Comment: Consolidation will be the keyby Arabian Oil & Gas Staff on Jan 12, 2017
The global chemical industry has seen a wave of consolidations in recent years, with 2016 expected to be record-breaking for chemical M&As.
The rise of sector-wide integration has been led by the planned mega-merger between Dow Chemicals and DuPont, which – if granted approval by US antitrust authorities – will create the largest chemical company yet. The deal between Dow and DuPont is one of the most significant examples of companies’ growing efforts to add value to their business by pursuing portfolio cohesion and inorganic growth. Furthermore, current market conditions characterised by rising global competition and slowdown in demand are naturally forcing the market to consolidate and restructure.
If we look at the history of our region, stand-alone, highly fragmented, lacking-in-capabilities plants were largely the norm and, despite a significant integration push by a number of the GCC states, many such facilities remain to this day. They lack an integrated global network, assets and capital, making them highly vulnerable to volatility on the commodities market. As a number of industry experts indicated during the 11th Annual GPCA Forum, collaboration and further consolidation will be the key to ensuring the competitiveness of smaller regional players and that of the GCC industry as a whole.
The Arabian Gulf chemical industry has remained resilient during the recent economic downturn, posting the second highest growth rate in the world, and even outpacing regional GDP growth. Yet, it is in the midst of a fundamental transformation that will see it transition from a commodity export oriented market into more specialised, value adding manufacturing hub.
To ensure a smooth transition and continued long-term success, the GCC producers will need to focus on efficient resource utilisation, higher asset productivity and optimised performance. Lowering variable cost through vertical integration, restructuring, upgrading existing production facilities and deploying more energy efficient technologies will be absolutely the key. The industry will also need to leverage digitisation to maximise the potential of its physical and intellectual resources.
Mergers of assets at home and overseas acquisitions should be leveraged to create critical mass and build capabilities in critical areas. To unleash its true economic power, boost growth and create more jobs, the industry will need to partner with the national governments to develop ‘Competitive Industrial Clusters’, which are robust and well-integrated in terms of logistics and derivative units. A key enabler is creating ‘smart policies’ and ‘efficient services’ that nurture SMEs and strengthen an entrepreneurial ecosystem.
In the future, competitiveness will depend on the region’s access to leading-edge technologies and markets; so, it is important to cement long-term partnerships with new and existing global leaders, as well as build local innovation capabilities. An increased focus on Open Innovation that welcomes external ideas will help leapfrog knowledge intensity and bring the emerging technologies to market.
The recipe for success lies in realising the value of by-products, creating new technologies to enhance the competitiveness of liquid feedstock, and by leveraging the region’s versatility and abundance to increase product differentiation. A critical step in this direction is optimising functional excellence across manufacturing, marketing, supply chain, procurement and service functions.
As global petrochemical markets become ever more challenging, the Arabian Gulf producers would need to come together to ensure they remain competitive during these uncertain times for the industry. Value-adding synergies in asset optimisation, supply chain efficiencies and joint technology developments will be required in order to make the most of the region’s existing capabilities and build upon its geographical and feedstock strength. The further it moves in its industrial evolution, the more its success would depend on companies’ willingness to work and innovate together.
Dr Abdulwahab Al-Sadoun is the secretary general of the Gulf Petrochemicals and Chemicals Association (GPCA). Set up in March 2006, the GPCA is a dedicated non-profit association serving its members with industry data and information sources. It is the first such association to represent the interests of the petrochemicals and chemicals industries in the Arabian Gulf.