06 August 2010 00:00 [Source: ICB]
With its advantaged feedstocks and access to growth markets, the Middle East will become the petrochemical sector's core. But there are opportunities for success elsewhere
In the literal sense, the hub carries the bearings around that smoothly circulate to turn the wheel and support the weight of the entire vehicle at its contact with the axle. In the chemical world, there is a great deal of confusion about where a hub stops and everything else within the value chain starts.
A few years ago, individual sites might have been considered to be hubs. Wilton, in the northeast of the UK, was once considered exactly that, with its bearing being the leader-style steam cracker from which material spokes extended into products such as glycols, polyolefins and polyesters. Beyond this was the wheel rim of the process segment of the petrochemical value chain. However, rationalization of the petrochemical sector in the 1990s saw many of the material spokes pass into new ownership. This made them subject to further rationalization and, in some cases, to closure.
To say the least, in spite of the quality of the central assets, this rendered the wheel somewhat shaky, and this position is being rebuilt by the current owners of the cracker to maintain its economic viability. The shakiness of the original model was only exacerbated by the collapse of many of the local region's keystone industries - a difficult situation, both economically and socially. Bodies such as the North East Process Industry Cluster are making stern efforts to address this, using the historical, industrial and technical skills base that exists in the Wilton area.
In a way, this is a reverse of what happened at BASF Ludwigshafen, in Germany. Wilton, which under the original ICI governance, was an English "Verbund" (integrated) concept, with each part integrated to and mutually reliant upon the others. For BASF, Ludwigshafen is a hub in itself and acts as such for the heartland of German industry that utilizes its output. However, the last recession changed the stability of this concept and shook the foundations of North European petrochemical strategy.
BASF ACTS FAST ON DOWNTURN
BASF's own response to the downturn in 2008 was crucial, immediate and effective - but represented a considerable degree of pain for the company and the Verbund principal. Turndowns and closures, leading to operating rate penalties upstream was clearly a situation that the decades of Verbund development had not previously suffered and management should be praised for its "step-out" in thinking.
Recent years have begun to see a shift in what is considered a hub, away from operations and production sites, towards feedstock advantage and logistics provision. Within Europe we have little to speak of in terms of feedstock advantage (if considered in terms of feedstock into petrochemicals - with the exception of gas from the North Sea fields) when compared with, for example, the Middle East, Russia or even Canada. Our modern-day hubs are ports such as Rotterdam or Antwerp, which have land, access, terminal facilities, storage facilities and a concentration of all these and more tools that make them cost-effective places to invest in petrochemical production.
Extensions of this are the wheel spokes of the infrastructure in Europe, in particular the ARG pipeline network that links the port hubs with landlocked sites. This too can lead to hubs of a different sort where landlocked sites integrate with each other and the ARG to provide provincial hubs - an example being the Chemsite network in Northern Germany.
However, all of these more recent considerations of the nature of a petrochemical hub in Europe have a fundamental downside - the regional competitiveness of Europe versus other regions and the polarization of international trade post-recession.
NEW PARADIGM FOR PRICING
Go back 20 years, and the price-setting mechanisms for globally traded bulk petrochemicals and polymers would be found in the economics of the US Gulf coast marginal exporter, trading with East Asia. Now all that has changed. Now, it would be best to look at the cost base of the Gulf Cooperation Council producers, the logistics costs to China and China's trade in finished or semi-finished goods with the rest of the world, and its own internal economic competitiveness. The trade in chemicals and global commodity pricing mechanisms are now polarized along an axis between the Middle East and East Asia (particularly China).
This brings us to the issue of modes of global recovery, post-recession. We are in what Kline terms a realignment (or Trade Bloc) scenario. The change of administration in the US has taken a strong line on its role in global trade - as Larry Summers, head of government advisory body the National Economic Council, put it in his interview with UK newspaper the Financial Times in July 2009 - the "world can no longer regard the USA as the consumer of last resort." However, what the institutional target of a reduction of US trade with China did not achieve was any significant impact on China's GDP growth. China simply looked to its own internal demand requirement and continued buying materials from the Middle East in a pretty much unabated fashion.
The end result of all this is fairly reflected in the statement made by Margaret Walker, US-based chemical producer Dow's global vice president of engineering solutions, technology centers and manufacturing and engineering work processes. Speaking recently in Bahrain, she described the Middle East as becoming "the foremost global petrochemical hub." It is a logical conclusion and the end-game - if push comes to shove - is that the Middle East will be the last man standing based solely on feedstock cost advantage.
So we are down to a situation where the ultimate hub is where the cheapest feedstock is, assisted by sound logistics and access to markets - the regional hub serving the other regions. How many of these can we have?
WHO WILL THE WINNERS BE?
Eventually of course the answer is "one winner," but, in the meantime, what opportunities are there? Jumping from one global crunch point to another - recession to "end of oil" - there are some regions that may have scope to make a major play.
The previously mentioned Russia has major reserves, but even within its own territory the access to market can be challenging. The major fields are in the East and the demand in the West, with an awful lot of territory in between.
Russia's industry has two clear commodity choices: transport the feedstock to the West of Russia and build derivative positions of a scale linked to the market, or become a hub for the East, with lead scale derivatives on top of the gas fields, to serve the markets of Asia. Logistics will be the sticking point here - in either case.
As oil reserves dwindle and demand continues, we are looking to a cost curve in terms of the extraction of oil that drives us up towards a reliance on alternative sources - hence the earlier reference to Canada. As our continuing demand for oil looks set to remain above 100m bbls/day of oil equivalent, oil sands and oil shales sit at the point where they become economically viable as a source of transport fuels and petrochemical feedstock.
If Kline's innovation mode becomes the favored economic scenario, expect these and other alternatives to give the potential for new regional hubs. But if the environmental mode holds sway, there may be problems associated with local opposition to the extension of these deposits into a fully grown petrochemical hub.
In the end, the scope to be the global hub still rests with the Middle East, but the changing dynamic of what is and is not an economically viable feedstock position gives new regional opportunities for some.
Glyn Johnson is director (Middle East and Eastern Europe), Kline Europe. He is responsible for developing the management consulting business and client coordination in Central/Eastern Europe and the Middle East. Since April 2010 his role has increased to include M&A prospects in EMEA.
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