initiatives announced at the recent COP28 in Dubai. For the chemical industry specifically, COP28 saw the announcements of various initiatives and projects from producers and their affiliates advocating their efforts to promote sustainable practices in the regional industry. These are presented in Figure 2.

In addition to the advocacy for regional sustainability by COP28, there is an increasing market demand for sustainable products driving the expansion of diversification practices within the chemical industry. Toward the end of 2023, an announcement was made highlighting that in light of growing environmental concern, and the fact that 60% of GCC businesses were off track toward achieving their sustainability targets, consumers in the GCC were willing to pay premiums to prioritize sustainability. For the chemical industry, this presents itself as an opportunity for various reasons.

Figure 2: GCC companies’ sustainability initiatives announced at COP28

Source: GPCA Research (2024)

Figure 3: Global green chemicals market demand forecast

Source: GPCA Research (2024), Precedence Research (2024)

First, responding to the demand for ‘green chemicals’- which are chemicals produced via sustainable processes, such as green ammonia or hydrogen, can increase regional producers’ market competitiveness in the coming year. The forecast for projected global green chemicals demand for 2024 is presented in Figure 3.

The Asia-Pacific region accounts for almost 40% of the demand for global green chemicals. If GCC countries continue their trajectory toward producing sustainable chemicals, particularly fertilizers, for which they already have an existing market stronghold, they have the potential to claim a significant portion of the global clean chemicals market in 2024 and beyond.

Furthermore, although the full effects won’t come into force until mid-2025, the implementation of Europe’s Carbon Border Adjustment Mechanism (CBAM) may negatively impact GCC chemical producers’ exports that aren’t sustainably produced. GCC chemical producers and governments are embracing economic diversification projects, particularly those involving CCUS. This is advantageous as changing regulations under CBAM may lead to products produced via CCUS practices being exempt from carbon tax.

As the GCC constitutes 10% of total global carbon capture, with more looming projects and expansions on the horizon, their continuation of sustainable innovations can not only increase their global market share, but also protect their exported products from tax and attract consumers due to their due diligence toward environmental protection. Upcoming GPCA members’ sustainable chemicals projects are presented in Figure 4.

Digitalization of chemical supply chains

Aside from innovative sustainable projects, the implementation of digitalized supply chains and artificial intelligence are becoming an important element for the success of the chemical industry. In 2023, 8% of GPCA member companies reported having a fully executed strategy in place for the implementation of digital supply chains. Meanwhile, 58% of member companies reported having a fully thought-out strategy in place, with plans to implement it in coming years. In 2024, numerous regional producers may witness the realization of these strategies, as an increasing number are recognizing the competitive advantages associated with implementing digital supply chains in the industry. With digital integration, producers can benefit from increased productivity, accelerated innovation, improved decision-making, and stronger customer relations.

Figure 4: GCC chemical industry sustainable projects

Source: GPCA Research (2024)

Many regional producers, including SABIC, Aramco, ADNOC, and OQ have announced AI programs to accelerate research and development (R&D) for sustainable products, predict the impact of changes in the production of one product or other processes, gain insights by tracking data through the entire value chain and recruit and harness talent in this sector to foster the future of the digitalization of the chemical industry.

With the chemical industry experiencing a rise in the adoption of AI technologies, 2024 could see the streamlining of organizational processes, as well as enhance critical business operations and deliver quicker and more resilient chemical supply chains.

FTAs and trade negotiations

Another notable factor to consider in 2024 is the GCC’s growing importance toward trade negotiations and Free Trade Agreements (FTAs). In December 2023, the GCC signed an FTA with South Korea to boost economic ties.

Even prior to the signing of this FTA, when negotiations were under way, trade between the GCC and South Korea skyrocketed from USD 50 billion in 2021 to USD 78 billion in 2022. In the chemical sector, South Korea imports over USD 3 billion annually from the GCC. This points to a likely increase in market share for GCC exporters, catering to South Korea in 2024. FTAs provide numerous benefits for both parties, including increased access to higher quality goods for the importer, and the elimination of tariffs. For the GCC, who already have a very prominent global market for chemicals, the adoption of free trade agreements will undoubtedly help producers acquire a greater market expansion and a larger array of customers. Trade negotiations are currently under way with five of the GCC’s major trading partners as presented in Figure 5, along with the average chemical import tariff (per product) of each of the negotiating countries.

Although import tariffs affect the importing countries more than the exporter – in this case GCC producers – the removal of tariffs through the signing of FTAs will bring an array of benefits to GCC chemical producers. Without import tariffs, the cost of the exported goods decreases for the importing country. This can make GCC chemical products more competitive in the international market, potentially leading to increased sales for regional producers. As the GCC already constitutes ∼5% of the global chemical market, a 2024 signing of these pending FTAs will expand their global share. Another notable benefit includes supply chain efficiency: Eliminated import tariffs can streamline the supply chain by reducing administrative burdens and the paperwork associated with customs procedures. Along with the imminent digitalization of regional chemical supply chains, this efficiency can lead to faster shipping times and reduced operational costs for exporters.

Figure 5: GCC FTA negotiations and average chemical import tariff

Source: GPCA Research (2024), World Trade Organization (2024)

Lastly, with global collaborative events like COP28 positioning the GCC as a key global player, the introduction of tariff-free environments can attract foreign investors seeking to establish facilities or expand within the GCC. The absence of import tariffs could enhance cost-effectiveness for both parties, ultimately contributing to an overall boost in regional GDP.

Final thoughts

In summary, 2024 is projected to be a highly promising year for the GCC chemical industry. Beyond the rebound in crude oil production, the region is committed to implementing strategies that will enable the industry to adapt to changing global climates. The persistence of sustainable projects, implementation of digital practices, and the fostering of international collaboration via trade agreements collectively position the regional chemical industry for a very successful future.

References:

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