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INTERVIEW: Gulf petchem output seen steady as key buyer China seeks self-sufficiency

Highlights

Petrochemicals output forecast at 175 million mt in 2021

China is Gulf industry's biggest market

Africa may make up for lower demand from China

Gulf petrochemical firms are expected to hold output steady at 175 million mt in 2021 as key export destination China embarks on a self-sufficiency drive, prompting the region's producers to eye the African market, according to the secretary general of the Gulf Petrochemicals and Chemicals Association.

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China is the Gulf petrochemical producers' biggest market, accounting for 23.8% of total exports, Abdulwahab al-Sadoun told S&P Global Platts in a June 6 interview. China is increasing domestic production and lowering imports of some chemicals amid a self-sufficiency drive that could impact the region's future exports. The six countries that make up the Gulf Cooperation Council are Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain.

"China has been on a very aggressive sell-sufficiency drive based on coal and this had led to reduction in the import of some products, with China turning over the past few years from being a net importer of some commodity chemicals to becoming a net exporter," Sadoun said.

"The biggest market for our chemicals is in Asia which accounts for 68% of our exports, and with the changing industry landscape driven by the ongoing self-sufficiency drive in China and India, and the several shale-based US projects coming on-stream soon, there will be an intense competition to retain market share in the Asian markets."

African markets

Gulf petrochemical producers are forecast to spend $71 billion on new domestic developments between 2020-2024, including projects under construction or confirmed by the developers, according to GPCA estimates. This is happening despite the self-sufficiency drive in Asia, the rise of protectionism and increase in trade barriers.

"We are seeing opportunities in the African markets that could mitigate the risk of the potential decline in demand in our current markets due to the self-sufficiency drive," Sadoun said.

"The GCC industry is now moving toward higher-value products such as specialty chemicals and those are normally produced in much smaller volumes but are much higher in value, and their demand is less cyclical when compared to commodity petrochemicals."

Several Gulf countries are integrating petrochemicals with refineries, such as Kuwait's Ras al-Zour project and Oman's Duqm development, while at the same time creating domestic downstream industries to stimulate demand for their products and rely less on export markets, such as China.

"On a regional level, there is a trend to develop specialized parks for the downstream value chains to capture more value and create job opportunities domestically," Sadoun said.

"This approach will, to some extent, mitigate the risk related to protectionism and trade barriers adopted by key import markets to protect their domestic industries. That said, our industry is expected to remain export-oriented given the small size of the domestic regional market."

Chinese mega projects

China's current efforts to minimize imports of chemicals involves building mega refineries to maximize naphtha production and secure the precursor to producing chemicals, said Eshwar Yennigalla, senior petrochemical analyst at S&P Global Platts Analytics. With the current pace of investments and equally bullish demand growth projected for a post-pandemic world, China might not be able to achieve complete self-sufficiency in the olefins value chain, including chemicals such as ethylene, propylene, MEG and polymers such as polyethylene, polypropylene, he said. The Asian country is self-sufficient in PET and polyester markets and recently turned a surplus in PTA.

"China's drive for petrochemical self-sufficiency does create headwinds for investments in regions which are already surplus in terms of chemical production such as Middle East and United States," Yennigalla said.

The pandemic has delayed or prompted the reconfiguration of some petrochemical projects in the Gulf region, with the most high-profile change occurring in Saudi Arabia's $20 billion crude-to-chemicals project, a joint venture between Saudi Aramco and Sabic that was downsized. Qatar's Ras Laffan petrochemical project, along with the al-Zour and Duqm developments, were also pushed back during the pandemic. Some projects did progress, including the $1 billion Farabi petrochemical project and Aramco-Total joint venture Amiral in Saudi Arabia, Sadoun noted. The UAE's Borouge 4 development is also on schedule. All of these projects are expected to be completed by 2023-2024, Sadoun added.

Gas advantage

Gulf producers have a competitive advantage over some of their peers because they use natural gas as feedstock, whose price is fixed, as opposed to rivals in Asia that rely on naphtha, an oil by-product whose price goes up with an uptick in crude prices, Sadoun said.

As crude prices edge higher, the Gulf petrochemical industry will prosper, amid expectations that chemicals prices may be close to pre-pandemic levels by the end of this year, Sadoun said. The petrochemical industry is buoyed by the faster-than-expected recovery in the global economy, he added.

"We have reasons to be optimistic that the industry's future is bright driven by the recovery of several key downstream industries such as the auto and electronics industries," Sadoun said.