The GCC region has a natural competitive edge through low input costs for the fertiliser and petrochemical industry and cheap energy prices for aluminium smelting and metal processing. Industry moves upwards in the value-adding process (from simple energy production to energy-heavy materials production).
Most of the world, except for North America and the MENA region, depends on naphtha (derived from oil) as the main feedstock for petrochemical production, resulting in margins that are negatively co-related with the price of oil. For example, naphtha is the world’s main feedstock used in fertiliser production, accounting for 52% of global ethylene production, as it is easy and cheap to transport. Naphtha dominates ethylene production in Europe and Asia. On the other hand, the natural gas feedstock (41% of the world’s ethylene production), particularly ethane (29%), is widely used in North America and the Middle East due to accessibility and low cost. The cost of natural gas is the most significant cost component (more than 80% of total cost) in the production of urea and ethylene.
Companies producing basic chemicals in the region are not really competing among themselves for export opportunities, but are benefiting from an environment in which the marginal cost of production is significantly above their cost structure, providing them with a strong pricing umbrella for their products. For producers like QAFCO, with relatively fixed feedstock costs, the majority of the urea price flows to the bottom line, allowing the company to report gross margins in excess of 70%.
The Middle East has now emerged as the most important region for chemical investments globally, with very competitive feedstock positions and opportunities to export to growth markets in Asia. The region is expected to account for more than 40% of basic chemical capacity additions globally over the next five years.