Arab Spring stalls Middle East polymers demand

30 January 2012 00:00  [Source: ICB]

Political revolutions hit the Arab world in steady waves for the majority of 2011, with Egypt and OPEC member Libya thrust in the limelight, flagging concerns about possible disruption of oil supply from the Middle East.

© Rex Features Thousands of Lebanese protesters massed on the Beirut seafront chanting "Syria out"

From Tunisia, other countries in the Middle East and North Africa (MENA) caught the contagion of political upheaval, aided by social media. The call to oust longtime, resented leaders in the Arab world spread like wildfire.

Egypt saw months of protests, raising concerns that an important channel for trade - the Suez Canal - may be shut because of political riots. When Libya, the world's tenth-largest oil producer and exporter, was hit by political tumult, oil prices shot up, with Brent rising above $100/bbl. With unrest so close to Saudi Arabia, which supplies 35% of the world's crude requirements, most watched with bated breath the unfolding events last year.

The MENA region had seen decades of political stability until the uprisings - collectively called the "Arab Spring."

PLASTICS DEMAND HIT

Within the region itself, the adverse consequences of political protests were evident in the polymers industry, in which demand weakened significantly. Some of producers were unable to book sales for several months as a result.

A number of chemical plants in Libya and neighboring countries shut down as an offshoot of unrest in the months leading to the final removal of leader Muammar Gaddafi. With Libya's crude production disrupted by protests, there was a shortage of feedstocks to run its polyolefin facilities.

Libyan National Oil Corp. (NOC) shut its 130,000 tonne/year cracker at Ras Lanuf in February. The cracker may be restarted in the first quarter of 2012, market sources say.

The cracker's shutdown forced Egypt's Oriental Petrochemicals Co. (OPC) to run its 160,000 tonne/year polypropylene (PP) plant at about 80% capacity because propylene supply from Libya ceased in April 2011, a company source says.

In Syria, protests are still ongoing, calling for incumbent president Bashar al-Assad to step down. A number of converters have been running plants at rates of 30-50%. The country is the largest consumer of polyethylene (PE) and PP resins in the East Mediterranean region.

When the Jordan-Syria border was closed in April 2011, Gulf Cooperation Council (GCC) countries exporting to Syria faced logistics problems in transporting cargoes by land.

Land transportation costs to Syria for PE and PP resins have increased by an average of about $5-20/tonne since the unrest began in March 2011.

There has been some improvement in demand since the last quarter. Middle East polyolefin resins producers are receiving inquiries for new materials as most converters in Syria are located in the country's north - away from the protests in central Syria.

Still, difficulties in doing business remained as the US and Europe implemented sanctions, requiring Syrians to deal with foreign banks in their transactions. The sanctions have forced Syria to scramble to find buyers for its heavy crude oil.

Syrian converters said that unless the country ends the political turmoil, the local economy will continue to deteriorate, further undermining consumer confidence.

Neighboring Jordan faces the same problem of slowing polymer consumption as the country is wracked by political unrest.

Market players say sales of resins in Egypt have started to improve as domestic converters may have raised production with the removal of former president Hosni Mubarak.

Egypt's demand for imported polymers has yet to return to levels before its political debacle. Raffia and fiber grade PP are the key raw materials for the manufacture of carpets.

Egypt has the world's largest carpet production, but domestic sales were poor in 2011. Egypt is exporting more and more products to nearby Syria, Libya and Saudi Arabia, even as those nations are awash with supply. The supply overhang in carpets is dampening demand for raffia and fiber-grade PP. In 2010, PE consumption in Egypt was about 600,000 tonnes. Syria consumed 200,000 tonnes, and Jordan 70,000-80,000 tonnes. Also in 2010, Egypt consumed 300,000 tonnes of PP, while Syria and Jordan consumed 90,000-100,000 tonnes and 30,000-35,000 tonnes each.

THE BIGGER PICTURE

The overall impact on the Middle East petrochemical industry is minimal given that huge petrochemical complexes in the region mainly cater to the European and Asian markets, according to Sriharsha Pappu, a Dubai-based analyst at HSBC Global Research.

The political unrest in MENA had an impact on trade flow, but the domestic market is quite small, he said. The consequent spike in crude prices, meanwhile, had a net positive effect on the business operations of major petrochemical players within the Gulf Cooperation Council (GCC), particularly Saudi Arabia, Qatar and the UAE, Pappu says.

"The bulk of the petrochemical capacity is in the GCC. Because crude prices spiked, this meant that the global petrochemical complexes have seen price inflation," notes Pappu.

He says the impact has been a "net positive" on earnings for local petrochemical companies. "Most of them have low-cost or fixed-cost gas, and so they have actually had windfall profits this year," says Pappu.

Saudi Arabia-based major SABIC reported a 54% year-on-year jump in third-quarter 2011 net profit to Saudi riyal 8.19bn. A different picture emerged in the fourth quarter, as demand significantly weakened amid concerns that the world recession would begin anew.

"More than the political concerns in the Middle East or the Arab Spring that we have seen over the last nine to 10 months, the impact that we've seen on trade flows and pricing and the industry has come from what is happening in the eurozone, and also what is happening in China, which we call a credit situation," says Pappu.

Trading has been slowing down in China given a domestic credit crunch as the government is trying to address its inflation problem via continued tightening of monetary policy.

"From speaking to our [corporate debt] issuers, the main concern is the eurozone debt crisis and sluggish US economy rather than political instability in MENA," says Andrew Wong, a Singapore-based credit analyst at global ratings firm Standard & Poor's.

"The challenges in Europe and the US are impacting petrochemicals through weaker consumer confidence (lowering demand and product prices - customers are delaying purchases and keeping inventory low) and increasing borrowing costs," adds Wong.

Author: Pearl Bantillo and Ong Sheau Ling

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