Realising Opportunities for the 21st Century Through Resilient Global Value Chains for the Petrochemicals Industries
For people everywhere, everyday life is unthinkable without petrochemical products. Plastics, rubbers and specialty chemicals are vital to everything from automotive engineering to construction, from electronics to packaging and from medical engineering to detergents. The sector contributes some USD 5.7 trillion to global GDP. As a capital-intensive industry, its demand for production machinery and equipment adds value in other sectors, and petrochemical production also drives growth in secondary industries that depend on its supplies and innovations.
Petrochemicals serve a global market, which was dominated almost exclusively by the USA, Western Europe and Japan until the 1970s. Petrochemical production has since spread mainly to the Middle East and Asia, changing the competitive landscape beyond recognition and establishing the Islamic Development Bank (IsDB) member states as a major player in this space. Despite owning nearly 60% of global oil and gas reserves, IsDB member countries contribute only 22% to petrochemical output. Overall industry development is guided by the needs of end industries such as packaging, construction, automotive, electronics and textiles. 50% of value creation in today's USD 1.5 trillion market for formulated petrochemicals comes from the production of finished chemicals – IsDB countries still focus predominantly on base chemicals, which only contribute 20% to total value creation.
Substantial upside value creation potential remains to be tapped by IsDB member countries due to the high value of petrochemicals. For countries with access to crude oil and gas, establishing a petrochemicals industry harbours huge value creation potential as petrochemicals sell at much higher prices than crude oil. As Keith Couch, Senior Director Sales Support & Integrated Solutions at Honeywell UOP puts it: "You can sell fuels for USD 550 a ton or convert them further to petrochemicals and get around USD 1,400 a ton". However, building an efficient petrochemical industry is no easy task given the current global dynamics and the high capital requirements.
What is the impact of the global pandemic?
The coronavirus pandemic and the “Great Lockdown” since early 2020 poses unprecedented challenges that may streamline and restructure the overall petrochemical industry, especially in IsDB member countries that consume or produce the most petrochemical products. The Global Lockdown has slashed global petrochemicals demand in the short and medium term; it has disrupted the supply side of petrochemicals due to maintenance and investment hiatus. This will lead to negative growth for most petrochemical products in 2020 compared with 2019 due to weakening downstream demand. This decline coupled with declining oil prices is very alarming for IsDB member countries. These disruptions are leading to heightened volatility of the prices and margins of petrochemicals.
Demand for petrochemicals is expected to rebound in 2021, depending on the prolonged severity of the coronavirus pandemic. In a fast recovery scenario, the industry is projected to rebound with a long-term growth that may surpass USD 2 trillion by 2030, driven by increasing income levels and a growing global population. In addition, as more countries start to ease their COVID-19 lockdowns, studying the lasting impact of the global pandemic on this important industry for which the demand has all but been plummeting for months will be crucial to saving trillions of dollars’ worth of export and hundreds of thousands of jobs in IsDB member countries.
What are the barriers to growth for IsDB member countries?
Since the petrochemical industry is driven by end industry demand, stimulating end industries through comprehensive industrialisation strategies will indirectly attract the petrochemical industry, for which proximity to end industries is an important factor.
It will be difficult for IsDB member countries to attract the investment needed to build up or expand a local petrochemical industry without first creating a commensurate infrastructure and putting good governance in place. Significant up-front investment in public infrastructure is thus needed to create or upgrade industrial zones, roads and ports, for example. Stagnation in other key areas such as education and governance would stifle development in the local petrochemical sector, eroding productivity and keeping foreign investors from getting involved. IsDB member countries need to improve training for quality jobs and tailor courses to the petrochemical industry's need for highly skilled employees.
Five main areas are therefore crucial to developing a world class petrochemical industry in IsDB Member Countries:
- Integrated petrochemical production facilities such as crackers and refineries are a fundamental prerequisite.
- A transport infrastructure is needed to bring feedstock and other materials to production sites and ship processed petrochemical goods via pipelines, roads, ports and airports.
- A robust utilities infrastructure must ensure stable production in this energy-intensive industry.
- A reliable communication infrastructure should facilitate smooth connectivity across production processes and along the petrochemical value chain, especially in the age of digitalisation and interdependent production sites.
- A strong research infrastructure is perhaps not essential but certainly beneficial to the petrochemical industry, driving innovation based on lessons learned and challenges overcome.
Managing competing traits
If these challenges are not met, IsDB countries will not progress significantly beyond their current capabilities. Instead, they will continue to suffer from the problems they know all too well today. Staying stuck at today's developmental level in an otherwise rapidly changing world is indeed likely to make these problems even worse. Resilience will be undermined, leaving them more exposed to the effects of economic and/or political crises. In a “business as usual” scenario, petrochemical firms will forgo planned projects and investments. It will lead to petrochemical plants being run down and closed, and operating margins squeezed.
While access to feedstock will remain a key success factor for the future petrochemical industry, volatile oil prices will continue to stress the fiscal space of IsDB member countries that rely on the industry to support their fiscal balance. In the long term, doing nothing to scale back dependency on petroleum and fuel exports could thus rob IsDB countries of their strategic cost advantage. On the one hand, demoted to the level of raw material providers, they would see the US, Europe and China remain the epicentres of value creation in the petrochemical industry. On the other hand, the global trend toward sustainability and the tighter regulation that goes with it will buoy demand for renewable feedstock, bio-based materials and clean energy. What, specifically, must our countries do to realise the rich potential explored in the chapters above?
Countries should manage two competing traits, the need to preserve cash to safeguard their petrochemical industry in the short term and the need for new investments to make sure that they are not left behind in the race for heightened petrochemical production efficiency in a world post COVID-19.
Given the importance of this industry to IsDB member countries, especially in the restart and recovery phase of COVID-19, IsDB is launching a report on the future of the petrochemicals industry, which provides a vision, strategy and uses the value chain approach at its core, which is increasingly important in the globally disrupted supply chains and provides IsDB member countries unique and innovative recommendations in facing the rising challenges in different parts of the petrochemicals value chain. Through this report, IsDBG appeals to all stakeholders, whether they are private or public sector practitioners to a call for joint action to support our member countries to develop their petrochemicals industries. The sector insight contained in the report - and its critical view of the challenges, opportunities and potential that lie ahead - provide a valuable baseline and starting point for future collaboration.
In its new business model, IsDB has set clear goals to galvanise private and public investment in the economic and social development of its member countries to the greatest extent possible. To sustainably drive modernisation and growth, IsDB places strong partnerships between the private and public sectors at the core of its strategy. The petrochemical sector requires such partnerships along its entire value chain, from oil and gas exploration and electricity generation to chemical production and further processing for the end industries that foster demand. This can also include education and training, as well as partnerships to drive innovation and R&D.
IsDB invites its Member Countries and the firms within them to collaborate on further developing the petrochemicals. By adding greater value in this high-impact/high-growth industry, our member countries will be able to collectively evolve from oil-producing countries to technology developers, while at the same time diversifying and increasing their portfolio of products.