Multiple market disruptions are shifting the balance of power among major regional players and reshaping the Middle Eastern petrochemical industry, The Boston Consulting Group (BCG) says in its latest report Why the Middle East’s Petrochemical Industry Needs to Reinvent Itself.
A number of factors including the shale gas renaissance in the United States, plummeting oil prices worldwide, and a capacity expansion drive in China and Iran, are putting Middle Eastern producers at risk of losing the competitive edge they long enjoyed from cheap feedstock, BCG said.
By enhancing the commercial, operational, and innovation excellence, industry players can take vital steps toward safeguarding their bottom line.
“Often strategies in the Middle-East don't work out not because of lack of vision, but because companies don't pay sufficient attention to capability building,” said Mirko Rubeis, partner and managing director at The Boston Consulting Group Middle East. “How to develop capabilities needs to be an integral part of the strategy, with a clear plan and attention not to stretch the organisation in too many new domains. The issue today is that these new capabilities have become essential to maintain competitiveness – not anymore a 'nice to have' for Middle-Eastern petrochemical players. And since capabilities building takes time, companies in the region should embark on their transformation journeys now,” he said.
Historically, GCC producers have relied on off-takers and traders to carry and sell their products in core markets, and as a result have lost anywhere from 3 per cent to 5 per cent of their product value to middlemen. Middle Eastern producers must strengthen their sales and marketing capabilities (including pricing sophistication) in addition to their supply chain management capabilities. Producers must invest more into market analysis and customer segmentation and deepen their understanding of their customers’ value chain and identify critical applications for their products. Commercial excellence has become even more important as petrochemical producers in the region expand downstream the value chain.
Embarking in an operational excellence program to enhance energy efficiency, effective raw materials usage, and asset utilisation while optimising costs could improve petrochemical producers’ bottom line by more than 10 percent, BCG said. In addition, players can also benefit from close integration with refining and other chemical plant to achieve operational synergies. Jubail and Yanbu, petrochemical industry hubs in Saudi Arabia, are cases in point. Producers in these locations could capture infrastructure related synergies across plants through feedstock and product exchanges, and pooling of logistics. This approach could prove especially valuable as the use of liquid feeds sourced from refineries increases in the Middle East.
The report said that GCC petrochemical producers must strengthen their product specialisation skills for the benefit of not only their existing value chain but also of future value chains that will arise from increased use of liquid feedstock. By going further downstream and increasing the specialisation of their products, GCC producers can reap higher and more-¬stable earnings. Producers must innovate not only in the area of technology but also in their business processes and operating models. For example, the ability to respond swiftly to customers’ product needs is vital to maximising customer satisfaction and the value of products. This form of innovation becomes increasingly important when a producer expands downstream in the value chain and gets closer to customers.
“In addition to the above three excellence domains, companies should aim to achieve overall corporate excellence and excellence in specific functions,” stated Udo Jung, Senior Partner and Managing Director at The Boston Consulting Group Frankfurt. “We have seen producers in the Middle East ramp up their commercial, operational and innovation excellence without aligning their efforts to build up internal capabilities and have thus delivered limited results. It is vital for companies to focus on those capabilities (capital allocation, talent management, etc. to name a few) that best strengthen the execution of their overarching corporate strategy. . Moreover, they must tailor their plans for building corporate and functional leadership capabilities to the requirements of different product segments such as commodities versus specialized offerings.”