The escalation in Middle East chemical industry capacity is threatening European chemicals companies and could flood the global market with excess capacity.
European companies will need to consider innovation, off-shoring and M&A to ensure survival, a report by market adviser KPMG says.
'With an abundant supply of cheap oil and gas reserves, Middle Eastern chemicals companies can access natural resources at greatly discounted prices when compared to their Western neighbours,' Chris Stirling, European head of chemicals at KPMG, comments.
KPMG's report Finding the Right Formula: How the Middle East Will Impact European Chemical Companies examines how and why the Middle East has taken centre stage and looks at the resulting threats and opportunities for the established Western-based chemical industry.
'The Middle East-based companies have made the most of their natural resource and transformed their business from a supply of raw material to heavyweight, global petrochemicals production. Our research shows that 53 plants could come on-stream by 2012 which, if taken together with investment in Asia, could lead to European players being marginalised on the global market,' Stirling adds.
The Middle Eastern chemical industry grew 9% a year during the decade from 1997 to 2007. KPMG forecasts the region will grow at an average 9.5% a year until 2020; more than twice the global average.
The chemical industry is the third biggest industrial sector in the EU and yet innovation levels have been falling due to high levels of regulation and difficulties in attracting a sufficient skills base to the industry. The European market is also highly fragmented and ready for consolidation, the report says.
While the credit crisis has impacted M&A levels in all industries, the research shows that this could act as a catalyst to drive further market consolidation as well-capitalised trade buyers take advantage of the lack of competition from financial investors such as private equity houses, Stirling notes.
While M&A may be a difficult path to follow, a more readily accessible partnership is possible through joint ventures. Middle Eastern and western companies have announced collaborations which provide expertise, access to technology and process innovation, without the potential increased complexity that a takeover can bring.
Selecting appropriate partners in the region, establishing symbiotic relationships, and effectively managing the resulting joint ventures will be the key to reaping the rewards now offered by Middle Eastern engagement, KPMG advises.
KPMG is a global network of professional firms providing audit, tax and advisory services, operating in 145 countries.