The Middle East and North African (MENA) 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, as per a report by Al Masah Capital. 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% to 174.8 mln tpa by 2014 from 17% (132.7 mln tpa) in 2009. 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. The 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. The petrochemical producers here 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 spot market rates ranging from US$3.8–5.8/mmbtu. Even companies elsewhere in the region enjoy similar cost benefits, including Iran, Qatar and the United Arab Emirates, paying in the range of US$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 US$200/mt relative to US$480/mt and US$500/mt in North America and Western Europe, respectively. 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. The major challenge for the petrochemical sector here lies 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. 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. China’s ethylene capacity is forecast to increase to 20.9 mln tons by 2014 from an estimated 12.6 mln tons in 2009, while India’s ethylene capacity is likely to rise to 8.7 mln tons from an estimated 3 mln tons over the same period. As per a KPMG report, the Middle East has emerged as a major competitor for the European chemical industry, based mainly on ready access to cheap feedstocks, proximity to growing markets in Asia and support by governments and local authorities. The Middle East region has about 67% of the world’s oil reserves and 45% of all natural gas reserves, the largest such reserves found anywhere. The availability of these resources provides the chemical industry in the Middle East with both energy and feedstock at relatively low prices. Companies like Saudi Basic Industries Corporation (SABIC) pay only US$0.75 for one million British Thermal Units (BTU) of natural gas compared to the average market price of between US$7–8 in Western countries. Some analysts estimate that ethane-based Middle East producers have a cost advantage of up to US$350/mt over some of their naphtha-based competitors in Europe. Whilst the government-backed oil producers in Saudi Arabia have announced plans to increase the cost of natural gas to petrochemical producers from 2012 (initial estimates suggest US$1.25/m BTU) there will only be a marginal erosion of this massive cost advantage. Of more concern to Middle Eastern producers is continued access to cheap ethane allocations as alternative LPG and naphtha feeds have a significantly lower cost advantage. Whilst reports have suggested that additional ethane allocations were likely to be limited, it was announced that Saudi Arabia’s proven gas reserves, which stood at 263 trillion standard cubic feet (SCF) at the end of 2008, will increase by 5 trillion SCF in 2010. The Kingdom’s gas production is expected to increase from 8.8 billion SCF/day now to 13 billion SCF/day in 2020. Backed by a dependable supply of resources as well as significant cash reserves, Middle Eastern countries are making huge investments to increase capacity in both upstream and downstream production facilities (principally in the form of world-scale, integrated complexes). More than 19 mln tpa of ethylene capacity will come onstream in the Mideast by 2015, according to SRI Consulting in a recent analysis. Some development projects have been delayed by financing constraints. The global downturn has led to questions about the ability of worldwide markets to absorb capacity from the Middle East and other regions. China, the EU and India have each begun antidumping procedures this year against petrochemical exports from the Mideast. Nevertheless, the region is still expected to become a leading producer for a range of petrochemicals and plastics, including ethylene glycol (EG), polyethylene (PE), and polypropylene (PP). EG capacity will increase in the region from 6.2 mln tpa in 2009, to 8.8 miln tpa in 2014, raising its share of the global total from 28% to 32% over the five-year period. Forecasts until the year 2020 predict that the region will continue to grow at an average of over 9.5% pa, more than twice the global rate. KPMG analysis shows that European petrochemical capacity may decline dramatically in the coming years. According to recent estimates, 40 out of 200 crackers worldwide are likely to become uneconomic by 2015, and approximately 14 out of these 40 will be in Europe. The closure of these plants would correspond to the loss of 26% of total cracker capacity in the EU. Similarly, 10 out of 17 European ethylene glycol plants may become uneconomic, corresponding to 65% of total European capacity. US chemical producers are likely to be similarly impacted. However, there is a sentiment within the industry that the US will be more ruthless in restructuring uneconomic plant as the industry there is less encumbered by political issues which can make restructuring difficult in Europe. The challenge for the European chemical industry is to resist the urge to hide behind protectionist barriers. Rather, there should be a process to identify and rationalize chemical plant and clusters made uneconomic by the new world order (principally, likely to be small, land-bound, non-integrated units). This should allow future investment to focus on those areas in which the European chemical industry remains competitive on the global stage. This explosive growth and expansion in the Middle East has helped to drive significant changes in the European commodity chemicals market. Ten years ago, North America was the primary exporter and supplier of products such as PE and PP to the world. Europe was well balanced between supply and demand. However, trade flow patterns have changed dramatically, and the Middle East is now the dominant inter-regional exporter of polyolefins. Older European commodity-based plants are likely to be less competitive in the years ahead. Many European customers have already turned to the Middle East for supplies of raw materials such as PE, and Europe is expected to become a net importer of polyolefins by 2010, as per a KPMG report. The same cost advantages that help chemical companies in the Middle East to enter European markets will also help to increase their success in Asia. Although more port facilities, tankers and pipelines need to be developed, it is still cheaper to transport raw materials and products from the Middle East to Asia than from Europe. This geographical advantage will enable the Middle East to further expand into Asian markets, gain new customers and even displace European companies from markets where they have traditionally dominated. European companies are being pushed out of commodities because of the cheap feedstocks available to producers in the Middle East. In addition, the last 15 to 20 years have seen relatively little investment in the EU in the basic chemical sub-sectors; the last cracker was built in the early 1990s. This has led to a significant loss in competitive advantage. The average cracker size in the EU is currently about 450,000 tpa while the new, world-scale crackers being built in Asia and the Middle East reach a capacity of more than 1,000,000 tpa. European companies that continue focusing on commodities will have to make massive investment simply to survive. European companies are attracted both by strong specialty markets and the fact that value-added, specialty manufacturing requires a high level of technical capability found more often in the EU than in developing countries. Because of this, the European petrochemical industry is a natural choice for complex specialties for biotechnology and nanotechnology, as well as for emission-abatement products such as insulation materials for residential and industrial buildings. This move will require strategic investment in the face of tight credit, rising costs and other business pressures. European companies also need to maintain sources for commodity chemicals through clustering of crackers with downstream manufacturing, even though this strategy will become more challenging as commodity production increases in the Middle East, China and other areas. Despite these challenges, specialty chemicals remains a highly attractive global market worth over US$680 billion. Established European companies have the resources and experience in this market to help them compete as major players worldwide. To protect their technological advantage, European companies need to review their R&D plans and extend corporate research programs to medium and long term objectives. Using their technological advantage to stay ahead of the market, these companies are uniquely positioned as leaders in the development of new energy-efficient products, efficient manufacturing processes and alternative feedstocks based on natural materials such as sugar, vegetable oils and plant extracts.