Gulf petrochemical industry could see a short term demand opportunity

By: Marcin Jedrzejewski, managing director & partner at Boston Consulting Group (BCG)

The competitive position of the Gulf petrochemical sector is linked to the ethane vs. naphtha cracking economies. In the current low oil price environment, naphtha cracking becomes competitive vs. ethane cracking. The global oversupply on naphtha, observed in the last few years, is further contributing here.

We will still have to see how U.S. olefin prices will react to the drop in oil prices. Typically, there is a negative correlation of U.S. ethane (and consequently ethylene, key olefin) to oil prices. However, bearing in mind significant oversupply on natural gas and natural gas liquids already apparent before the oil price collapse in March 2020, we expect ethylene price in the U.S. to remain low, adding to the intensity of competition and further challenging the position of the Gulf petrochemical sector.

The competitive situation is now definitely more challenging than last year. What may give some respite is that the Gulf producers overall maintained production throughout 2020 while China, due to COVID-19, was forced to shut down most of their petrochemical capacity. This will offer a short term demand opportunity as the Chinese industry is coming back from COVID-19 – although this will differ by application industry.

Outlook for the continuity of Gulf projects

There is definitely space for competitive projects in the region. What is critical is to identify sustainable sources of competitive advantage – typically coming from feedstock pricing and a logistics premium. Propane is a good example – as it is typically provided to Gulf producers at a formula with a 20 per cent discount and without logistics cost in comparison to, for example, the North-East-Asian producers.

Together with the premium on the energy cost, this can make projects still very attractive. Where we expect players to be more careful are projects where there is limited or no structural feedstock advantage – while the global markets have been oversupplied. Commodity liquid derivatives generally fall into this category.

However, in a low margin environment as we face it now, other sources of competitive advantage are critically important – operational excellence, efficient logistics, robust go-to-market models without margin leakage.

Competitive advantage of the region

Historically, the advantage of the Gulf petrochemical sector came from feedstock and energy cost advantage. Additionally, the creation of chemical clusters and value parks where Gulf petrochemical players can share services and infrastructure is also a plus. The low oil price environment may have affected some elements of this– but it is still important and relevant. It is also essential is to be aware that this cannot be the only source of advantage. What still remains is, for example, the importance of market access and an advanced go-to-market model.

In the past, only a few players invested in the go-to-market model – but definitely, they now face a different opportunistic situation. Some players have been investing systematically in go-to-market capabilities, increasing target market presence, and focusing on superior delivery. These investments can make a real difference. Having a direct relationship with the final users of petrochemical material, efficient and controlled logistics, quick feedback from the market is critical to ensure your market position is resilient and that you can respond quickly (e.g., adjusting your polymer grade selection to demand changes). Such players are definitely in a completely different situation than players just relying on the global trader and bulk off-takers.

Energy and emission cost also needs specific attention. Most of the European players have put in place strategies to become carbon-neutral within the next decade or two. If successful, strengthen their place from a production cash cost position.

This column first appeared in the June issue of Pipeline Magazine