BCG recommends petrochemical sector consolidation in the Middle East

A new report from The Boston Consulting Group has strongly recommended consolidation as the key to avoid ongoing stagnation for petrochemical companies of the Gulf Cooperation Council in the increasingly challenging international sector.

In its review of the petrochemical industry of the Arab Gulf States, conducted in collaboration with the Gulf Petrochemicals & Chemicals Association (GPCA), strategy and mangement firm The Boston Consulting Group (BCG) has endorsed consolidation as a prime strategic solution for local producers seeking to remain globally competitive in the face of rising challenges.

The concluding report, ‘Consolidation as a Route to Transformation’, examines the current and future industry impediments for petrochemical organisations of the Gulf Cooperation Council (GCC), and, in recommending consolidation as a means of future growth and greater competitiveness, highlights the advantages of such an approach.

In addition to the longer-term global market trends which threaten the petrochemical and refined product industry at large, such as efficiency improvements, environmental regulations, alternative transportation fuels, and the rising tide of electric vehicles and ride-sharing, the sector in the Middle East continues to encounter specific pressures both internally and externally. 

The report states: “On the external front, the continued low oil price environment has reduced the margin advantage that Middle East producers enjoyed over their naphtha-based peers in Europe and Asia. The shale gas renaissance in the United States is further changing the competitiveness of NA peers. While ethane-based producers in the GCC continue to be the most competitive in the world, North American producers are catching up fast. In addition, a capacity expansion drive in China is threatening to shrink the most significant export market for regional players.”

Internally, a GCC reduction in feedstock availability and the removal of certain subsidies have resulted in rising production costs in the region, while limited demand for local chemicals has forced companies toward export-led strategies and a reliance on distributors to serve distant foreign markets. More importantly however, the accelerated consolidation trends within the industry globally have granted a competitive advantage to international rivals as activity in the Middle East greatly lags behind.

Last year saw a record figure of $166 billion in M&A deals in the chemicals sector, with the big closures – individual deals worth over $10 billion, such as Dow-Dupont, ChemChina-Sygenta, and Sherwin Williams-Valspar – contributing more than 75% of the total volume. According to the report, 2018 looks set to be equally robust, and potentially another record year as further mega-deals including Bayer-Monsanto are expected to close.

North America, Europe and China have, however, combined for 80 per cent of all deals in the period – and will continue to dominate the consolidation landscape in the near future – while the Middle East and Africa have contributed just $22 billion in M&A activity in the sector over the past ten years, against North America ($296B), Europe ($230B), China ($110B) and the remainder of Asia ($106B).

Rationales for consolidation vary, but the authors of the report believe increased activity in the area is a transformative imperative if Middle Eastern producers are to remain globally competitive and achieve value creation through growth; with the benefits of consolidation potentially enabling companies to better ‘build market leadership in certain segments, achieve portfolio coherence, increase their cost competitiveness (including better integration of site networks) and support accelerated development of capabilities.”  

Mirko Rubeis, Partner & Managing Director at BCG, said in summary, “Multiple market developments – both internal and external – are reshaping the petrochemical industry in the Middle East. We believe that consolidation is an effective route to positive transformation for GCC producers.”

The report also reminds prospective companies that consolidation need not imply the acquisition or full merger of two companies, and that avenues such as joint ventures may also provide worthwhile benefits. In one such example, the consulting firm, Oil and Gas Innovation (O&G), recently announced the brokering of a joint venture partnership between Abu Dhabi O&G providers Al Yaseah and stored electrical energy specialists the Norco Group of Scotland.

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