Issue Date: March 23, 2009
Financial Crisis May Delay New Rush Of Capacity
Between 2008 and the end of 2011, companies in the Middle East are scheduled to add 34.6 billion lb of ethylene production capacity, or twice the region's current capacity and 60% of the new capacity expected worldwide. The region will also add nearly 19 billion lb of polyethylene capacity, or 47% of the world's new capacity for the plastic.
As with the region's current chemical output, most of the new production of ethylene and other petrochemicals will head east to supply Asia-Pacific markets. Middle Eastern companies will compete directly with the suppliers that target that market now—mostly European firms. U.S. producers will be affected only marginally because of their large markets in North and South America.
For European producers, the only bright spot, if it can be called that, is that the global credit crisis will probably delay some of the projects scheduled to come onstream during that time. That's the view of Chris Stirling, European head of chemicals at management consultant KPMG, in London.
In October 2008, before the financial crisis's full impact on the chemical industry became apparent, KPMG published a report on how competition from the Middle East will affect European chemical companies. According to Stirling, if a similar report were published now, the conclusions he and his team would reach "would be different but not dramatically different."
The main change, Stirling says, is that some investments will be delayed. "So the impact of capacity increases will be less marked in the short term but offset by the dramatic drop in demand."
However, Stirling adds, the Middle East's basic attractiveness to investors, including Western chemical companies, hasn't changed. "They want to secure feedstocks at competitively attractive prices," he says. "That fundamental need won't go away."
The resource-rich countries of the Middle East "will continue to be attractive," Stirling says. One reason, he explains, is that the leaders of the region's countries are "adamant that plants will be completed. They may be delayed, but they will be completed eventually."
Still, despite its heady mix of advantageous feedstock costs and strong government backing, the region is feeling the effects of the economic crisis. According to a report issued last month by the International Monetary Fund, the countries of the Gulf Cooperation Council, a trade bloc of several Persian Gulf states, will see gross domestic product growth fall from 6.8% in 2008 to 3.5% this year.
Compared with the growth rates expected in European countries, 3.5% seems positively blistering. But the slowdown is waking some Middle Eastern firms up to global financial realities. For example, the overall poor financial performance in the last quarter of 2008 prompted Moody's Investors Service to caution that companies in the region are likely to scale back their investment plans to match lower cash flows in 2009.
Chemical producers in the region are already starting to feel the pinch. Saudi Basic Industries Co. has frozen all salary increases, bonuses, and promotions for its 17,000 employees in Saudi Arabia as part of cost-cutting measures. SABIC reported net profits of $83 million for the fourth quarter of 2008—a 95% drop from the comparable period in 2007.
Also in Saudi Arabia, Saudi International Petrochemical Co. (Sipchem) has postponed the start of its Jubail acetyls complex by three months and now plans to bring it on-line in the second half of this year. The acetyls plant is part of a larger complex planned by Sipchem, although plans for a big ethylene cracker at the site were scrapped last year when the project became too expensive.
The global slowdown is also encouraging companies and investment agencies in the region to turn to the old tactic of buying market share. SABIC made the first moves early on, acquiring DSM's European petrochemicals business in 2002. It bought the European basic chemicals business of Huntsman Corp. in 2006 and GE Plastics in 2007.
Abu Dhabi's International Petroleum Investment Co. took SABIC's cue last month, putting up $2.3 billion to purchase Canada's Nova Chemicals. That acquisition follows IPIC's January purchase of MAN Ferrostaal, a German engineering company with expertise in methanol projects.
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