INSIGHT: ‘Decisive actions’ needed for GCC chemicals to remain competitive – GPCA chairman

LONDON (ICIS)–The Gulf Cooperation Council (GCC) chemical industry’s traditional reliance on cheap and plentiful feedstock is no longer a guarantee for competitive performance and “changes are necessary” to remain a global chemical powerhouse, according to the chairman of the Gulf Petrochemicals and Chemicals Association (GPCA).

Yousef Al-Benyan, who is also the CEO of Saudi chemical major SABIC, added that GCC chemical companies are facing challenges in several fronts and needed to take “decisive actions” in order to overcome negative trends.

Al-Benyan spoke to ICIS ahead of the GPCA annual meeting in Dubai, UAE, on 27-29 November.

“Changes [in the GCC chemical industry] are necessary. For decades, part of our success in the region was based on access to advantaged feedstock. We can no longer rely on that… Global trends show that cheap raw materials are becoming available elsewhere… The challenges are everywhere,” he said.

The GPCA chairman said that the region’s chemical companies which had based production mostly on natural gas liquids (NGLs) like ethane and propane would need to face up to the reality of a lower-for-longer crude oil price, which had made naphtha-based producers competitive again.

“That makes our region’s products less competitive in Europe. That turns the situation of 2004 to 2014 on its head,” said Al-Benyan, pictured right.

Moreover, Al-Benyan spoke about protectionist trends in North America, Europe and Asia, where “trade blocs and barriers are increasing” and which could potentially add another threat to the global competitiveness of GCC chemical players.

“If we have to pay higher import tariffs on top of already higher costs and other unfavourable economic conditions, this only makes circumstances even more difficult for us,” he said.

Moreover, the end of subsidies to crude oil related products in certain countries as well as the proposals in some states in the region to link local feedstock prices to higher global prices would also put pressure on chemicals, which could see higher costs for their utilities in what intrinsically is an energy-intensive industry.

“Finally, the most basic cost of all, manpower, is likely to rise as well due to wage escalation. All of these factors eat away at our profitability,” said Al-Benyan.

“GCC [chemical] players need to take decisive actions to combat these trends, which undermine our region’s competitiveness to deliver growth, profitability and long-term sustainability.”

Asia – and particularly China – has been a key region for GCC chemicals, as the fast development in the past three decades in the region has helped fuel demand for materials produced in the Gulf.

In fact, large-scale petrochemical complexes in the GCC region, like Abu Dhabi’s Borouge – a joint venture between the emirate’s oil major ADNOC and Austria’s Borealis – or Saudi Arabia’s Sadara – a joint venture between Saudi Aramco and US’ DowDuPont – place their hopes on the relentless urbanisation of Asia as a key market for all types of chemicals.

However, Al-Benyan adds another caveat, warning that GCC producers will not be able to rest in their laurels as the region’s own chemical production grows.

“The long-term challenge will be China’s declared intention of satisfying most of its rising petrochemical demand from domestic sources, which will leave limited room for exports from the GCC region,” he said.

“I believe we can meet this challenge, but only by increasing customer focus and through more efficient commercial and operational strategies.”

To achieve sustainable growth, Al-Benyan mentioned two key factors which will need to be at the centre of GCC chemicals producers’ corporate strategies in coming decades: more transparent governance structures and to act as facilitators for heavily crude oil-dependent countries to diversify their economies.

“We support the Kingdom’s [Saudi Arabia] recent efforts to improve the transparency of the markets and economy, in order to encourage increasing overseas investment,” he said.

“I think most of us know instinctively that organisations that are more transparent tend to be among the most profitable and successful.”

Saudi Arabia’s 32-year-old Crown Prince Mohammad bin Salman announced in 2016 an ambitious plan of reforms, Saudi Vision 2030, which has been well received by a population excited about the reforms and what opportunities they could present to them.

The lower-for-longer oil price scenario, following the sharp fall in prices in 2014, will make a change in economic policies more necessary in several GCC countries. As far as Saudi Arabia is concerned, SABIC’s CEO said his company stands ready to play a key role in a diversification programme aiming to create “thousands” of jobs in coming years.

SABIC employs more than 10,000 people in Saudi Arabia.

“SABIC is a strong supporter of Saudi Vision 2030, the most significant shift in the Kingdom’s economic development policy in decades. Vision 2030 opens up broad vistas of possibilities for strengthening Saudi Arabia’s local economy and business capabilities across every sector,” said Al-Benyan.

“SABIC’s Local Content programme will be key to attracting internal investments in innovation, technology, manufacturing, procurement and in creating thousands of high-skilled and specialised jobs for Saudis. It will also help create a culture of entrepreneurship and a more vibrant business climate overall.”

Creating jobs is a paramount task for the country. The well-educated Saudi youngsters who fill up the country’s colleges and universities often find that job opportunities are scarce once they finish their education.

According to the International Labour Organisation, 31% of Saudi people aged between 15 and 24 were unemployed in 2016.

However, the long-term sustainability of GCC chemical companies will also depend on the feedstocks they use or the methods of transport they develop.

While crude oil or natural gas derivatives are and will be for years to come the main feedstocks for chemicals production, SABIC’s CEO said the company was keen to explore greener ways to produce chemicals. An example is the company’s plant at the Jubail industrial city which captures carbon dioxide (CO2) to produce chemicals like methanol, and fertilizers.

According to SABIC, the plant has the capacity to process up to 500,000 tonnes/year of CO2, which it obtained from the company’s production of ethylene glycol (EG) at Jubail.

According to Al-Benyan, the company is evaluating more such opportunities.

“At SABIC, sustainability is in our DNA. We were founded in 1976 to discover valuable uses for the natural gas that was then being flared off uselessly into the atmosphere,” he said.

Another push for a more sustainable chemical industry would come, according to Al-Benyan, from the switch to rail transportation in the vast country, which would aim to deliver freight between the industrial and populous areas of Jubail, Jeddah, and Riyadh.

“The rail network will allow SABIC to shift 3m kilometres of truck trips per year to rail, resulting in an 86% reduction in greenhouse-gas emissions, 75% less fuel consumption, and significantly reduced national road maintenance. We anticipate that the Saudi national rail project will be completed sometime after 2020.”

On 27 November, SABIC and energy major Saudi Aramco announced an agreement to develop an integrated crude oil-to-chemicals complex (COTC) in Saudi Arabia which is expected to process 400,000 bbl/day of crude to produce about 9m tonnes/year of chemicals and base oils.

The project’s financial details were not disclosed. It is expected to start operations in 2025.

Pictured above: Sadara petrochemical complex in Saudi Arabia.
Picture sources: Sadara Chemical Company and GPCA

By Jonathan Lopez