By Niall Marshall

THE Middle East, with its vast oil and gas reserves and massive petrochemical complexes has been, for many years, the centre of the polymer producing world. The centre, that is, in terms of mega projects and an apparent immunity to waves of global economic crises dating back to 2008. Why then, as the global economy seems to be starting to show some slight recovery, does the regional petrochemical industry seem so much less confident?

To understand we need to reconsider the historic strengths of the Middle East petrochemical plants. Firstly, the economics of polymer plants in the region have been very attractive. In Western Europe most of the ethylene, used to make polyethylene, PVC and polystyrene, is produced using energy intensive cracking processes (processes where naphtha – basically crude oil - is ‘cracked’ or broken into smaller molecules).

In the Middle East most of the ethylene is sourced from ‘associated gas’, that is, the gas captured at the well-head when the oil is pumped from the ground. As most of the cost of producing polymers is determined by the cost of the raw materials, the Middle East has had an enormous advantage in the production of polyethylene. With the price of oil dropping from its high of over $100/barrel to under $50/barrel, polymer plants relying on naphtha saw their costs dropping dramatically while plants using the cheaper associated gas saw no decrease in raw material costs. Instead in Saudi Arabia they saw the cost of gas doubled! Middle Eastern polymer plants still have a lower raw material cost than almost anywhere else in the world, but the advantage is much less than previously.

The feedstock cost advantage that made the Middle East the preferred location for investments over the last few years, particularly for polyethylene plants, is now less than in the past and other factors start becoming more important in making investment decisions. Factors such as the low cost of shale gas-based ethylene in the USA – ethylene costs in the USA are only slightly more than in the Middle East. For American companies, investing in the USA is far more interesting than investing in the Middle East – especially if there will be import tariffs imposed on imports into the United States.

The second reason why Middle East capacity was so important was that most of the polymer produced was exported, mostly to China and the Asian-Pacific markets, but also to Europe, Africa and the Americas. All of these regions are still importers of Middle East polymer, but China is investing in its own polymer capacity (it is still a net importer of polyethylene, but it has surplus PP capacity).

European polymer producers are much more cost effective and have increased their production rates to enjoy the increased profitability and the USA is investing in polyethylene plants which will, as they come on-line, compete with polymer from the Middle East in export markets. From the Middle East perspective the Trump Administration’s withdrawal from the Trans-Pacific Partnership (TPP) Free Trade Agreement negotiations at least, keeps a level playing field for selling feedstock-advantaged polyethylene to Asia.  

The third reason was that petrochemical companies, who had cash available for investments, believed that lower construction costs during the global slowdown made for good timing on building new petrochemical complexes capable of producing higher value chemicals (including other polymers) in feedstock-advantaged regions – the idea being they would come on-line as the economy started to improve.

This has largely been true except that raw material costs and petrochemical selling-prices are very different to what was expected and the return on investments are therefore also different.  Even when these same petrochemical companies are considering further petrochemical investments the location may not be in the Middle East. And, of course, Iran may (or may not) be an interesting country for major petrochemical companies to invest, depending on international political sentiment.

Today the Middle East still has many of the same advantages as it had in the past: it is still a cost-effective polyolefin producer, it is still well located for export markets and it still has cost advantages over many other regions for other polymers.

But with relatively smaller cost advantages than previously, and with increased competition, particularly in the USA and China, the Middle Eastern polymer producers need to evolve even as their governments increasingly see them as routes to creating employment and alternative sources of income. As polymer producers diversify their product offerings, both in terms of polymers and grades, and improve their efficiencies as costs increase, they will become stronger in future and the Middle East will remain a key region in the global polymers market.