Dubai: Faced with falling oil prices along with other challenges, the Gulf Cooperation Council (GCC) petrochemical producers must act fast to retain their long-held competitive streak, according to a new report.
According to The Boston Consulting Group (BCG) report, this has occurred as a result of a whirlwind of global forces — some expected, others not — that include the domino effect of the US shale gas renaissance, oil prices’ relentless dive, Saudi Arabia losing its access to cheap gas feedstock, China’s capacity build-up, and the lifting of Iranian sanctions.
“Together, these game-changers have altered and reshaped the region’s petrochemical landscape — giving rise to a plethora of new challenges and opportunities,” said Marcin Jedrzejewski, Principal at the Boston Consulting Group Middle East.
“The fact is, today, external political and economic factors paint a less rosy picture of the future of the GCC’s petrochemical industry.
“And while there is still time to reverse the damage done and even turn these setbacks into moments of growth, GCC petrochemical producers must do so fast — or risk losing their long-held competitive streak,” the report said.
First and foremost, the US’ much-talked about shale oil renaissance has flooded the US market with abundant supplies of cheap feedstock (ethane).
This in turn has armed US petrochemical producers with a hefty cost advantage over their European and Asian rivals — most of whom rely heavily on high-priced naphtha as feedstock.
Although this advantage has been eroded by the current drop in the oil prices, in the long run, the US is still positioned to strongly benefit from the abundance of low-cost ethane.
While the GCC’s ethane-based producers are still the most competitive in the world, North American producers are, without a doubt, trailing closely behind.
All in all, this low-cost feedstock environment has spurred a massive expansion of the US petrochemical industry — in fact, ethylene capacity is expected to rise by a staggering 7.5 million tonnes over the next five years.
“North American petrochemical producers will therefore be increasingly better placed to go head-to-head with GCC exporters when it comes to exporting to regions such as North-Western Europe and Asia,” stated Jedrzejewski.
Since the prices of petrochemical products are directly correlated with oil prices — sinking oil prices translate into immediate margin erosion for historically feedstock-advantaged producers, which means most Middle East players.
A high oil-gas spread favours ethane-based GCC crackers as the price is typically set by marginal producers in Northeast Asia and Europe who use naphtha as fee.
