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Global petrochemicals Who is really benefitting from the growth in the new world?
When oil and gas prices increased sharply in the 1980s, countries in the Arabian Gulf started
to leverage their cheap and abundant feedstock to develop their petrochemicals industry.
Petrochemicals companies thus acquired a substantial pricing advantage compared to
Western producers of ethylene, backed by additional action of the Gulf governments
to foster domestic demand.
The Singaporean government chose a different path in the 1990s and invested more than
USD 23 billion in the Jurong hydrocarbon cluster. The government focused specifically on
education and R&D to increase university throughput, attract foreign talent and effectively
build a sound knowledge base in Singapore.
These investments, along with similar efforts more recently in India and China, have eroded
the dominant position of the West, and today, the US and Europe combined represent only
30% of the global petrochemicals production, less than half compared to 30 years ago.
These examples demonstrate that the key drivers of the petrochemicals industry, namely
proximity to demand, access to feedstock, access to talent and technology as well as
supportive government actions, have stayed the same for the last 50 years. But the dynamics
of these drivers are changing today's environment in the petrochemical market, requiring
participants to adapt their operating models.
Global petrochemicals Who is really benefitting from the growth in the new world?
1) Consumption of polyolefins is a suitable proxy for petrochemicals demand, as they are not used for captive
consumption to produce other petrochemicals, but are used directly for numerous petrochemical applications
such as automotive and packaging.
Global petrochemicals Who is really benefitting from the growth in the new world?
2) It is noteworthy that prices for ethane per mmBtu in the US currently differ by a factor of 5 from the oil and
gas prices, while elsewhere the gap tends to be much smaller.
Global petrochemicals Who is really benefitting from the growth in the new world?
To remain competitive in the specialty chemicals business over the long run, European petrochemicals companies can build on their strengths in terms of home market, technology and
know-how to gain access to competitively priced feedstock and the major growth markets.
They face a number of key strategic questions:
> W
hat is the most interesting feedstock in the long term and where is the optimal sourcing
location? Moreover, what are the best structural approaches to gain access to these feedstock sources? Is it through joint ventures, through M&A or through organic growth?
> W
here are the most dynamic growth markets, given the product portfolio and key
strengths of individual companies, and how can these markets best be accessed?
How far should European companies go into specialty chemicals?
> H
ow can they best use their technological and operational know-how edge as
a bargaining chip?
> W
hat is the best strategy for global R&D, given the importance of technical know-how
and the problems with IP protection in several key growth markets? Is it really wise
to move key R&D facilities into the emerging markets, or would a "hub and spoke"
approach be better for protecting IP?
> W
hat should the companies do about their ageing asset base? Should they shut down,
upgrade or replace old plants? Should they do this across the board or selectively?
How does this tie into their strategy to securing feedstock and market access?
> W
hat other strategies might exist other than specialty chemicals or global integration?
Are there specific niches that European players are particularly well suited to exploit?
Therefore, initiatives such as Saudi Arabias Industrial Clusters or Abu Dhabis Polymer Park
concept are important signals that Gulf governments are willing to invest the substantial funds
needed for developing a market setup in which integrated petrochemical plants can compete
globally without subsidized feedstock. In addition to employment opportunities, further downstream developments provide a way for the Gulf countries to differentiate themselves.
A key advantage of the Gulf countries is their geographic proximity and centuries-old trading ties
to large emerging markets in Africa and in Asia, especially India. Indias population is currently
the second-largest in Asia, and is expected to equal Chinas by 2025. By that time, Indias
middle class will have grown to represent a consumer group larger than todays US population.
While India is currently aggressively building up its petrochemicals industry, it will still have to
rely on imports for quite some time. Market access for Gulf companies is made easier by longstanding business relationships and the established trading between the major ports in the Gulf
and India. Current concerns regarding anti-dumping tariffs will fade as the feedstock pricing
advantage of Gulf companies evaporates. In this respect, it is fortunate for the Gulf players that
India has been lagging somewhat in creating a domestic petrochemicals industry, as they now
have an opportunity to support India in catching up.
While access to India as a key growth market is a key asset, Gulf companies need to strengthen
their knowledge and skills base in terms of technology, research and efficient operations. The
key partners here are the Western petrochemicals companies, especially from Europe, whose
strengths and gaps are largely complementary to those of Gulf companies.
Bearing this in mind, and considering that feedstock and operational costs in the Gulf will likely
remain below those in Europe and the US, petrochemicals companies in the Gulf are facing
certain strategic considerations:
> W
hat options do Gulf players have for dealing with the diminishing availability of advantageous feedstock? Will the feedstock pricing gap (e.g. with Europe) remain large enough to
make feedstock accessibility a long-term asset for Gulf companies?
> S
hould Gulf companies move into downstream businesses? Which ones? How far down
the value chain should they move? Do they have the necessary capabilities to expand along
the value chain sustainably without know-how from other market participants?
> W
hat are the options for an R&D strategy in this context? Should they build a domestic
R&D platform? If so, what focus should it have, and what partners should they work with?
Can the Gulf region offer unique advantages to foreign companies in terms of IP protection
that China cannot?
> W
hat Asian countries should Gulf companies try to access first and what entry strategy
do they need to adopt? Are there attractive markets other than China and India where
Gulf companies can provide development support early on to capture the market?
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Global petrochemicals Who is really benefitting from the growth in the new world?
> H
ow can these companies gain access to the required technology and operational know-how?
Is buying European companies better than building knowledge through joint ventures and cooperation agreements? What would the business case look like for potential partner companies
to invest in the Gulf and not in China?
Domestic capacity increases will not be able to keep up with rising demand and Asia will remain
a net importer of feedstock and petrochemical intermediary products in the medium term. For
example, China currently relies heavily on naphtha as feedstock for petrochemical production,
with 80% of its ethylene production facilities being naphtha-based.
Simply put, refining capacity expansion will not be able to keep up with demand for naphtha as
the country expands its petrochemical production capacity. This mismatch will be eased to some
extent by increasing capacity for unconventional feedstock, in particular coal and shale gas. This
process, however, will be gradual as the coal-to-olefins technology is subject to considerable environmental impediments and the ease of exploiting shale is still being investigated. India is facing
similar problems, as it mainly uses naphtha for petrochemical production. Recent government
initiatives to establish petrochemical clusters will fuel the need for additional feedstock.
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Global petrochemicals Who is really benefitting from the growth in the new world?
The discovery of oil and gas resources in Latin America, especially in Brazil, has set off the
initial stages of developing petrochemicals production. According to the Brazilian Association
of Chemicals Manufacturers, local and foreign investments in the countrys chemicals industry
are expected to reach USD 26 billion by 2014.
The attractiveness of Brazil and other Latin American countries is further underlined by their
robust economic growth rates and relative political stability in recent years. For Brazil alone, the
improving conditions for large parts of the population are expected to increase the per capita
consumption of polyolefins by some 7.5% per annum during most of this decade. American
companies have started to enter this attractive market despite protectionist governmental
action.
Given that they are technologically well advanced, command a substantial domestic market
and have found renewed access to domestic, competitively priced feedstock, US petrochemicals companies are considering strategic questions that center on capturing growth in certain
emerging markets:
> Is China the most important market or should Latin American countries have a higher priority?
What is the likely competition from European countries with strong cultural ties to Latin
America?
> W
hat are the most promising ways to enter these markets? Is it through sales and distribution
or does integrated local production offer additional advantages? Who are suitable partners?
> What action will governments in Latin America likely take with regard to building a domestic
petrochemicals industry? Is there room for American companies to play a role or will they be
threatened by protectionist action?
> W
ould it make sense to give Latin American players access to the US market on a quid pro
quo basis? What would such an arrangement entail and how would US companies protect
themselves?
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Global petrochemicals Who is really benefitting from the growth in the new world?
A globalizing game
The petrochemicals market is becoming increasingly globalized in terms of technology transfer,
feedstock sourcing and market access. The companies active here all face the same basic
issues of access to technology, feedstock and markets, but players have different starting
points based on their respective strengths and weaknesses. And while the strategic issues
are specific to each geographic group of companies, all of them are facing the basic issue
of how to compensate for their weaknesses within this increasingly global market setup.
Possible actions include joint ventures, M&A or organic international expansion aimed
at up- or downstream integration, product specialization or development of scale.
The implications of any strategic decision are substantial due to the amount of investment
involved, and careful analysis and evaluation of the available options is key to long-term
success. It is therefore still a completely open question who will capture the new market
demand. Will it be players from the fast growing Middle Eastern or Asian countries, or
will American and European companies stage a strong global comeback?
Amsterdam
16 Global petrochemicalsMadrid
Who is really benefitting from the growth in the new world?
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