Moving the chains

With an immense capacity boost expected to come on-stream over the next few years, petrochemical producers around the world will be harder pressed to find and secure markets for their products at competitive prices.

This will remain especially true as the global economic recovery continues to drag on with Chinese demand for petrochemical imports expected to plateau.

Thus, regions which are more reliant on export markets for the placement of their products, such as the GCC which exported 60.7 million tons of petrochemicals in 2012, will need to develop more competitive supply chain networks for their products.

“Five years ago we were worried about securing critical materials, now it’s about finding outlets on the marketplace,” says Dr. Tobias Lewe, partner at A.T. Kearney. “So the supply-demand relationship is changing globally, and this is shifting supply patterns around the world, and that’s one of the main impacts on the supply chains.”

Traditionally, the region’s producers were able to rely on competitively priced feedstock as a deciding factor when selling petrochemical products. The low price of associated natural gas made it possible for producers to undercut competition, particularly in Europe.

But the emergence of shale gas production in the USA continues to make downstream activity more lucrative, cutting the country’s reliance on exports from the GCC. Likewise, the development of Chinese coal-to-chemicals technology, has created a similar scenario in the East.

As Dr. Lewe explains, if you’re a producer of those molecules and the US is becoming more independent from imports and shifting towards an export position and you know there are other regions that are also in the future becoming more export or import oriented, then you have to ask yourself, especially as the Middle East, with a limited domestic demand for hydrocarbons, what do you do with your molecules?

Fortunately, the region is geographically well suited to access markets in Africa, the Mediterranean, Europe and East Asia, allowing it to be more responsive to global demand shifts. But there remain a number of chokepoints in the region’s supply chains that will continue to hamper the region’s ability to boost exports.

According to a report titled Chemicals Supply Chains in the Arabian Gulf: Chokepoints and Opportunities released by Accenture, a global management strategy and technology consultancy, at the sixth GPCA Supply Chain conference, held at the Ritz Carlton, DIFC, Dubai, these bottlenecks include: heavy reliance on ocean shipping, a still-emerging local infrastructure, heavy dependence on a single unstable waterway and a fragmented approach that limits end-to-end supply chain visibility.

Despite these challenges, Dr. Abdulwahab Al Sadoun, secretary general of the Gulf Petrochemicals & Chemicals Association (GPCA), believes that the trade of petrochemicals between GCC states is set for robust growth in the coming years, led by the development of the region’s rail and transport network.

“An integrated railway network is an important catalyst in driving increased economic integration between GCC countries as it fosters the region’s development agenda,” he says.

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The GCC railway network, a $200 billion venture that will link the six Gulf countries for the first time, is expected to significantly boost the intra-GCC chemicals trade when completed in 2018.
Opening a new railway will directly address the most pressing of bottlenecks, the heavy reliance on shipping and the associated supply chain vulnerabilities.

At the same time, it will minimise the risks of transporting chemicals across long distances. In the medium term, intra-regional trade is set to surge following the planned expansion of the GCC railway network.

“The GCC railway network will enable the region’s petrochemical companies to optimise their supply chains,” says Dr. Sadoun. “This is a positive development as it signifies deeper trade ties within the Gulf.”

Beyond the development of physical assets to support the region’s supply chain, both the GPCA and Accenture believe that it will also take the implementation of a digital supply chain to help tackle the challenges related to petrochemical export growth.

The GCC’s petrochemicals industry exported 63.4 million tonnes of chemicals in 2013, according to GPCA estimates, valued at $55.5billion. The sector currently produces over 90 products, with the portfolio expected to expand to 160 products by 2020.

According to the report, a digital supply chain reduces costs by applying more efficient logistics, decreases purchasing costs and supplies, and eliminates obsolete inventory while strengthening customer service, reaching new consumers, and growing sales.

To manage this increasingly complex system, the GCC chemical producers will also have to invest in local talent to operate these complex systems. Accenture’s report states that chemicals companies in the Gulf must look beyond efficiency and focus on attracting talent that understands rapidly changing markets.

While the GCC’s petrochemical industry provides employment to an estimated 140,000 people, including 32% of Gulf nationals, hiring information and analytics oriented employees will be the key to leveraging technological advantages.

“As an industry that is growing in scale, depth and reach, the GCC petrochemicals sector needs a sophisticated workforce,” says Dr. Sadoun. “And while the technological and talent transformation will not occur overnight, the GPCA-Accenture report provides tools which the industry can use to achieve better results and realise its immense potential.”

The GPCA also took last month’s supply chain conference as an opportunity to announce the launch of a three-year assessment programme across the GCC region that will promote supply chain efficiency, flexibility and transparency in the petrochemical and chemical industry. 

The Gulf Sustainability and Quality Assessment System (SQAS) is a uniform, independent and standardised programme for petrochemical logistics service providers that will enable companies to track and monitor progress in their environment, health, safety, security and quality (EHSS&Q) processes.

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This helps identify and improve weak areas in the supply chain and develop cost-efficient practices that shorten lead times and are environmentally sustainable. Reports generated from the assessment will assist petrochemical and chemical companies in evaluating their service providers.

“The Gulf SQAS programme will measure the EHSS&Q standards of all the logistics service providers in the six GCC countries,” says Alan Izzard, director of GPCA’s SQAS program.

“Certified independent assessors will evaluate a variety of technical aspects related to chemical and petrochemical warehousing, road and future rail transport and associated chemical cleaning stations, which are crucial elements of a product supply chain.”

Izzard adds “The programme will lead to an efficient and integrated system for logistics companies, driving consistent alignment with the advancements in the petrochemical and chemical industries worldwide. It will also ensure that international benchmarks are established outside the manufacturing facilities.”

“The Gulf SQAS programme is a natural step forward in our drive towards making the region’s petrochemical industry efficient, safe and successful. The initiative demonstrates that sustainability cannot be exercised in isolation, and needs to be undertaken in a holistic and integrated manner.

To date, 29 of the region’s main players, accounting for 87% of the total regional production volume, signed a declaration of support for this program” concludes Dr. Sadoun. “It is testimony of how the industry is evolving with a vision to adopt long term perspectives.”

Factbox:
– $200 billion the expected spend on the Intra-GCC railway network.
– 63.4 million tonnes the amount of exports from the GCC in 2013.