As their North American and European competitors recover from the economic crisis, Middle Eastern chemical companies are facing new opportunities and new challenges.
They are continuing to build on their cost advantage in basic petrochemicals, which has made them formidable challengers in the global industry. They are also beginning to invest in more specialized chemicals to further strengthen their overall position and create more industrialized, diversified economies in their countries. However, as they expand into new chemicals, their cost advantage diminishes and they will have to be selective about their approaches to growth and develop new capabilities to compete successfully.
Cashing in on the crisis
As the global chemicals industry begins to pick up the pieces and recover, it is finding itself in a post-crisis landscape that looks significantly alien. Middle Eastern companies have capitalized on a cost advantage of 30 percent to 90 percent in natural gas-based feedstock — the raw material necessary for producing basic petrochemicals. As a result, regional companies will nearly double their share of global capacity from 2008 to 2013 (from 11 percent to 19 percent for ethylene and 7 percent to 14 percent for polypropylene). Additionally, Middle East chemical companies are well positioned logistically to serve Asian markets, which are currently growing faster than those in North America and Europe.
With these advantages, chemical companies in the Middle East are expected to emerge from the crisis in good shape, despite the fact that global demand for chemicals has dropped while supply has expanded.
To date, companies in the region have focused on basic commodity chemicals based on natural gas feedstock, such as fertilizers and plastics; these are relatively straightforward to manage and highly profitable. Indeed, Middle East firms have such a strong cost advantage in manufacturing these products that Western companies, including Borealis, ExxonMobil Chemicals and Dow, have partnered with regional forms in order to benefit from these advantages.
But with the gap between demand for gas and available supply widening in the region and pressure from governments to diversify economies and create jobs, chemical companies are investigating the possibility of expanding into a broader product portfolio that encompasses oil-based (e.g., naphtha) feedstock.
However, the cost advantage that Middle East companies enjoy with natural gas reduces significantly when moving to naphtha feedstock.
In addition, these products are more complex to manufacture, require greater interaction with customers to provide the necessary technical and applications support, and demand new capabilities for Middle Eastern companies to manage the diversified portfolios and complicated supply chains.
To determine their path forward, Middle East chemical companies need to look at two elements: the competition and their own capabilities.
In terms of competition, North American and European companies are likely to be more aggressive in defending their territory in specialty chemicals — where their innovation capacity is a strong source of competitive advantage — than in basic chemicals. However, a lot of specialty segments are commoditizing rapidly and Middle Eastern companies are finding opportunities to put down stakes — particularly as Western companies divest businesses to clean up their balance sheets or adjust to their growth strategies and, in doing so, seek to sell or establish joint ventures for their businesses that could significantly benefit from integration with Middle Eastern players.
Earning and learning
In these cases, it will fall to the Middle Eastern firms to make sure that they truly capture knowledge from these partnerships, thus building their own capacity to develop a high-value and diversified product portfolio, rather than simply acting as the purveyors of inexpensive feedstock. In particular, regional companies should consider where else they might be able to build a competitive advantage, such as using their regional proximity to Asia and Europe to better serve those markets.
Saudi Arabia and the United Arab Emirates have both started to move into new chemical products and are making significant investments in integrated petrochemical and specialty chemical projects.
But the move is not without challenges. They must carefully choose those products that meet their profitability targets, yet at the same time balance government requirements for diversification and job creation in order to receive the feedstock they require. In addition, they need to further develop their technology and management capabilities to handle the diverse array of products. Marketing these products will also be more complex, as companies will need to work much more closely with customers to meet their needs; this requires them to place supporting infrastructure directly in Asia and Europe, where there is a demand for these products.
In order to overcome these challenges, Middle Eastern companies should focus first on just a small number of new products to allow for a learning curve, then build a sustainable, competitive position. They should continue to use acquisitions and joint ventures with Western and Asian companies to make use of existing technology, market access and management experience, as well as capabilities, in order to be competitive. In doing so, it is important for Middle Eastern chemical firms to have a clear strategic intent toward acquisitions or joint ventures and vital that they capture the integration benefits of such arrangements.
Forging the future
As the crisis recedes, companies in the Middle East will continue to shape the chemical industry by further increasing their footprint across products and regions, as they build on their relative advantages. As a result, they will be a main driver in the transformation of the chemicals industry by actively pursuing acquisitions and forging new alliances.