Wealthy oil states are expanding rapidly
by Liz White, editor
If one thing characterises the Middle East, and particularly the Gulf States, at present, it is its astonishing growth, notably in construction but also in other areas.
And this is also driving expansion in the polyurethanes sector, as demand for insulated panels for the building sector soars, according to local expert Hassan Baalbaki, managing director of the polyurethane business unit Baalbaki, headquartered Damascus, Syria.
To give a feeling for this rapid economic growth in the Gulf region, Baalbaki said, "I visit Dubai once a month and get lost quite often with my car due to the consistent change." Dubai is of course an extreme case but in Saudi Arabia, the MENA (Middle East and North Africa) region, Syria or Jordan, investment in the construction industry is unbelievable, he said.
"I would put growth for the PU industry in the area at above 20 percent," the Baalbaki boss said, in an 8 May telephone interview.
Baalbaki said visitors to the region are often astonished at the pace and extent of development, which is at odds with common perception outside the Middle East that it is a troubled and difficult region.
Another factor stimulating growth is the high number of young people in the region. In Syria and Saudi Arabia, for example, under-25s make up around half of the population, said Baalbaki. "So you can imagine the demand for housing and consumer products is very high."
Systems in the Middle East
In polyurethanes, Baalbaki pointed out that the major raw materials companies - Dow, Bayer, BASF, Huntsman - are now all present with blending capability in the region.
In contrast to the multinationals, Baalbaki, however,sees itself "as a local blending operator, with capabilities well integrated into the industry. We have a good local network and we see ourselves as supported by the local market, because some of our customers see our story as partially a success ... for themselves as well," he said.
For a multi-national or other entrant, it is hard to get into such tight-knit business networks from outside the region.
Baalbaki explained that local systems houses have become so strong "because of their local orientation, the very high flexibility and the fast supply to the market. This is something we have thrived on."
With the current trend for the major raw materials suppliers to buy up independent systems houses, is Baalbaki a target for acquisition? "We do recognise the desire of some of the multi-nationals to buy out the independent systems houses, this is no secret." said the Baalbaki chief, pointing out that sometimes the opposite occurs.
But Baalbaki thinks the independents are hard to kill off: "The entrepreneurial sense will not die down." Also, "There are enough suppliers of polyurethanes raw materials globally at the moment ... who are interested in supplying independent systems houses," so such systems houses remain a key customer for these producers, he feels.
Systems houses and continuous panel manufacturers, are good customers for MDI (methylene diphenyl diisocyanate) producers, Baalbaki said.
An MDI plant in the region?
Baalbaki also sees "potential for a new plant in our region for MDI as well ... because the growth is going to become significant in our territory and the cost of energy is much cheaper than anywhere else in the world."
"To go into isocyanates would require a significant investment in precursors ... it will need, independently, benzene, chlorine etc," Baalbaki commented.
"If you want to produce today any raw material based on petrochemicals, it will make the most sense to produce it somewhere in the GCC countries (see table)," he said, citing Saudi Arabia as having the most potential because energy is so cheap there.
Baalbaki pointed out that Dow Chemical has recognised the logic of production in the region. It announced a new venture in Dubai recently, in addition to one in Saudi Arabia.
Demand growth uncertain
One unknown factor, said Baalbaki, is the ripple effect that from the sub-prime crisis in the US. If this crisis becomes more widespread, then "all the global demand calculations for MDI have to be reconsidered, since the construction industry very much drives the MDI needs."
The US constitutes 25 percent of the global economy, so if consumption there drops 10 percent, this means the global demand will drop roughly by 2.5 percent, he said. "It would be a challenge for other markets to absorb this amount of material."
"We are seeing another adverse effect in China now, with a substantial drop in pure MDI consumption because the artificial leather and leather industries are down," Baalbaki said. In just this sector in China, "they are working at 65 - 70 percent of their capacity," Baalbaki said. And the polyester yarn business in China is also reported to be down 20 percent, Baalbaki said.
"It will be interesting to see if the growth in insulation demand will outperform the setbacks due to economic reasons," he concluded.
OIL PROFITS DRIVING GROWTH
"The future of the [Middle East] territory in my opinion is very, very promising. What has helped us a lot in the region is basically the excess cash out of oil," Baalbaki said.
Creating new jobs through investment is also helping rapid growth, said Baalbaki. Saudi Arabia, for example, supports agricultural development s by providing government loans, refrigerated trucks, permits to establish a shop and more.
"If you relate this to polyurethanes and you take the manufacturing of refrigerated trucks in Saudi, you can easily recognise that this programme has outperformed the building capacity of these special kind of trucks." These truck makers have contracts for another two or three years, he said.
Increasing political stability in the region will drive a much faster rate of growth than before, Baalbaki feels. Eventually, he said, Europeans. Americans, Japanese - who are "still not hands on in the territory and may be scared today," will also start to invest.