MENA Petrochemicals: A Global Advantage…and which companies do you buy?
The Middle East and North African region is well poised to become the world's petrochemical hub, building on its cost-advantaged feedstock position, rising demand for petrochemical products globally and the efforts of regional governments to expand the sector with a slew of massive capacity addition exercises.
These huge capacity additions are not only currently underway but actually ramping up significantly in the petrochemical sector in the MENA region,. The region's share of global ethylene capacity is set to reach 23.4 per cent (equivalent to 174.8 mtpa) by 2014 from 17 per cent (equivalent to 132.7 mtpa) last year.
Apart from benefiting from the feedstock advantage, the MENA region is likely to maintain a high growth trajectory using its regional proximity to booming Asian markets, which are currently growing faster than those in North America and Europe. This is according to trend setting alternate asset management player, Al Masah Capital, which outlines the future potential of the regional petrochemical industry in its fresh, insightful report "A Global Advantage..Which companies' do you buy?"
Saudi Arabia, which accounts for seven per cent of the global supply of basic petrochemical products and 70 per cent of the total GCC output, is the undisputed leader of the regional petrochemical sector, while rapidly flourishing petrochemical sectors in Egypt, Qatar, Kuwait and the UAE paint a strong foundation for future growth.
"The increasing capacity additions in the MENA petrochemical sector, sustainably supported by governments' plans to diversify their economies, have been instrumental in the sector's growth over the past few years. The fact that the MENA region is an ideal location for petrochemical production is also likely to support growth in the sector going forward. The region's proximity to demand-dense areas such as Asia led by China and India offers significant logistics advantages for petrochemical manufacturers," said Shailesh Dash, Founder and Chief Executive of Al Masah Capital.
MENA petrochemical producers boast a clear cost advantage over their global peers thanks to highly subsidised procurement rates of raw material. While Saudi Arabian producers purchase ethane from government-owned Saudi Aramco at a fixed price of $0.75/mmbtu, petrochemical producers in Western and Asian countries shell out a fortune at spot market rates ranging from $3.8–$5.8/mmbtu. Even companies elsewhere in the MENA region enjoy similar cost benefits, including Iran, Qatar and the United Arab Emirates, paying in the range of $1.25–$1.50/mmbtu.
Similarly, the cost of producing ethylene in an ethane-feed plant in Saudi Arabia and other Middle Eastern countries is approximately $200/mt relative to $480/mt and $500/mt in North America and Western Europe, respectively.
"Consequently, Saudi companies especially, operate at significantly higher margins relative to their western counterparts, triggering an exodus of sorts from the West," said Dash. Attracted by the cheap feedstock, there has been an influx of several foreign petrochemical producers over the last few years with some western players even closing their existing facilities back home and forging joint ventures with regional companies.
"However, this could also prove to be the region's undoing," Dash cautioned.
He said the major challenge for the MENA petrochemical sector lay in sustaining the feedstock advantage. Spiralling demand for alternative usage of ethane in the utility sector, be it for electricity or water desalination, posed a grave threat to the availability of cheap feedstock in the long term.
According to the International Energy Agency, the share of natural gas in electricity generation in Saudi Arabia would reach 60 per cent by 2030 from 45 per cent in 2007. Similarly, natural gas fuelled desalination of sea water with demand for water increasing at a CAGR of 4.4 per cent during 2000–08 to 240.1 billion gallons. In fact, the Saudi Kingdom is the largest user of desalinated water across the globe (approximately 36 per cent of the world's total) and demand is still growing at around 3.4 per cent every year.
Industry estimates suggest that government aided oil producers in Saudi Arabia are planning to raise the cost of natural gas to $1.25/mmbtu for petrochemical producers from 2012. "Such a scenario will hurt margins but should nevertheless keep MENA producers ably competitive compared to most global producers."
Long-term demand outlook for petrochemical products points to a very positive future, supported by rising consumption rates in emerging economies of Asia, primarily China and India, both who are key end-user markets for petrochemical products, having robust investment pipelines in infrastructure projects and eye catching growth in the building materials and fixtures market.
"Internal capacity build-up in China and India could potentially dampen demand for Middle Eastern products," Mr. Dash points out. China's ethylene capacity is forecast to increase to 20.9 mmt by 2014 from an estimated 12.6 mmt in 2009, while India's ethylene capacity is likely to rise to 8.7 mmt from an estimated three mmt over the same period.
Given the immense potential of this regional industry, savvy investors will look to capture this growth by investing in regional companies that show the ideal set up necessary to capture this future trend. Al Masah Capital recognizes this specific investor requirement and has highlighted at the end of its report, 10 regional companies that should lead the way.