JEDDAH, 23 March 2005 — A paradigm shift is likely in the petrochemicals business from the West to the East, with the Middle East emerging as a global hub, backed by the region’s advantages of low-cost feedstock and labor, fast growing demand in Asia and new technologies.
In a detailed research report released at the two-day ArabPlast 2005 Summit, McKinsey & Company, a management consulting firm advising leading companies on issues of strategy, organization, technology, and operations, has projected a shake-up in the global petrochemical industry, wherein established Western companies will exit, shrink, or move eastward through partnerships, in order to defend their stakes.
The summit is a part of the ArabPlast 2005, the region’s leading trade fair on rubber plastics and plastic processing, which is being held at the Dubai International Exhibition Center (DIEC). The summit will track market trends, spot challenges and will have a special plenary on the outlook for investment in the petrochemical industry in the region.
According to the report, the Middle East’s share in the global ethylene market is expected to grow to 17 percent in 2010 from 9 percent in 2004, which means that 40 percent of all new ethylene capacity will be built in the Middle East. The total global ethylene capacity is projected to increase to 148 million metric tons in 2010 from 114 million metric tons in 2004.
Mckinsey has projected a growth of 119 percent in net trade from Middle East to East Asia by 2010, with China accounting for a major part of the increase. In addition to its huge population, China’s chemical-intensive and export-driven industry is also driving demand for petrochemicals.
“The gravity of the polyolefin world is shifting eastward, and chemical companies that want to stay in the business need to move and transform before their entire economic rationale is swept from under their feet,” the report said.
US share of global trading in ethylene derivatives has fallen to less than 10 percent today from 30 percent in the 1990s, and it will probably be less than 5 percent by 2010. Over the same period, the Middle East is likely to increase its share to more than half of the globally traded volume.
Western petrochemical players are under increasing pressure given disadvantages in feedstock, poor improvement in productivity, expensive work forces and subscale assets. As the gap between price and cost diminishes, they have a hard time coping. As a result of this, petrochemical plants in the US and Europe are becoming less competitive as compared to those in the Middle East, which is leading to a flat or declining production for ethylene and polyethylene.
Mckinsey has cited several reasons for the re-direction on both the supply and demand side of the scale. Primary among these is a projected boom in demand for petrochemicals in the Asia-Pacific region, which is catching up rapidly with the US and Europe. Demand is expected to achieve the same levels with the two regions combined by 2010.
Demand for polyolefin is expected to grow at around 10 percent per annum with high density polyethylene (HDPE) growing by nine percent, linear low density polyethylene (LLDPE) growing by 12 percent and polypropylene (PP) growing 10 percent.
Besides this, Middle Eastern companies have access to cheaper gas, with ethane costing $0.75 to 1 per MMBTU. The cost of crude oil would need to drop below $15 per barrel for Western producers to be competitive for LLDPE in Asia.
McKinsey has also spotted a trend of emerging alliances between the Middle East and China, which will combine the benefits of the Middle East’s cheap feedstock costs and China’s access to Asian markets. For example, Saudi Aramco has picked up a 25 percent equity stake in China’s Fujian Refinery and Petrochemical.
According to the McKinsey, there are three dimensions to the growth of the petrochemical industry in the Middle East - capacity, portfolio and geography. The Middle East’s heavy investments in ethane crackers and polymers will enable it to exploit the huge quantity of gas available. Its ethane supply will be able to meet around 17 percent of the global ethylene demand, which is expected to be 148 mmt per year by 2010. Some of capacity expansions include that of Iran’s NPC, SABIC and Chevron Phillips-Qatar Petroleum-Total.
Companies in the Middle East could also expand by acquiring the assets of Western companies or by forming joint ventures with them. Examples of joint ventures are SABIC-Chevron Phillips Chemicals, Atofina-Qatar, Basell-Saudi Polyolefins, Dow-Oman Oil, and CPC-Qatar Petroleum-Total.