Interview- Saudi to lead consolidation drive in GCC petrochemical industry
19 April 2017
By Nada Al Rifai
The Gulf’s petrochemical industry faces a challenging year ahead, with more restructuring likely in response to stiffer competition from the United States and Asia, the Secretary-General of the Gulf Petrochemicals and Chemicals Association (GPCA) told Zawya in an interview earlier this month in Abu Dhabi.
“I think Saudi will lead the privatisation and consolidation drive in the region for one simple reason: Unlike other GCC states, the petrochemical sector had been liberalised in the mid-90s so there are several wholly owned companies by the private sector that are listed on the stock exchange and these could be the low hanging fruit,” said Dr. Abdulwahab Al Sadoun.
“For other GCC countries, all the players are wholly owned by governments that may push them to consolidate the businesses within their own countries, but I doubt there will be cross border consolidation in the short term.”
The Gulf’s petrochemical sector makes more than $108 billion worth of products annually and is responsible for around half a million direct and indirect jobs in the region. Petrochemicals has also been identified as vital to economic diversification and job creation.
As an export-oriented industry in which nearly 80 percent of output is shipped overseas, the Gulf’s petrochemical producers are vulnerable to the whims of the global trade, Al Sadoun noted, citing China’s economic slowdown.
“China, which is the largest producer and consumer of petrochemicals, has been on a drive of self-sufficiency. They developed technologies to convert coal into raw materials for the basic petrochemicals,” he said.
The revival of the U.S. petrochemical companies following the shale gas revolution has also changed the industry and made for a tougher competitive environment for producers in the Gulf Cooperation Council area, according to Al Sadoun.
“Nowadays, we are not the only producers who have access to raw materials that are provided at favourable prices,” he said. “The low oil prices have also contributed to make other producers of petrochemicals in Asia and Europe who are utilising the Naptha, a refined oil product, more competitive vis-a-vis the GCC producers.”
Moves to consolidate and privatise the Gulf’s chemical sector and related industries have increased.
“We have seen some mergers and anticipate more will be in the pipeline. These are steps in the right direction to create critical mass, as the small players cannot survive in a competitive environment next year,” said Al Sadoun.
Saudi Basic Industries Corp (SABIC), one of the world’s largest petrochemicals group, last year merged its chemicals and polymers units to help counter the market downturn.
“Gulf countries might also privatise part of the government-owned businesses and I will not be surprised if we see some IPOs for petrochemical companies in Oman, for instance,” said Al Sadoun.
In Oman, the government is planning to privatise public assets to create additional sources of revenue, with oil refiner Oman Oil Refineries and Petroleum Industries Co (ORPIC) among the companies identified for privatisation.
Kuwait has also unveiled plans to sell stakes in the shipping and chemical subsidiaries of its state-oil producer Kuwait Petroleum Corporation (KPC) to increase industrial efficiency and tap into global markets for funds.
But the region’s regulations are not sufficiently developed to help such consolidation moves happen as often as it should, Al Sadoun warned.
“The legal framework for mergers need to be refined and revisited to safeguard the interests of the shareholders in the new merged entities,” he said.
“For instance, there was a case in the past few years for a merger between two privately owned companies in Saudi: Sipchem and Sahara. All the studies showed the merits of this consolidation, but it did not proceed as planned because the regulatory framework was not there.”
Research and development
Contrary to global trends, Gulf petrochemical producers’ investment in research and development jumped 38 percent in 2016 versus a year earlier, according to a recent GPCA report, with Saudi chemical companies accounting for most of this spending.
Research and development is critical for the industry to grow sustainably, said Al Sadoun.
“We have reached the industry’s highest rate of growth in R&D investment worldwide,” he added.
“However, in terms of the share of the R&D investment out of the total sales revenues, we are still at 1 percent, whereas the global average for the industry stands at 2.5-3.0 percent so we need to double or triple our current levels of investment in research and innovation.”
© Zawya 2017