Dr. Abdulwahab Al-Sadoun – Secretary General, Gulf Petrochemicals and Chemicals Association (GPCA), UAE
Dr. Abdulwahab Al-Sadoun, Secretary General of the Gulf Petrochemicals and Chemicals Association, shares his insights on the evolution of the petrochemical industry in the region since its beginnings in the 1980s as well as the unique challenges and opportunities that the Association’s members are facing. He also discusses the Association’s role as a platform for the exchange of knowledge and ideas, working as one to advocate for the continued growth of the entire industry in the region.
You stepped into your role as Secretary General in 2009. Given your expertise within the regional petrochemical industry, can you tell us a bit more about some of the trends that you have seen in the industry?
“Economy of scale combined with our geographic location and proximity to big markets in Asia have enabled us to flourish as an industry, and regionally the industry is regarded as a cornerstone in the diversification drive.”
The industry in this part of the world has some unique features, first being that it is feedstock driven. The supply, in terms of volume and type of feedstock, determine the product portfolio and the scale of the industry’s expansion. Overall, since the early 1980s, the industry has seen exponential and consistent growth. From less than 3 million tons capacity in 1985 to 150 million tons by the end of 2016. The industry had been growing at double digits up through the year 2000, and then, because of the rapid pace of the expansion, we have encountered some challenges, mainly in the constraint in the supply of feedstock. This is due to many reasons, such as the expansion of other sectors that are energy intensive, mainly water desalination and power generation, which both saw significant demand growth of 7 percent annually, largely due to population growth and urbanization. Not surprisingly, priority of gas allocation was given to those sectors. As a result, the industry had to rely more on using mixed feedstock, liquid and gas and subsequently, this resulted in more diversified portfolio.
The move towards mixed feedstock had slightly diluted the cost leadership of regional producer. However, that being said, the economy of scale combined with our geographic location and proximity to big markets in Asia have enabled us to flourish as an industry, and regionally the industry is regarded as a cornerstone in the diversification drive. We have been doing very well and our global position has been expanding. Currently, we have a global share, by volume, of around 10 percent, and we have also expanded globally through inorganic growth such as acquisition of assets in leading markets, including Europe and North America. We have also seen a trend towards establishing joint ventures for integrated refineries and petrochemicals in leading markets, namely China, Vietnam and recently Indonesia and Malaysia.
Overall, the industry has been on a growth pattern, but the growth had been characterized by “volume” in the early 1980s and the first two decades, and in the last decade it has been defined by “value” through the diversification of the product portfolio, focused on higher value-added products and the development of downstream industries, for example industrial and consumer products. This will add further value as well as create job opportunities for local populations, which is becoming a critical topic, especially in Saudi Arabia.
Considering the broad membership base the association has, with over 250 members, what is the mandate of the association, and how do you deal with any conflicting goals or objectives within your membership?
We are a platform for the exchange of knowledge and best practices, and that has been our clear mandate from the beginning. We do not engage in commercial issues, meaning there are limited chances for conflict within our membership, because commercial issues are not on the table. Our industry is a global industry, and the competition is in the global markets, not here. Around 80 percent of the volume produced in this part of the world is exported overseas. From this perspective, it is up to the individual company to ensure that they have cost leadership, and ensuring that their products are delivered to the target market on time and at competitive landed price for the customers. Given that the GCC has the longest supply chain, regional producers must optimize their supply chain, which presents close to 30 percent of the landed price, and develop intimate and long-term relationship with their customers to explore new applications and address any technical issues associated with the usage of the products.
Petrochemical producers in the region are generally united by common objectives and goals. There is an emphasis on addressing issues of common interest, benefiting a broader spectrum of the members. For instance, we tackle issues related to trade remedies in key markets, and step in as the voice of the industry, rather than each individual company addressing the claim for anti-dumping or anti-subsidy. As an association, we take the lead and defend the interest of our members.
Can you expand on any recent examples of these types of actions?
The latest example was in Taiwan, where there was a case regarding the polyethylene produced in the GCC. We managed to address this case and prove to the concerned Taiwanese authorities that there is no basis for the claim, and the case was closed. There have also been issues in Turkey, Egypt and Europe, and in all of these cases we stepped in and defended the common interests of our member companies.
The GCC region represents over 10 percent of the petrochemical production worldwide at the moment. Where do you see that percentage in the coming few years?
I believe the growth will be more on the diversification of the product portfolio rather than simply volume. This will target higher value-added products, such as specialty chemicals and performance polymers, which could stimulate the development of new set of industries in the region such as the synthetic rubber which will hopefully stimulate the production of tires, which in turn could be the basis for assembly plants for auto clusters. Those new products are either under construction, have already started production or are under consideration for the member companies.
Despite growth within the industry, it has been effected by the downturn in oil prices. How specifically has this effected your members in the GCC?
We have been effected both positively and negatively by the oil prices. When the oil prices are high, that enhances the global competitiveness of our regional producer vis-à-vis the producers who are using refined oil products in Europe and Asia, who use Naphtha, which is a product produced from refined oil. When the oil price is high, the Naphtha price is going to be high as well. That will make the cost competitiveness of those players and those markets become weakened, whereas our competitiveness globally will be enhanced, as our industry is largely based on gas, and the gas is supplied to our member companies at favorable or fixed price. For example, when oil was around USD 100 a barrel, Naphtha was around USD 1,000 per ton, and now it is close to USD 420 per ton. The low oil prices have enhanced the competiveness of the Europeans, the Asians, and for the Japanese in particular, who rely heavily on the refined oil product as a feedstock for their petrochemical plants.
What are your strategies to deal with this increased competition from the lower price in oil?
Functional excellence and more efficiency, ensuring that we enhance cost leadership. We are also focusing on improving and optimizing the supply chain, as our market is not in our region. We have the longest supply chain on a global level, so any improvement will hit the bottom line for our members. There is also a heavy focus on innovation and R&D, and we see this happening throughout the region. Member companies are setting up state-of-the-art research and innovation centers and dedicating higher percentages of sales revenue to research and innovation, which is critical for retaining and enhancing the global competitiveness of this region. It is well-known that commodity products, which represent the lion share of our industry’s output require less investment compared with specialty products. Furthermore, commodity products are not associated with breakthrough innovation, but incremental one. Industries such as the pharmaceutical industry, requires over 7 percent of revenue invested in innovation, whilst the commodity petrochemical industry spend on average 2-2.5 percent of sales revenue on research and innovation. That being said, we have seen an increase in our regional industry’s R&D expenditure, and between 2014-2015, the GCC was the only region on a global level that had increased the expenditure on R&D, with a year-on-year increase of 38 percent. That said, the industry’s overall spending on R&D remains modest and represent 1% of total sales revenue. We see a trend of growing R&D investments from both the industry and the mushrooming research centers within leading academic institutions such as Masdar Institute for Science & Technology, King Abdullah University for Science & Technology (KAUST) and others. These are all steps in the right direction which will expedite our journey to the top.
Are there any initiatives that GPCA is working on foster an increased focus in these areas?
As a platform for knowledge and best practice exchange, we advocate for the creating of an innovation culture, and we recognize those who go the extra mile and invest in research. We have launched three awards, GPCA Supply Chain Excellence Awards, Plastics Excellence Awards, and Responsible Care Awards which were designed to recognize outstanding contributions, leadership and vision across the entire supply chain industry and plastics conversion in the region as well as best practice related the continuous improvement of Occupational Health, Safety and Environment (HS&E) management. Our awards are specifically tailored to reward the effort of students, academia and researchers from our member companies who have done some distinguished work in areas relevant to the chemical and petrochemical industry.
This is an exciting time in the petrochemical industry in the region, with Saudi Aramco planning to raise production to 34 million tons by 2030, and ADNOC to 11.4 tons by 2025. What are the effects that you see that increase having in the region?
I believe this is the right move. Companies with critical mass, such as Saudi Aramco and ADNOC, have the potential to be global players. Aramco had set a target to be one of the top 3 global petrochemical producers by 2020, and ADNOC, through its subsidiaries, has the potential to be among the top ten. These type of companies have the potential to invest in two critical areas for sustainable growth: talent as well as R&D. The smaller player cannot really invest heavily in those capital intensive areas with lengthy incubation period, and they are critical for sustainable growth, for global competitiveness and critical to the expansion of global market share. When you build in such a capital-intensive industry as this, your eyes are set on global markets, not regional. You need to be able to have global competitiveness in order to expand your market share on a global level.
They have the potential to succeed as well. In terms of having access to the raw material such as oil and gas, and leveraging both their upstream and downstream capabilities, meaning there will be a high degree of integration which will ensure that their cost competitiveness will prevail.
On a more macro level, how do you believe this ramp-up will impact the industry in the GCC?
It will be positive. When you expand capacity in this part of the world it will also stimulate supporting industries, such as shipping, engineering, construction. This will create significant multiplier effects on the economy, the socio-economic benefits will increase, and the in-country value impact will be extremely positive.
For example, Sabic and Saudi Aramco in Saudi Arabia are not simply investing in chemicals. They are investing in specialty chemicals, and a lot of specialized products that will further support the development of manufacturing, conversion and downstream industries. The introduction of engineering plastics in the region will also drive secondary and tertiary chemicals manufacturing.
In addition, regional players have national commitment towards local SMEs aimed at helping to develop the manufacturing capabilities of the local supplier and vendors in the GCC region.
At a recent GPCA event hosted in collaboration with McKinsey & Company and entitled the “Future of the Petrochemical Industry”, you mentioned the importance of increasing efficiency to maintain growth in the future. Is this something that your members are pursing actively, and is there still areas of improvement that need to be addressed?
I believe that achieving higher operational efficiency is not an option anymore, it is becoming critical. We talk about energy efficiency, reducing our carbon footprint, recycling waste, investing in water conservation schemes and using waste as production input. For example, CO2 which is a by-product produced in certain manufacturing processes is being captured by several of our members to be used as a raw material for manufacturing other value added products. This is an investment which is both positive from an environmental and economic perspectives. You reduce your carbon footprint and you add value to a waste, which used to be simply released in the air. These types of investments are enhancing the profitability of all of our members.
These types of activities are no longer a choice. When the industry was in the early stage of development, the feedstock was very competitively priced. However, the prices have been revised upward since then. With the cyclicality of the industry, it has become very critical for all members to ensure that, even at the bottom of the cycle, they remain profitable. That will require continuous improvement, continues enhancement of the efficiency, and the relatability of the plant as well as a reduction in the carbon footprint. This is becoming an expectation from all responsible players, and I think that all of our members have gone above and beyond to achieve key improvements in these areas.
Looking forward to the coming three to five years, what are your ambitions for the GPCA?
“It is our belief that one of the key sources of competitiveness is talent. If you have the right talent in the right place, that will enable you to innovate and enhance the competitiveness of your firm.”
Our vision moving forward is to continue to serve the interests of our members, and exceed their expectations in terms of steering the direction and shaping the future of the industry in this part of the world. We will continue to working closely with the regulators and stakeholders to ensure the implementation of policies that are conducive to the sustainable growth of the industry in the GCC region. We will be putting extra efforts to emphasize the need to create a culture of innovation and contribute to the development of local talent. We have a very ambitious program called Leaders of Tomorrow. It is an initiative launched by GPCA and supported by its members and aims at building the local human capital in the region. The initiative falls under one of the three pillars of the association which is advocacy by promoting STEM and bridging the gap between academia and the industry. Leaders of Tomorrow is considered as the first official collective step where industry stakeholders collaborate in shaping skills and preparing the future industry leaders with the required skills set. It is our belief that one of the key sources of competitiveness is talent. If you have the right talent in the right place, that will enable you to innovate and enhance the competitiveness of your firm. Additionally, we will continue to advocate for an open market policy as we think this is something that is beneficial to both the producer and the consumer.
We are also championing global initiatives and programs related to safety and environment, such as Responsible Care, Gulf SQAS and Waste Free Environment, and have really become a role model globally. Whenever the ICCA does the annual rankings of the global associations, the GPCA is the top of the rank. When you look at our journey, we started back in 2006, and our progress has been remarkable, both due to the commitment and contribution of the team as well as the board, and we believe we are fortunate to have both of these ingredients for success.