Middle Eastern petrochemical industry to reshapeby Martin Menachery on Nov 29, 2016
According to a Boston Consulting Group study released recently, the Middle Eastern petrochemical producers must invest in capabilities building to maintain competitiveness and focus on strengthening their operational, commercial and innovation expertise to achieve a sustainable advantage.
Multiple market disruptions are shifting the balance of power among major regional players. A number of elements, including the shale gas renaissance in the US, plummeting oil prices globally and a capacity expansion drive in China and Iran, are placing the Middle Eastern producers at risk of losing the competitive edge they long enjoyed from cheap feedstock. According to a study by The Boston Consulting Group (BCG) entitled ‘Why the Middle East’s petrochemical industry needs to reinvent itself’, by enhancing the commercial, operational and innovation excellence, industry players can take vital steps toward safeguarding their bottom line.
“What needs to be done is often clear. Often strategies in the Middle East do not work out not because of lack of vision, but because companies do not pay sufficient attention to capability building. How to develop capabilities needs to be an integral part of the strategy, with a clear plan and attention not to stretch the organization in too many new domains. The issue today is that these new capabilities have become essential to maintain competitiveness – not anymore a 'nice to have' for the Middle Eastern petrochemical players. And, since capabilities building takes time, companies in the region should embark on their transformation journeys now,” said Mirko Rubeis, Partner and Managing Director at BCG Middle East.
The GCC producers have, historically, relied on off-takers and traders to carry and sell their products in core markets, and as a result have lost anywhere from 3% to 5% of their product value to middlemen. In addition to their supply chain management capabilities, the Middle Eastern producers must strengthen their sales and marketing capabilities (including pricing sophistication). Producers must invest more into customer segmentation and market analysis, and deepen the knowledge of their customers’ value chain and identify critical applications for their products. As petrochemical producers in the region expand downstream the value chain, commercial excellence has become even more important.
Embarking in an operational excellence programme to enhance energy efficiency, effective raw materials usage and asset utilization while optimizing costs could improve the bottom line of petrochemical producers by more than 10%. In addition, to achieve operational synergies, players can also benefit from close integration with refining and other chemical plants. Jubail and Yanbu, and petrochemical industry hubs in Saudi Arabia, are cases in point. Through feedstock and product exchanges, and pooling of logistics, producers in these locations could capture infrastructure related synergies across plants. As the use of liquid feeds sourced from refineries increases in the Middle East, this approach could prove especially valuable.
The GCC producers can reap higher and more stable earnings by going further downstream and increasing the specialization of their products. Producers must innovate not only in technology but also in business processes and operating models. The ability to respond swiftly to customers’ product needs, for example, is vital to maximizing customer satisfaction and the value of products. When a producer expands downstream in the value chain and gets closer to customers, this form of innovation becomes increasingly important.
“In addition to the above three excellence domains, companies should aim to achieve overall corporate excellence and excellence in specific functions,” said Udo Jung, Senior Partner and Managing Director, BCG Frankfurt. “We have seen producers in the Middle East ramp up their commercial, operational and innovation excellence without aligning their efforts to build up internal capabilities and have thus delivered limited results. It is vital for companies to focus on those capabilities (capital allocation, talent management etc. to name a few) that best strengthen the execution of their overarching corporate strategy. Moreover, they must tailor their plans for building corporate and functional leadership capabilities to the requirements of different product segments such as commodities versus specialized offerings.”