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Marcin Jedrzejewski ... principal at BCG Middle East

GCC petchem firms ‘must focus on excellence’

DUBAI, April 5, 2016

GCC producers should focus on commercial and operational excellence and product specialisation, to face the paradigm shift currently sweeping across the Middle East’s petrochemical industry, according to a study.

The study conducted by the Boston Consulting Group (BCG), a leading global management consulting firm, revealed that the situation is a result of a whirlwind of global forces, some expected, others not, that include the domino effect of the US shale gas renaissance, oil prices’ relentless dive, Saudi Arabia losing its access to cheap gas feedstock, China’s capacity build-up, and the lifting of Iranian sanctions.

Marcin Jedrzejewski, principal at BCG Middle East, said: “Together, these game-changers have altered and reshaped the region’s petrochemical landscape – giving rise to a plethora of new challenges and opportunities.”

“The fact is, today, external political and economic factors paint a less rosy picture of the future of the GCC’s petrochemical industry. And while there is still time to reverse the damage done and even turn these setbacks into moments of growth, GCC petrochemical producers must do so fast – or risk losing their long-held competitive streak,” he said.

The US Shale Gas Renaissance: A Far-Reaching Revolution
The much-talked about shale oil renaissance has flooded the US market with abundant supplies of cheap feedstock (ethane), which in turn has armed US petrochemical producers with a hefty cost advantage over their European and Asian rivals – most of whom rely heavily on high-priced naphtha as feedstock. Although this advantage has been eroded by the current drop in the oil prices, in the long run, the US is still positioned to strongly benefit from the abundance of low-cost ethane, said the study.

The low-cost feedstock environment has spurred a massive expansion of the US petrochemical industry – in fact, ethylene capacity is expected to rise by a staggering 7.5 million tonnes over the next five years, it added.

Oil Prices: The Downward Spiral
The drop in oil prices is undeniably a major contributor to the current trends punctuating the GCC’s petrochemical industry. Brent oil prices have sharply collapsed from a high of more than $110 in June of 2014 to below $30 early this year. Subsequently, the price of naphtha has fallen steeply. And, in parallel, the price differential with gas has narrowed, further added the study.

The reason why the topic of plummeting oil prices is critical is because naphtha-based producers tend to be marginal producers of ethylene – and their cost of ethylene production sets the fundamentals for the product price globally and regionally, further added the study.

Since the prices of petrochemical products are directly correlated with oil prices – sinking oil prices translate into immediate margin erosion for historically feedstock-advantaged producers, which means most Middle East players. A high oil-gas spread favours ethane-based GCC crackers as the price is typically set by marginal producers in Northeast Asia and Europe who use naphtha as feedstock, it said.

Based on this, sustained weakness in oil prices will continue to undermine the profitability of GCC petrochemical producers, especially those fully integrated with upstream or taking advantage of preferentially priced feedstock allocations, it stated.

Saudi Arabia: The Impact of Price Adjustments
The Middle East is running out of cheap gas feedstock, and recent petrochemical expansions in Saudi Arabia have shown that feedstock is gradually getting heavier and closer to naphtha economics in the absence of price support from the government.

Furthermore, as demonstrated by Saudi Arabia’s recent price adjustments, feedstock costs have also significantly increased. In December 2015, Saudi Arabia more than doubled its ethane price from $0.75 British thermal units (mmBtu) to $1.75 mmBtu. This seriously affects the competitive power of petrochemical producers in the region and puts additional pressure on their margin, said the study.

The Case of China and Iran
In yet another development, China, which has long been the largest importer of basic chemicals – comprising polyethylene (PE) and polypropylene (PP) – is undergoing a colossal capacity expansion. Once the country’s ambitious plan to develop coal-to-olefins (CTO) technology is brought to life, it will naturally reduce its reliance on imports.

The GCC’s petrochemical landscape is riddled with a number of severe challenges. To effectively overcome these obstacles and minimise any resulting damage, GCC producers will need to act soon. Instead of simply bracing themselves for the impact, they must view this particular situation as an opportunity to refine the petrochemical industry – and in the process not only improve their bottom line but also add some much-needed high-skill jobs to the market.

More specifically, GCC producers should focus on the areas of commercial excellence, operational excellence, and product specialisation.

In terms of commercial excellence, historically, GCC producers have invested very little in sales, marketing and supply chain. In lieu, they greatly rely on off-takers and traders to carry and sell their products in core markets. This arrangement basically means that producers can lose anywhere between 3-10% of their product value to a ‘middle man’. Moving forward, GCC producers should invest in building robust marketing and supply chain capabilities – so they can win back this ‘lost value’ from off-takers.

Jedrzejewski said: “At present, the GCC’s petrochemical industry is caught in the throes of fundamental change.”

“To thrive and survive despite these evolving circumstances, GCC players will have to rethink and revise their business plans – urgently. Because stagnation is no longer an option,” he concluded. – TradeArabia News Service




Tags: | GCC | firms | petchem |

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