Petrochemical Industry in the Middle East

Petrochemical Industry in the Middle East

Vision

The Middle East is endowed with an abundance of natural resources. These resources form the basis for a formidable petrochemical industry. The vision of the region is to be the largest exporter of petrochemicals in Asia with specific focus on China and India.

SWOT analysis

Strengths

Access to cheap feedstock

The Middle East’s major competitive advantage stems from the fact that it has abundant reserves of natural gas. This means that it has the capacity to produce petrochemicals at a cheaper rate than its major competitors that use heavier sources.

Presence of cheap labor

The proximity of the Middle East to Far East Asian countries which are a traditional source of cheap labor is a major advantage. This is because the region is able to carry out its activities at a lower cost as compared to western countries where the cost of labor is high.

Weaknesses

Outdated technology

The major investments in the petrochemical industry in the Middle East were in the latter decade of the 20th century. There have been new technologies that have been employed elsewhere that have greatly increased the capacities of competing regions. The outdated technologies must be revised if the region is to continue being a major exporter of petrochemicals.

Government

Most of the production in the region is done by government backed companies. This trend has affected competitiveness. It is important for the government to cede major control of the industry in order for private companies to compete for resources which will ultimately improve capacity.

Opportunities

Geographic location

The Middle East is located between its major competitors and the emerging markets in Asia. Over the last decade, demand for petrochemicals in Asia has steadily risen with the Middle East countries being the beneficiaries. With increased planning and investment in the industry, these countries will increase their production capacities in order to meet increasing demand. It is estimated that the population of India will equal that of China by 2025. This increase will be accompanied by a consumer group that will be larger than the population of the US. Thus, close ties with India will guarantee that Middle Eastern petrochemicals have a market for a long time to come.

`Improving technology

The Middle East has been a producer and exporter of petrochemicals for a long time. This means that there is developed infrastructure to support its endeavors. However, other competitors including Europe, the US and Japan are improving their technologies in order to produce at lower costs. The presence of better technologies presents an opportunity for the Middle East to also invest in them.

Threats

Increased capacity in major markets

India is aggressively building its petrochemical industry. The lag in developing its capacity over the years has been to the advantage of the Middle East. While the country will take some time in order to meet its local demand, it will nonetheless be able to do so in the long run. In the meantime, the Middle East will continue to supply its demand but this will change in the future.

Increasing competition

The US and Europe which have been the major competitors in the petrochemical industry are re-strategizing in order to recover the markets that have been captured by Middle Eastern countries. They have invested heavily in technologies that ensure they have access to cheap feedstock and have a diversified product base.

Alternative energy sources

Over the last couple of decades, there have been major strides in the production of cleaner energy with breakthroughs in nuclear energy. In the developed and developing world, there has been a massive shift from overreliance on oil and gas into alternative energy sources (Gordon 7). These developments have reduced the market for oils and gas products as well as slowing down on improving capacities for their improvement.

Key success factors

The Middle East is endowed with an abundance of oils and natural gas reserves. These have ensured that there is cheap feedstock for the petrochemical industry. As long as there is a reserve of raw materials, the industry will continue to thrive. The low opportunity costs associated with the use of natural gas as feedstock will continue to create demand for Middle Eastern petrochemicals.

Traditional relationships and proximity to major markets in Asia will ensure that there is a readymade market for Middle East products. Although countries like India are working in developing their own industry, they will still rely on products from the Middle East for the foreseeable future. The growth of China has also increased demand for petrochemicals which has ultimately created a larger market for Middle East products.

The proximity of the Middle East to countries like India and China not only provides a market but also a source of cheap labor. This plays a part in reduction of operation costs while ensuring that there is constant supply of end products.

Another success factor is technology. Since there has been increased demand for energy in the Gulf States due to increased population and overall development, the opportunity costs associated with having natural gas as feedstock will increase. This increase will be offset by employing advanced technologies to ensure that the Middle East industry is at par with that of major competitors (Campbell & Sommers 86).

Government subsidies and policies are a major determinant of the success of the industry. Currently, government involvement has ensured that the industry has continued to thrive. However, there is need for a rethink in the strategy to ensure competitiveness. Privatization will avail an outlet for improvement in the industry.

Competition

One of the major competitors for Middle Eastern petrochemicals is Europe. The European industry is largely supported by the presence of local demand. This mature market has witnessed increased growth for a long period of time but now grows at a lower rate compared to emerging markets in Asia. The European industry is hampered by high opportunity costs in feedstock, ever tightening regulations and high energy costs (Kalkman & Keller pp 7). This is however offset by improving technology and know-how that has leveraged access to cheaper feedstock and capitalization of foreign markets. Extensive research and development into new ways of improving the industry and excellent education have led to creation of a competitive advantage due to the presence of superior technologies and knowhow. The European industry has vast experience in operating large scale clusters like the Rotterdam-Antwerp and BASF Verbund petrochemical clusters. Plant operations have been optimized to enhance efficiency and management (Favennec pp 4).

The European industry has diversified its product range by building a niche market in the chemical segment. The extensive knowledge base has informed the emphasis from commodity chemicals to specialty ones. BASF, for example, moved from production of styrene and fibers and ventured into plastic adhesives, pigments and care chemicals which was effected after the acquisition of Ciba and Cognis (Kalkman & Keller 9).

The US is a powerhouse in the petrochemical industry. It has a large local market. It produces petrochemicals at high costs as it uses heavier sources of feedstock due to a large demand of natural gas. This negatively affects its competitiveness with other players like Gulf countries where they use cheaper feedstock due to a low demand for natural gas’ energy. However, improved technology has led to discovery on new ways of tapping into resources like shale gas. This raw material can now be economically extracted marking its resurgence in the petrochemical industry. Another reason for increased US competition is the discovery of oil and gas in Latin America which will provide cheap feedstock for the country.

Goals and objectives

The objectives and goals of the petrochemical industry are:

  1. To maximize of the capital investments
  2. To minimize costs of production and distribution
  3. To maximize the output from a particular region within the Middle East states
  4. To make sure that facilities produce to their maximum level
  5. To develop necessary competencies to be competitive in the global market
  6. To increase domestic market capitalization
  7. To employ modern technology at every level of production and distribution

Formidable strategies

The competitive advantage enjoyed by the Middle East in the petrochemical industry is largely due to its access to cheap feedstock. This situation is anticipated to change in the medium term due to increased opportunity costs in the exploitation of natural gas as the major feedstock coupled by decreased ethane stocks. The major players in the region need to review their business models in order to gain access to improved technologies and emerging markets.

There is an unemployment crisis in countries like Saudi Arabia where a majority of its citizens who are below the age of 25 are demanding better employment opportunities since the government can no longer provide them in the public sector (Oil Review 6). One of the major outlets for this situation is the petrochemical industry where the country needs to rethink its approach by emphasizing more on value addition than exportation of crude materials. The region has an abundance of natural resources, infrastructure and a ready market. This should be its starting point when adopting strategies to improve its standing like privatization. There are specific actions that have already taken root, including Abu Dhabi‘s Polymer Park Concept and Saudi Arabia‘s Industrial Clusters, where substantial resources have been invested to ensure that the petrochemical industry in these regions can compete with global players without the dependence on cheap feedstock (Makoto 45). An added advantage apart from creating employment is that the gulf region gets an opportunity to differentiate itself.

Establish control

Many governments in the Middle East have ceded much of their control in the running of the petrochemical industry with the realization that privatization will increase competitiveness and employment for the youth. However, they have remained as oversight authorities over the industry with numerous laws that touch on the environment and modes of doing business. In particular, there are numerous antidumping tariffs that are aimed at discouraging environmental unfriendly activities.

Internally, the industry has instituted a number of regulations that are aimed at enhancing competition and avoiding the formation of monopolies. Additionally, the industry has been organized in a comprehensive manner to allow for self-regulation with a uniform application of new technologies and unified marketing and distribution of end products.

 

 

Works cited

Campbell, Andrew & Sommers, Kathleen. Core competency-based strategy. London: Cengage Learning, 1997

Favennec, Jean-Pierre. Petroleum Refining: Refinery Operation and Management. Editions Technip, 2001

Gordon, Richard. Alternatives to Oil and Natural Gas. The academy of political science, Vol. 31, No. 2, Dec., 1973

Kalkman, Jaap & Keller, Alexander. Global petrochemicals – Who is really benefitting from the growth in the new world? Roland Berger Strategy Consultants, n.d

Makoto, Takeda. Middle Eastern petrochemical industry strategy and Japan’s role, Chemistry and chemical industry vol 65 (1), 2012, 45

Oil Review. Middle East to ‘dominate global petrochemicals industry by 2020’. Oil review, 2013. Accessed 10th Feb, 2014 [http://www.oilreviewmiddleeast.com/event-news-events/middle-east-to-dominate-global-petrochemicals-industry-by-2020]

 

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