North African chemical markets have plenty of potential

Land of opportunity

11 November 2009 11:53  [Source: ICB]

North Africa's infant chemical markets are expected to grow significantly over the next few decades

LIKE THE wide-open plains throughout the continent, the potential for petrochemical producers in North Africa is vast and far-reaching.

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An abundant supply of natural gas feedstock, expanding markets and improving political stability mean that more foreign multinationals may soon consider dipping their toes into these nascent markets - which could pay dividends in the years ahead.

Africa represents one of the smallest petrochemical markets globally, and boasts some of the lowest demand. Even ethylene, a key product in Africa, with an output of 1.9m tonnes/year, represents only 2% of the overall market worldwide, according to research by UK-based consultancies Tecnon and Accenture.

Nevertheless, there is plenty of potential, according to Theo Jan Simons, global chemical industry lead for Accenture, adding that planned and speculative capacity increases could see North Africa's petrochemical output surge by around 40-50% by 2020 from current levels.

"Probably the key reason for future growth is that the local petroleum players are recognizing the potential that chemicals provide on top of their energy interests, and regard this as a way to diversify from pure energy-based revenue streams," he says.

"They probably also see this as a way of creating products that may increasingly be in demand within their own countries - and also realize that this has potential to develop local industries and provide jobs in the region," says Simons.

"Clearly, this is something that has taken place in Latin America and the Middle East; North Africa is now catching that wave and following some of these global trends."

On paper, at least, Africa is well positioned logistically, with access to markets in Southern Europe, Asia and the Middle East - and labor costs are relatively inexpensive.

However, to date, few have ventured into the arid landscapes of Libya, Algeria, Tunisia, Nigeria, Egypt or Morocco - the only countries other than South Africa to boast any real chemical industry in the entire continent.

Historically, most capacity investments have come from state-owned companies, such as Egyptian Petrochemicals Holding Company, Algeria's Sonatrach, National Oil Corp. in Libya, and Nigerian National Petroleum Corp.

Otherwise, foreign players have had little input. France's Total Petrochemicals has shown interest in Algeria, Indonesia's Indorama has targeted Egypt, and China's BlueStar has focused on Nigeria. US-based Dow Chemical is also said to have been looking into the Libyan market.

"I would struggle to see some of the leading chemical players go over there in the short term," says Johan van den Arend Schmidt, partner at global consultancy PricewaterhouseCoopers.

"I could see a situation where the national oil company would need technical help and access to end-markets from international chemical players, which, in turn, can offer access to cheap feedstocks, and are not generally available to foreign companies.

"That's the challenge; how do you build those partnerships or joint ventures with the national oil companies to gain access to those markets? I would say that there is an opportunity there, particularly if they seek to produce more complex chemicals, but we'll have to wait and see."

Edouard Croufer, global director of chemicals at consultancy Arthur D. Little, agrees: "If you could get the gas for an attractive price then you could probably justify building there, but why would somewhere like Algeria give you gas at an artificially cheap price when they could instead ship it to Europe, who would be happy to pay the right price rather than taking it from Russia? When the world needs additional capacity in the future, it will be tempting to build in Algeria or Libya. In the long term, I'm sure it will happen because there will be a need for product; the local population is large, and their economies should improve. But is it going to be the next big center of production for chemicals? I don't think so."

DEVELOPING ECONOMIES
North Africa is, however, starting to be of particular interest to companies in the rapidly developing Chinese and Indian economies, with many of the new global players acknowledging the strategic opportunities offered by the continent.

"I think they're eyeing it primarily with resource availability in mind; they have massive markets themselves but are generally short of the basic feedstocks. North Africa seems to be quite the reverse so this could be an interesting option," says Simons. "China and India obviously have capital in spades to develop the local industries so this could be quite a powerful combination. There's a long lead time with these investments; you're not in petrochemicals for a fast buck - but players are starting to look slightly longer term than they did before and at how they can develop local markets."

There is little incentive - and plenty of risk - for chemical producers to invest in North Africa, particularly with the imminent influx of supply from neighboring markets, points out Croufer. "The biggest problem for North Africa - other than the political instability - is the huge amount of capacity coming in from the Middle East," he says. "Is this the right time to go ahead and build something south of the Mediterranean? Not at the moment."

Aside from the availability of raw materials in Libya, Nigeria and Algeria, there is too little to justify any major investment in the region, he says. For all its attributes, there are just as many disadvantages.

Heightened competition from thriving markets such as the Middle East, comparatively poor infrastructure, corruption, security issues, and a lack of skilled workers mean that the major chemical players have, as yet, been unwilling to commit there.

"As a result of the downturn, you'd also want to be more secure in downstream markets than in the past," says Simons. "Maybe five years ago you would have said that if the feedstocks, technology, financing and stability were right then there would be a demand for your products.

"Obviously, with the recession hitting, it looks like we're in for a protracted period of overcapacity - so probably in assessing the attractiveness of these countries for petrochemicals, you would also need to consider what they can bring to the table in terms of downstream use within their own country or nearby," he says.

"There's no obvious downstream outlet at the moment, with little domestic consumption, meaning there are only export opportunities," adds van den Arend Schmidt. "I think it will become a key region because there's a lot of gas there that they need to monetize, and domestic markets may well grow. But for now, the disadvantages outweigh the benefits."

He adds: "We see that most of the chemical investments planned there are pretty simple and there's little need for international players to get involved. But we've seen some interest so it may well be that when they get to the phase of commissioning these plants they'll realize they may need to team up with international players to maximize value from these assets."

POTENTIAL VALUE
In the longer term, the prospects for these small but potentially valuable markets look a little more positive. Simons says that North Africa could emulate the growth spurt seen in Latin America and the Middle East, and prove to be strategically important to the chemical industry in the future.

Egypt and Algeria are expected to drive petrochemical capacity growth in the next five to seven years, he adds. Production capability is forecast to more than double between 2008 and 2015. By 2020, they will account for 58% of regional production.

Egypt, in particular, will see significant investment over the coming years, which will transform its product portfolio to include new capacities for ethylbenzene, purified terephthalic acid (PTA), styrene, ethylene oxide (EO) and monoethylene glycol (MEG). Algeria's output, meanwhile, is set to increase fourfold by 2015 - with an emphasis on ethylene, methanol and MEG.

The question does not therefore appear to be if North Africa can be considered a key region for petrochemicals, but when.

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By: Andy Brice
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