INDUSTRY INSIGHT

Despite challenges, opportunities abound for GCC chemical companies

By Paul Harnick, Global Head of Chemicals and Performance Technologies, KPMG International

Among countries that are part of the Gulf Cooperation Council (GCC) the chemical industry is the second largest manufacturing industry, after refining, when measured by value added. According to the GPCA 2017 Facts and Figures report, it currently accounts for 3.1% of the GCC’s GDP, which places it among the top nations in the world. It is also one of the largest global producers of basic chemicals, and it continues to show growth. Indeed, the chemical industry is one of the fastest growing industries in the GCC, with revenue growing 17% in 2017, the biggest single year increase since 2011.

Growth in specialty chemicals

With continued volatility in oil prices and the benefits from cheap feedstocks declining, GCC chemical producers have had to explore new strategies and opportunities. In particular, the emergence of cheap feedstocks from other regions, such as the development of shale gas reserves in the US, has removed some of the traditional advantages experienced by GCC chemical producers. In response, they are transitioning towards higher margin value added chemicals. These chemicals have not traditionally been a major part of GCC production—in 2006 they accounted for just 1% of total GCC petrochemical production—but with the growth in emerging markets globally, and the concurrent expansion of middle-class buying power, demand for specialty chemicals will certainly increase.

China’s middle class is expected to make up more than three quarters of the country’s total population by 2022, and by 2030, the Asia Pacific region is expected to account for two thirds of the global middle class. GCC chemical companies are well-placed geographically to take advantage of the Asia Pacific markets, and the specialty chemical industry will be a significant driver for GCC producers moving forward.  The big challenge for GCC producers will be adapting to the significant changes required in their business models to successfully own, operate and manage specialty businesses.

“GCC chemical producers who adopt a clear digital strategy have a comparatively open playing field for this new development and could jump ahead of their global competition as a result.”

Growth in fertilizer

Another opportunity for growth exists in fertilizer exports. In recent years, exports in this category have continued a strong pattern of growth seen over the past decade. With production expected to reach 38.7 million tons in 2018 and 44.8 million tons by 2025 according to GPCA, fertilizer will remain a key element in GCC chemical production, particularly with the increased focus globally on ensuring food security and developing innovations in regional agriculture.

Digitalization drives global growth

In order to stay competitive in these emerging global markets, GCC chemical producers will need to embrace digitalization. The chemical industry globally is in a nascent stage when it comes to assessing how digitalization can drive significant business benefit, but companies are investing heavily in exploring ideas and change is likely to come rapidly. Digitalization offers chemical producers an opportunity to fundamentally improve the way they do business. This is likely to move beyond the traditional focus on efficient plant design, operation, automating and monitoring production. Real-time access to data about customer demand, production capacity and operational performance will enable faster decision-making capacity in pricing, production planning, and supply chain management. Borrowing best practice from B2C businesses will likely see digitalization of the customer journey and experience enabling chemical companies to provide better services and offerings to consumers – driving cross-selling opportunities, maximizing profits and driving down costs.

This is supported by findings from KPMG’s 2018 CIO survey, which shows that the top three priorities for digital leaders are developing innovative new products, delivering stable IT and enhancing the customer experience. Worldwide, oil and gas companies are much less likely to maintain an enterprise-wide digital business strategy than those in other sectors (22% versus 32% for all industries). GCC chemical producers who adopt a clear digital strategy therefore have a comparatively open playing field for this new development and could jump ahead of their global competition as a result.

Protectionism on the rise – challenges and opportunities?

In 2017, the GCC exported approximately 80% of its chemicals and petrochemicals, and GCC chemicals exports revenue increased to USD 55.6 billion, according to the GPCA 2017 Facts and Figures report. The chemical industry globally, has been built on the principals of free trade and given the integrated nature of global supply chains, relies on the ability to move products freely across borders. Certainly, many global chemical companies have been concerned by the recent rise in protectionism around the world and the more entrenched these issues become, the bigger the impact on the chemical industry is likely to be – including potentially re-locating plants, restructuring supply chains and re-thinking global business strategy.

However, China and Europe currently represent the two largest export markets for GCC chemical producers, and the imposition of significant tariffs and import duties on both these regions by the US may give GCC chemical producers a significant opportunity to establish new and beneficial trading relationships with these markets.

Getting up to speed on the new mobility

The automotive industry is speeding toward a new era marked by electric-powered vehicles, autonomous vehicles and shared mobility. Even as global sales tick downward, individual vehicles will be used more intensively, spending less time parked and more time on the road, transporting people and goods in a growing number of ways. For chemical companies supplying the automotive sector, the new mobility will mean a dramatic shift in product portfolios, clients, end users and business models to address an industry ecosystem that’s becoming larger, more dynamic and far more interconnected.

“For chemical companies supplying the automotive sector, the new mobility will mean a dramatic shift in product portfolios, clients, end users and business models to address an industry ecosystem that’s becoming larger, more dynamic and far more interconnected.”
“Chemical companies will have to continue their efforts in enhancing regulatory compliance, improving operational efficiencies, identifying new markets and mapping their long-term expansion strategies.”

The growing adoption of electric, autonomous and shared vehicles will affect the number, type and amount of chemicals required by automotive OEMs, not to mention supply chains, aftermarkets and market structures. Electric vehicles will remain a strategic market for plastics and other lightweight materials. As for autonomous vehicles, it’s been estimated that they could eliminate the 90-95% of road accidents[1] caused by human error, and lower accident rates could impact demand for materials related to repair and repainting. Autonomous vehicles might also need to be more visible on the road, however, with surfaces that are reflective across a broad range of wavelengths and weather conditions, and this could create new markets for innovative paints and coatings.

In the face of these changes, GCC chemical companies may have to rethink their business models, reconsider key markets and recalculate the value propositions for every product in their portfolio. As with any disruption, there will be winners and losers. Companies that provide engine coolants, general lubricants, fuel additives and multi-gear transmission fluids for ICEs might have to prepare for the possibility of slowing demand. Manufacturers of battery materials and high-performance polymers might plan for increased competition in growing markets. As always, chemical companies will also have to continue their efforts in enhancing regulatory compliance, improving operational efficiencies, identifying new markets and mapping their long-term expansion strategies. In the 26th edition of REACTION Magazine, we take a deep dive into Mobility 2030 and how changing demand patterns in the automotive industry are likely to drive fundamental change into the chemicals supply chain over the coming years.

With all of the changes above, there are abundant opportunities for GCC chemical producers to find new ways to be successful in the coming years – if they can adapt quickly enough.