This has brought along some of the most significant disruptions in business, economic and social sense since the global financial crisis in 2008. The challenges facing current and future business leaders will continue to evolve as we begin to come to terms with just how disruptive the impact of the Covid-19 pandemic is on ongoing market dynamics, as well as companies’ competitiveness and their ability to remain profitable at a time of negative economic growth, subdued customer demand and more unpredictable than ever social and consumer habits.
The chemical industry in the region and globally depends significantly on economic activity and the performance of end-user industries it caters to, including electronics, construction, automotive, packaging, pharmaceuticals, medical equipment, and so on. As such, it is directly impacted by current market fluctuations on the demand and supply side, as well as the commodities price collapse that we have seen over the last six months as a result of ongoing travel restrictions and the resulting crude oil glut on the market.
Specialty chemicals vs. commodity chemicals
Historically, GCC chemical production has largely been dominated by commodity chemicals, leaving producers exposed to significant margin pressure, industry cycles and increases in feedstock and energy costs. Specialty chemicals, on the other hand, have less exposure to raw material price fluctuations, which represent less than 40% of the sales price vs. 60% for commodity chemicals. Furthermore, they generate higher value compared to their commodity counterparts, and are much less cyclical. Given the current business environment, regional producers have no other choice but to view the specialty chemical segment as a strategic priority for future growth.
Specialty chemicals – an enabler of diversification
Expanding into this segment will not only afford regional players the opportunity to maximise value addition, but it will help to stimulate the development of a new set of downstream industries in the region, which would subsequently contribute to national targets of job creation – as we know, specialty chemicals have a higher employment rate per tonne of product compared to commodity petrochemicals.
While the Arabian Gulf region is dealing with the effects of Covid-19 on the wider economy, long-term diversification strategies are still very much high on governments’ agenda. Successful diversification in the GCC can be accelerated with the introduction of innovation and technology intensive industries like specialty chemicals. A crucial ingredient for success in the region’s diversification strategy is to change the incentive structure for workers and firms towards investment in the private sector, as well as introduce favourable policies to encourage investment and entrepreneurship in specialty chemicals.
The GCC specialty chemical industry has an output worth $10-$11bn, which represents less than one percent of global output. Nevertheless, significant opportunities exist to further develop the sector in the region, which we estimate to have grown by a CAGR of five percent per annum during 2008-2018. While the specialty chemical market in the GCC is mostly fragmented, large chemical players in the region are expanding into specialty products. These large companies can bring the critical requirements such as the technical barriers and the regional market development to build a regional specialty industry.
However, as commodity producers in the GCC will start to formulate specialty chemical strategies, we need to recognise that it will begin from the consideration of raw material options. More liquid feedstocks will be required in the region to produce additional products in C3, C4 value chains to enable more downstream development. This would allow a more gradual shift towards the specialty chemicals business for the GCC producers.
Next steps – strategies for successful specialty chemicals business
Beyond expanding their own production, chemical companies must focus on developing a local market for specialty chemicals, especially in difficult economic times. First, they must develop the right products at the right price to help drive local demand growth. By working closely with existing end-user segments, companies can bring in new customers who previously bought specialty products overseas and understand which segments of the specialty chemicals market they could tap into first. Second, GCC companies are well positioned to leverage their experience in the chemical business to develop new and innovative ways to meet downstream challenges.
In order to create more opportunities for downstream industries, some companies have already created investment arms tasked with supporting downstream investment. For example, SABIC has established Nusaned Investment to provide opportunities for investors in innovative and pioneering industrial sectors in Saudi Arabia.
Challenges and opportunities in the specialty chemical industry
The success factors in the specialty chemical industry are distinctly different from those in the commodity chemicals business. While the commodity segment is mainly focused on commercial terms, the specialty space is largely driven by the customer relationship. To be successful, chemical players should focus on technical support, development cooperation, and having the right capabilities to meet specific customer requirements. They would need to enhance the skills of their employees, develop deeper technical product knowledge, and stronger R&D functions.
Some of the unique challenges characterising the specialty chemical industry include the need for continuous product diversification, changing demand patterns, an evolving nature of innovation, price pressure and a strong digitalisation drive. The industry is also highly regulated, with sustainability playing an important part. A diverse product portfolio will require specialty chemical producers to continuously investigate their product offerings and understand what products to create, keep, maintain, or phase out.
Specialty chemical companies would need to move closer to their customers in order to offer tailored products and customer specific services. To this end, Arabian Gulf producers are well positioned to establish closer geographic proximity to their customers, particularly in high-growth markets in Asia.
Grasping the opportunity
The current market downturn only highlights the need for chemical companies to explore new avenues for future growth and fresh business opportunities. The specialty chemical sector holds a huge potential and has largely been underdeveloped across the GCC region. Regional chemical players need to be ready to employ a number of measures in order to become successful in the specialty chemical business, especially in the post-pandemic environment. Companies that have the ability to take the necessary steps will be better placed to unlock the opportunities from the specialty chemicals industry.
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