United Arab Emirates Petrochemicals Report Q ISSN:

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1 Published by BUSINESS MONITOR INTERNATIONAL LTD United Arab Emirates Petrochemicals Report Q ISSN: Including 5-year industry forecasts Business Monitor International Mermaid House, 2 Puddle Dock London EC4V 3DS UK Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com web: Business Monitor International. All rights reserved. All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.

2 United Arab Emirates Petrochemicals Report Q Including 5-year industry forecasts by BMI Part of BMI s Industry Survey & Forecasts Series Published by: Business Monitor International Publication date: June 2009 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com Web: Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

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4 CONTENTS Executive Summary...5 SWOT Analysis...7 UAE Petrochemicals Industry SWOT... 7 United Arab Emirates Political SWOT... 8 United Arab Emirates Economic SWOT... 9 United Arab Emirates Business Environment SWOT... 9 Global Market Overview...10 Global Ethylene Capacities Table: World Ethylene Production By Country, 2008 And 2013 ( 000 tonnes capacity) Polypropylene Quarterly Oil Products Price Outlook Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl) Table: Oil Product Price Forecasts, (US$/bbl) Gulf Regional Overview...20 Table: Announced Ethylene Cracker Projects In The Gulf Region UAE Market Overview...24 Table: The UAE s Petrochemicals Sector Cracker Capacity Data, ( 000 tpa) Petrochemicals Business Environment...25 Table: Middle East And Africa Petrochemicals Business Environment Ratings Limits Of Potential Returns Risks To Realisation Of Returns The UAE s Business Environment Outlook Foreign Direct Investment Industry Trends And Developments...30 Abu Dhabi Dubai And The Northern Emirates Related Industries Developments Table: Major UAE Oil And Gas Concessions Plastics Futures Industry Forecast Scenario...37 Table: The UAE s Petrochemicals Projects Table: The UAE s Petrochemicals Sector, Macroeconomic Outlook Table: United Arab Emirates Economic Activity, Company Profiles...43 Abu Dhabi National Oil Company (Adnoc) Abu Dhabi Polymers (Borouge) Abu Dhabi Fertilizer Industries (Adfert) Country Snapshot: UAE Demographic Data...49 Section 1: Population Business Monitor International Ltd Page 3

5 Table: Demographic Indicators, Table: Rural/Urban Breakdown, Section 2: Education And Healthcare Table: Education, Table: Vital Statistics, Section 3: Labour Market And Spending Power Table: Employment Indicators, Table: Consumer Expenditure, (US$) BMI Forecast Modelling...52 How We Generate Our Industry Forecasts Chemicals And Petrochemicals Industry Cross Checks Business Environment Ratings Table: Petrochemicals Business Environment Indicators And Rationale Weighting Table: Weighting Of Indicators Business Monitor International Ltd Page 4

6 Executive Summary An ambitious programme of expansion at Abu Dhabi s Borouge complex is on course, with its backers pressing ahead with a third phase in the massive petrochemicals project even before the second phase is due for completion in This indicates that the development of the country s petrochemicals industry is robust in the face of a severe decline in global demand and remains attractive to investment due cheap and abundant feedstock resources, according to BMI s latest UAE Petrochemicals Report. The Borouge 2 project is on schedule with operation due to begin in Borouge 2, located next to Borouge s existing petrochemical complex in Ruwais, will raise production capacity from the current 600,000tpa to 2mn tpa of polyolefins. It will include one 540,000tpa Borstar technology-enhanced PE unit and two 400,000tpa Borstar PP units. A proposed Borouge 3 was announced in April In the same month of 2009, Borouge announced plans to commission a front-end engineering and design study for the Borouge 3 project to boost total production capacity to 4.5mn tpa by Q413. It will comprise an ethane cracker and PP and PE units. According to Borealis, Borouge 3 will capture additional feedstock availability resulting from the upstream refinery and gas processing expansions of the Abu Dhabi National Oil Company (Adnoc). The PP plants are expected to consume propylene supplied by local refineries. The LDPE unit, Borouge s first, will supply the wire and cable infrastructure market. However, exact capacities, including the cracker, have not been disclosed, although BMI believes it will be as large as the Borouge 2 cracker, which has a production capacity of 1.5mn tpa. Combined polyolefins capacity will be 2.5mn tpa, of which BMI believes up to 1mn tpa will be PP. BMI has projected start-up for commercial production in Q114. Another major upcoming development is the proposed 7mn tpa Abu Dhabi Chemicals Company (Chemaweyaat) Complex 1, which includes a 1.5mn tpa naphtha cracker, and aromatics, phenol and derivatives plants at Taweelah, to be completed in It is envisaged the complex will be the world s largest grassroots integrated chemical project, although by end-2008 no further details were available on the complex s capacities. BMI believes it is unlikely that the cracker and related units will be completed before Ownership will be split between the International Petroleum Investment Company (IPIC) (40%), Abu Dhabi Investment Council (40%) with the remainder held by Adnoc. In BMI s Middle Eastern Petrochemicals Business Environment Rankings matrix, the UAE has a score of 58.4 points, 5.8 points behind Qatar and 2.1 points ahead of Kuwait. The UAE s score has fallen 1.3 points this quarter due to deterioration in its country risk ratings. However, it has risen from fourth to third place as a result of a larger decline in Kuwait s score. The two states have jostled for third place in recent months, but Kuwait has suffered as a result of policy reversals in the refining and petrochemicals sectors which has adversely affected its market risk score, while its overall country risk rating as fallen, in line with global economic trends. BMI believes that it is unlikely the UAE will raise its ranking further Business Monitor International Ltd Page 5

7 with Saudi Arabia and Qatar continuing to lead the Middle East rankings over the next five years, even with the additional capacity provided by the second phase of the Borouge complex in 2010 However, it is likely to hold on to its third place, with the expansion of the Borouge complex and the proposed Chemaweyaat 1 bolster its petrochemicals capacities. Business Monitor International Ltd Page 6

8 SWOT Analysis UAE Petrochemicals Industry SWOT Strengths Large hydrocarbon reserves provide plenty of cheap feedstock for the petrochemicals industry Geographically well placed to export to both Europe and new and emerging Asian markets, such as India and China Adnoc and Borealis are forging a strong commercial partnership Weaknesses Narrow production portfolio Relatively small production capacity given the size of its hydrocarbon reserves; expansion plans might miss the current positive petrochemicals climate and come onstream at a low point in the price cycle Outside of the Borouge company, the sector has reflected the economy as a whole in attracting little in the way of foreign direct investment (FDI) The country faces problems regarding access to the EU markets, as the union feels that Middle East governments provide feedstock to domestic companies at a subsidised rate An extreme climate and a highly saline Arabian Gulf lead to high investments to offset the corrosion caused to petrochemical process facilities Opportunities Borouge is expanding PE capacity and, given Borealis s expertise in PP production, may expand its portfolio into propylene and PP production The Chemaweyaat project will eventually have a capacity of 6mn tonnes of petrochemicals per year Abu Dhabi is setting up special economic zones to house petrochemical production facilities As many projects are state financed, the sector should not suffer as badly from the liquidity crisis as many rival markets The financial crisis is causing capital expenditure costs to drop, which should encourage investment, providing financing can be arranged The government is increasing efforts to attract FDI The emergence of China as a major petrochemicals consumer Threats An economic slowdown in China could negatively impact export revenues Increased feedstock prices could pressure margins Competition from new production capacity in Asia Business Monitor International Ltd Page 7

9 United Arab Emirates Political SWOT Strengths Standards of living are high for nationals, which has dampened any demands for greater political representation The monarchy enjoys strong support nationwide Weaknesses Lack of democracy poses long-term risks given trends towards greater popular participation elsewhere in the region Sheikh Khalifa bin Zayed assumed the presidency after the death of Sheikh Zayed al- Nahayan. He is equally conservative and is unlikely to make concerted efforts to address constitutional issues The succession lineage is somewhat opaque, raising concerns about longer-term stability Opportunities The UAE co-operates closely with other GCC states in security and economic policy The UAE is typically a 'dove' within OPEC, sympathetic to the needs of consumer states, which is good for its relations with the West Dubai enjoyed a smooth political succession following the death of former ruler Sheikh Maktoum bin Rashid al-maktoum in January 2006, with new ruler Sheikh Mohammed bin Rashid al-maktoum welcomed by most of the public Threats There is a long-running territorial dispute with Iran, which continues to affect bilateral relations Relatively poor living conditions among some foreign workers have led to strikes and demonstrations. Given the size of the expatriate community, this poses some threat to domestic stability Business Monitor International Ltd Page 8

10 United Arab Emirates Economic SWOT Strengths The UAE is a member of the Gulf Co-operation Council, which, as well as being a common market, is targeting a common currency by 2010 The UAE has one of the most liberal trade regimes in the Gulf, and attracts strong capital flows from across the region In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy, making up for the otherwise small workforce The UAE is diversifying its economy, minimising vulnerability to oil price movements Weaknesses The UAE's currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure The state's location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and Iranian WMD programmes could affect investor perceptions Opportunities Oil prices are expected to stay high (by historical standards) over the forecast period Economic diversification into gas, tourism, financial services and high-tech industry offers some protection against volatile oil prices The construction, tourism and financial sectors are growing rapidly, driven by domestic and foreign investment Threats Heavy subsidies on utilities and agriculture and an outdated tax system have contributed to persistent fiscal deficits in the past, although rising oil revenues have masked the problem in recent years Some bottlenecks have been forming in the construction sector and there is a chance of delays in several high-profile construction projects United Arab Emirates Business Environment SWOT Strengths The UAE is a member of the Gulf Co-operation Council, a six member common market, and has been a member of the WTO since 1996 The state has invested large amounts in infrastructure, and will continue to do so The UAE's diversified economy reduces risks from volatile oil prices Weaknesses Due to the state's federal nature, regulations can vary considerably across emirates The regional economy is oil-dependent. This has historically been very cyclical, which increases risks for long-term projects Opportunities Large number of free trade zones offering tax holidays and full foreign ownership Comparatively relaxed rules on expatriate employment The UAE's social stability and relative prosperity means that there is far less concern for security than in some other Gulf states Threats The state is bureaucratic relative to regional peers Strong oil prices have massively increased liquidity. This has resulted in strong financial inflows, increasing risks that projects of lower potential are being funded Business Monitor International Ltd Page 9

11 Global Market Overview Global Ethylene Capacities Table: World Ethylene Production By Country, 2008 And 2013 ( 000 tonnes capacity) Country 2008e 2013f United States 29,270 27,770 Saudi Arabia 10,760 19,670 China 10,160 20,910 Japan 8,760 8,760 South Korea 7,490 7,690 Germany 5,745 5,745 Iran 5,606 9,006 Canada 4,951 4,951 Brazil 4,425 6,445 Taiwan 4,120 4,120 Netherlands 3,980 3,980 France 3,465 3,465 Russia 3,095 5,230 United Kingdom 2,885 2,885 India 2,850 7,300 Belgium 2,540 2,540 Thailand 2,480 4,470 Singapore 2,040 4,040 Malaysia 1,770 1,770 Mexico 1,580 2,580 Spain 1,480 1,480 Qatar 1,300 6,000 Kuwait 850 1,700 Argentina Egypt Poland Hungary Indonesia UAE 600 2,050 Business Monitor International Ltd Page 10

12 Table: World Ethylene Production By Country, 2008 And 2013 ( 000 tonnes capacity) Country 2008e 2013f Venezuela 550 1,850 Czech Republic Romania Turkey Australia South Africa Bulgaria Israel Nigeria Azerbaijan Central Asia Slovakia Algeria 130 1,230 Colombia Chile e/f = estimate/forecast. Source: BMI BMI estimates that total global ethylene capacity amounted to around 130.9mn tpa in 2008, with Asia Pacific representing 31.5% of installed capacity and North America a further 27.5%. Although the Middle East and Africa represent the largest source of oil and gas, the region contributed just 16.2% of total capacity. This is set to change over the medium to long term as new capacity comes online. The region s contribution to global capacity is forecast to rise from 11.8% in 2007 to 24.5% by 2012, the region should represent 24.5% of global ethylene capacity, which we forecast will reach 182mn tpa. Although Asia Pacific will have the strongest growth in demand Ethylene Global Capacity By Region 2008 Middle East and Africa 16.2% South America 4.4% Eastern Europe 4.8% NA FTA 27.5% Asia Pacif ic* 31.5% Western Europe 15.5% * Includes Central Asia. Source: BMI Business Monitor International Ltd Page 11

13 for olefins, its contribution is likely to rise by just 2.2 percentage points (pp). Another region set to raise its global profile is South America, with significant new capacity set to come online in Brazil and Venezuela. Brazilian Ethylene Global Capacity By Region petrochemicals giant Braskem is seeking 2012 to dominate production in the region and become a serious player on the Eastern Middle East Europe and Africa international petrochemicals market; the 4.8% 24.5% company is ramping up capacity, South including a world-scale ethylene joint America NA FTA 5.1% venture (JV) in Venezuela. 20.3% With Saudi Arabia and Qatar in particular ramping up capacities with a number of Western Asia Europe Pacific* world-scale projects, the feedstock will also shift. At present, naphtha represents 54% of feedstock for the world s 11.7% * Includes Central Asia. Source: BMI 33.7% crackers, with ethane providing a further 28%. By 2012, BMI forecasts that ethane will represent around 45% of total feedstock, derived largely from the gasfields in the Arabian Gulf. Access to cheap feedstocks gives petrochemicals companies in the Arabian Peninsula and Iran an even greater cost advantage over producers elsewhere in the world, particularly in Europe and North America. Higher oil prices have led governments in the region to reinvest profits in constructing petrochemicals plants. By 2012, the Middle East and Africa will have nearly twice the capacity of Western Europe. Saudi Arabia accounts for almost half the US$250bn committed to petrochemicals projects in the Middle East, excluding Iran. Due to this strong Ethylene US Contract Prices 2007 And 2008 (cents per pound) growth in capacity in the Gulf region, 80 investors will be reluctant to expand capacity in North America and Western Europe. Even debottlenecking expansions could be abandoned due to concerns about feedstock costs and loss of competitiveness An increased use of ethane and expansion of capacity should help raise margins. Ethane costs just over a third of the cost Source: BMI of naphtha and cracking margins are 6.5% higher. Naphtha prices have risen in line with crude, which was reaching all-time highs by mid This caused ethylene contract prices to soar to over 70 cents per Jan07 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan08 Feb Mar Apr May Jun Jul Aug Sep Business Monitor International Ltd Page 12

14 pound in July 2008, a 47% year-on-year (y-o-y) increase. Average oil prices of US$60 per barrel (/bbl) or above make the Middle East the prime destination for investment, due to access to low-cost ethane. However, the sharp decline in oil prices towards the end of 2008 and into 2009 should give naphtha-fed crackers a boost in competitiveness. Polypropylene The global slowdown is also a cause for concern for the petrochemicals industry, which will carry out large-scale capacity additions in 2009 and 2010, leading to a supply glut. Middle Eastern producers will be particularly affected as they are heavily reliant on exports, particularly to Asia. Already, Saudi projects are being delayed due to a lack of buyers for their products as well as the global financial crunch, although this is expected to be a short-term phenomenon. In the long term, with Middle Eastern capacity growth rising faster than Chinese import growth, producers are likely to reduce operating rates. In 2008, significant parts of China s polyolefins market were in stagnation, with the situation likely to deteriorate further in 2009, putting pressure on olefins prices. Chinese ethylene self-sufficiency could top 60% by 2010, compared to 45% in The falling price of naphtha feedstock will also undermine the competitive advantage ethane-fed crackers in the Middle East rely on to penetrate new markets. The downturn is not likely to last beyond 2010, as Chinese demand is likely to accelerate, with a supply gap exceeding 15bn tpa by the end of the next decade. Additionally, Chinese crackers are expected to struggle to find competitively priced sources of naphtha, thereby bolstering the penetration of Middle Eastern producers in Asian markets. Demand for PP has been running on average at 7.5% over the past decade, which is well above global average economic growth. BMI estimates global PP demand at 48mn tonnes in The polymer is attractive as it can be used in a wide range of products and yet it is priced lower than other thermoplastics. In recent years, global PP prices have been pushed up by demand growth outstripping capacity additions and the effect of high oil prices on propylene feedstock. As with all petrochemicals commodities, the level of growth in China and India has been largely responsible for the pace of PP demand growth. Rising PP prices mean they are catching up with PE prices, leading to a slackening in demand growth momentum. Nevertheless, PP consumption is set to exceed 50mn tonnes in 2010 and could reach 80mn tonnes by 2016, making it the world s largest polyolefins market. As a result, global plant operating rates are expected to stay at around 80-90% of capacity, based on expected capacity growth. Most new capacity will come onstream in , causing a temporary decline in capacity utilisation. Demand growth is set to continue despite the global economic slowdown, due to a broadening of the variety of applications particularly in the packaging, construction and automotive industries. The Asia- Pacific region has become the world s largest PP market and has led growth, due to rapid industrialisation Business Monitor International Ltd Page 13

15 in China and India, which are driving PP demand as their demand growth rates exceed their growth in capacity. South America is also witnessing high rates of demand growth, although it will remain a smaller market than Europe and North America over the foreseeable future. BMI estimates that global polypropylene capacity totalled 53mn tpa in 2008, with the United States the world s largest PP producer with 17% of capacity, followed by China on 13%. Western European producing markets contributed a further 19.4%, while the Middle East despite its immense resources represented just 8.2%. The global landscape is set to radically shift over the next five years, as demand and supply shift eastwards due to growth in developed markets, according to BMI research. In 2008 alone, BMI estimates the amount of added capacity at over 4mn tpa, with a further 5mn tpa over the following two years. Capacity expansion is occurring during a period of economic downturn, leading to excess capacity. PP producers in the Middle East and Asia will firm up their positions on the global market, exporting their surpluses to the detriment of Western European and North American producers which are unlikely to put significant new capacity online in coming years. BMI analysis indicates that profitability in Western Europe and North America will come under attack from cheap imports and will struggle to maintain their competitiveness on export markets. BMI forecasts a net decline in PP capacity in these regions, with producers mothballing or closing older, smaller and less efficient plants with capacities under 200,000tpa, instead focusing their attention on increasing capacity at larger sites. Production is shifting eastwards, following the pattern of demand. BMI expects modest declines in US capacity over the next five years. US producers are set to devote an increasing amount of output to the domestic market as exports come under pressure from new capacity in the Middle East and Asia. Net exports are likely to fall to zero by The main challenge for the US is over-reliance on propylene derived from fluid catalytic cracker units Regional Contribution To PP Capacity in refineries. As refinery capacity is Expansion unlikely to keep up with the growing demand for propylene feedstock, Middle East Central polypropylene producers will be forced 23.7% Africa and West 3.4% to look to other sources to sustain output. Eastern Europe Europe According to BMI forecasts, US demand 6.8% 3.5% will reach around 9.0mn tpa in 2009, an Japan 18% rise over 2005 levels, leaving a net 1.1% Other Americas surplus of around 1.5mn tpa for export. 14.2% In Western Europe, BMI estimates show that the recovery in PP demand since 2005 slowed considerably in 2008 as the China 23.8% Source: BMI forecasts Other Asia 23.5% Business Monitor International Ltd Page 14

16 region s economy slowed. Demand growth is set to be stronger in the Central and Eastern European markets over the next five years, although outside Russia there will not be any significant extra PP capacity coming online. This trend could lead to the EU becoming a net PP importer over the next five years. Producers are already closing PP plants and instead focusing their attention on debottlenecking and expanding their other facilities. The stagnation in production in Europe and North America and slower demand growth rates stand in stark contrast to the surging Chinese market, which will become increasingly self-sufficient. China is now the world s largest PP consumer, with BMI projecting demand reaching 11.8mn tonnes in 2010, a third more than in This is likely to lead to a deficit of over 1mn tonnes. Yet, the addition of 4mn tpa of PP capacity over , with other projects in the pipeline, should help contain the growth in imports. According to BMI forecasts, China will represent 23.8% of the 14.3mn tpa of PP capacity that is due to come online worldwide between 2008 and The whole of Asia will represent just under half the additional capacity, while the Middle East will add a further 23.7%, largely due to the developments in Saudi Arabia. There are no plans for additional capacity in the US, giving China the opportunity to become the world s biggest PP producing nation. Most of the contribution to capacity expansion in the Americas will be in Brazil with 2.38mn tpa due to be added over the next five years. Meanwhile, in the Middle East, PP projects have faced delays. The opening of PetroRabigh s 700,000tpa PP plant in Saudi Arabia was moved from Q408 to Q109, while the Sharq and Yansab complexes, which have a large amount of associated PP capacity, were also moved to Other PP plants due to come online in the Kingdom in 2009 include a 250,000tpa expansion of Saudi Polyolefins plant at Al-Jubail. Also at Al-Jubail, the Al-Waha Petrochemical JV between LyondellBasell and Sahara Olefins is due to add an extra 460,000tpa of PP. There are, however, significant risks facing PP producers. A stronger than expected slowdown in Chinese economic growth could lead to a glut in supply, driving down prices and forcing less competitive operations out of business. Margins will also be put under pressure by sustained high oil prices, which will keep the price of propylene at high levels. A combination of over-capacity and rising costs of raw materials could lead to a reduction of PP capacity in developed markets. A significant constraint facing the industry is the tightening of the propylene market as production of the monomer outstrips refinery output. Cuts in refinery throughput during the course of the global economic downturn will make this constraint more evident. As a result, some PP producers are considering plans to build plants dedicated to propylene production. While feedstock prices are set to rise, Chinese and Middle Eastern producers are managing to bring down prices of end products, leading to pressures on margins, particularly for producers in the developed world. The only way they can stay afloat is to corner niche markets with innovative products requiring greater technical sophistication than currently offered Business Monitor International Ltd Page 15

17 by plants in emerging markets. Efficiency in the manufacturing process also needs to be improved and markets developed. At the same time, energy and transportation prices are high, although easing with the decline in oil prices. Quarterly Oil Products Price Outlook Preparing For The Big Squeeze Weaker demand for diesel in road transport use, gas oil for manufacturing and industrial applications, and falling jet fuel consumption have acted in concert to pull the rug from under the middle distillates market. Gasoline prices and margins had, earlier in the first quarter, made some progress. Since then, refiners have again struggled. There is no clear pattern yet emerging for the oil products sector but, based on OPEC s efforts to limit crude supply, the downstream segment may be in for a tough time if crude prices rally but product demand remains weak. This is a recipe for ongoing margin weakness and refiners are preparing themselves for the big squeeze. The start-up of new refineries in Asia and the Middle East will only exacerbate the situation by providing an ill-timed boost to global capacity that will lead to reduced plant utilisation rates if demand remains weak. Lower fuel prices may stimulate demand in certain markets but the trend towards higher fuels taxation and the overhaul of subsidies in some developing countries mean that a near-term rebound is far from certain. In spite of some evidence that US drivers are migrating back to less fuel-efficient vehicles, the major shifts in patterns of consumption resulting from vehicle ownership changes are unlikely to be reversed simply because pump prices are temporarily lower. The move in Europe away from gasoline and towards diesel is expected to continue for a while longer, in spite of steep price differentials. However, advances in small petrol engine technology may mean these more economical units bring to an end the love affair with diesel. Over the longer term, expansion of the oil refining system is still needed, particularly as market growth is likely to accelerate as the world pulls clear of recession/depression. However, refining margins are likely to be under pressure for many months. Coupled with weaker upstream economics and modest profits in fuels retailing, the downturn in refining profitability means that both international and national oil companies may re-examine investment plans. The downstream oils market needs to see continued high spending in new crude distillation capacity, improved plant upgrading capability and better storage and distribution logistics. There will inevitably be reduced capital expenditure if industry earnings and cash flow remain under pressure. This can only result in the market tightening once again as demand picks up with a return to extreme price volatility and generally higher fuel prices. Moving Markets The continued weakness of refined product prices has played into the hands of those countries wishing to revise or abandon regulated systems. Many are seizing the opportunity and making sweeping changes that Business Monitor International Ltd Page 16

18 should bring prices more closely in line with the wider market. This will have an appreciable impact on demand patterns over the medium to longer term, but the likely effects are difficult to assess at such an early stage. India s fuel pricing policies are a case in point, where political issues are entwined with overall energy strategy. In early February 2009, the government decided to deregulate the price of gasoline, gasoil, liquefied petroleum gas (LPG) and kerosene, reflecting lower international oil prices. A month later, it decided to defer the move, with the May elections providing the explanation. Based on prevailing international prices, the liberalisation of the domestic products market would arguably result in another fall in retail prices, which are already down some 20% since December There is a risk, however, that more recent crude price strength may signal higher fuels prices to come. This could boost pump prices at an unfortunate time for some politicians. The government coalition, led currently by the Congress Party, which has been re-elected, will continue with the liberalisation policy. In March 2009 China surprised the market with a 3-5% increase in gasoline and diesel prices, its first in three months. This effectively reversed a cut made in January and sent out a clear signal that Beijing wants to move pump prices in tandem with global markets. The National Development and Reform Commission (NDRC) announced a 4.6% increase for gasoline and 3.2% for diesel, which was a reflection of steady gasoline demand backed by strong car sales against reduced diesel use. Diesel in China now costs almost the same as it does in Singapore, and gasoline has closed the gap to just 20% below the Singaporean price, according to a report from Reuters. In mid-2008, Chinese diesel prices were half the level in Singapore. Revised Forecasts In Q109 BMI estimates that the global wholesale price for premium unleaded gasoline was US$50.63 per barrel (bbl). This compares with US$56.37 in Q408 and during the two quarters the price has ranged from a monthly low of US$40.38 in December 2008 to the February 2009 US$53.29/bbl. Gasoline prices in Q109 were down from US$102.15/bbl in Q108 (-50.4%). For Q209, we now forecast an average global gasoline price of US$55.78/bbl, a rise of 10.2% over the previous quarter, but a year-on-year (y-o-y) decline of more than 56% from the impressive US$127.92/bbl seen a year earlier. For the whole of 2009, the BMI assumption for gasoline is an average US$56.89/bbl, with the price peaking at a forecast monthly average of US$64.75 in December The overall y-o-y fall in 2009 gasoline prices is put at 44.1%. In Q109 gasoil averaged US$56.83/bbl, based on a composite global price. This represents a y-o-y fall of 51.0%, illustrating a slight relative weakening of diesel versus gasoline. For Q209 our revised forecast is for global gasoil at an average US$66.81, representing a quarter-on-quarter (q-o-q) increase of 17.6% but a 56.4% y-o-y decline. For 2009 as a whole, the BMI forecast is for an average price of US$69.35/bbl, assuming a monthly high of US$94.48/bbl in December. The full-year outturn is a 42.8% fall from the 2008 level. Business Monitor International Ltd Page 17

19 Jet prices averaged US$58.93/bbl in Q109, using the composite for New York, Singapore and Rotterdam. The annual decrease was 50.4%, with jet matching the decline in gasoline prices. The monthly low during the previous six months was US$60.34 in December 2008, with the price reaching US$61.83/bbl in January Volatility has been low in the jet market when compared with gasoline and diesel. In Q209, we are assuming an average global jet price of US$68.22, a q-o-q rise of 15.8% and a y-o-y fall of 56.4%. For 2009, the monthly average price is forecast to range from US$53.75 in February to US$96.76/bbl in December, proving an annual level of US$71.78/bbl. This compares with US$124.95/bbl in In 2008 naphtha was the weakest performer among the major refined products, gaining 31% to US$87.40/bbl during In Q109, naphtha averaged an estimated US$42.91, compared with US$93.70/bbl in Q108 and US$38.37 in Q408. The 2009 average naphtha price is put by BMI at US$46.40/bbl, down 47% from the 2008 level. Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl) Gasoline Q408 Q109e Q209f Q309f Q409f Rotterdam Premium Unleaded NY Harbour Unleaded Singapore Premium Unleaded Global average Jet/kerosene Rotterdam NY Harbour Singapore Global average Gasoil Rotterdam Mediterranean Singapore Global average e/f = estimate/forecast. Source: BMI Looking further ahead, we see gasoline prices recovering to US$63.45/bbl in 2010, rising further to US$71.11/bbl in 2011 and stabilising at around US$76.58/bbl from Gasoil is expected to rebound to US$77.35 in 2010, reaching a plateau of US$93.35/bbl from The price of jet is forecast to average US$80.06/bbl in 2010 and US$89.72 in 2011, before levelling out at US$96.62/bbl from Business Monitor International Ltd Page 18

20 Table: Oil Product Price Forecasts, (US$/bbl) Gasoline f 2010f 2011f 2012f 2013f Rotterdam Premium Unleaded NY Harbour Unleaded Singapore Premium Unleaded Global average Jet/kerosene Rotterdam NY Harbour Singapore Global average Gasoil Rotterdam Mediterranean Singapore Global average f = forecast. Source: historical data: EIA; 2007/2008 historical data: IEA: Forecasts: BMI Business Monitor International Ltd Page 19

21 Gulf Regional Overview Oil-producing countries in the Middle East have increasingly been reinvesting revenue from the recent surge in crude prices into petrochemicals with the aim of diversifying their economies. Furthermore, the easy availability of feedstock has made the Gulf region a major focus of petrochemicals industrial development, supplying to the fast-growing markets of Asia, particularly China and India. A major growing concern is the expected decline in the global petrochemicals markets, with BMI expecting a downturn in the sector. Middle Eastern producers will have an advantage over their European and North American rivals as they have access to cheaper feedstocks. However, the massive expansion in China, expected in , could lead to a decline in global ethylene operating rates of up to 85%, according to some estimates. The level of crowding out of European and North American producers will depend on the strength of demand from emerging markets. There are problems with slippages in construction schedules. The generation of projects that began construction in 2004 and 2005 and are expected to be completed by 2010 are on schedule. However, projects due for completion after 2010, particularly those approved in 2007, are suffering difficulties accessing raw materials, human resources shortages and high capital costs, with some olefins complexes seeing costs increasing by 290% over the past five years. Currently, project delays of a few weeks or months have been recorded in the Arab Gulf states. However, high political risk, restrictions on imports and exports, a lack of expertise in building and running complex sites and difficulties in financing have led to significant delays in Iran. Iranian producers are facing a cash crisis and a crisis of confidence. The Olefins 8 Arvand petrochemical complex is widely tipped for further delays and is unlikely to begin production until after The Olefins 11, 12 and 14 projects, combined, will produce millions of tonnes of ethylene, PE and PP, but are now facing delays of years well beyond Even for those projects that are completed, it is debatable whether they can be run to acceptable international practices and standards. In Qatar, Qatar Petroleum and South Korea s Honam Petrochemical have announced that construction of their US$2.6bn mega petrochemical complex would be put on indefinite hold. The project, already delayed to 2012, will now only be reviewed when market conditions improve. At least four other projects have been delayed as a result of the tough market conditions and liquidity restrictions. Nonetheless, competitively priced feedstocks, close proximity to the fastest growing markets China, India and South East Asia as well as strong political support to build a competitive export-based industry are expected to help the Middle East withstand the current environment and propel growth. According to a report jointly conducted by the Gulf Petrochemicals & Chemicals Association (GPCA) and McKinsey in December 2008, low-cost gas is expected to keep driving growth in the Gulf chemicals industry over the next five years. Furthermore, government support for projects should act as a buffer Business Monitor International Ltd Page 20

22 against potential liquidity problems. Other factors promoting regional growth in petrochemicals include tax incentives and the latest cracking facilities incorporating state-of-the-art technology. Gulf countries are expected to account for around 20% of the world s ethylene production by 2010, compared to the current 8%, the GPCA has predicted. In the UAE, production capacity is expected to triple. According to the Gulf Organization for Industrial Consulting (GOIC), annual investment in the GCC s chemicals and petrochemicals industries is set to reach US$120bn in Some 50% of all new ethylene projects being developed in the world are located in the region, according to the GPCA. Saudi Arabia represents around 63% of total investment in the region, while Qatar comes second with a 14% share. Around 1,969 chemicals and petrochemicals-related companies operate in Gulf region, employing some 155,000 workers. The GPCA has forecast that the region will account for 40% of total global petrochemical production within 10 years but has also warned that this would bring fresh challenges to the region s producers in terms of the need to secure more feedstock. Gulf petrochemicals producers are aiming to diversify their production of polymers and speciality chemicals, with Saudi Kayan leading the way. Saudi Basic Industries Corporation (Sabic) s 2020 plan aims to raise the amount of speciality chemicals as a proportion of total sales to up to 30% by 2020, with Kayan underpinning its strategy. Similar strategies are being adopted across the region. Qatar is eager to utilise its massive gas reserves for downstream industries. In Kuwait, the Equate JV is doubling petrochemicals capacity in Shuaiba with the construction of new units adding capacity of 850,000tpa of ethylene, 600,000tpa of EG, 300,000tpa of PE and 450,000tpa of styrene. Plans are being considered for capacity increases in the Shuaiba complex. By 2010, Borouge will complete the construction of a cracker in Abu Dhabi with 1.4mn tpa of ethylene and 800,000tpa of propylene by This will provide feedstock to PE and PP units with a capacity of 540,000tpa and 800,000tpa, respectively. Outside the GCC, Iran s National Petroleum Company (NPC) aims to increase sales to US$20bn by 2015, with plans to increase output to 12mn tpa of ethylene, 4mn tpa of aromatics, 10mn tpa of polymers and 5.8mn tpa of urea. Europe is a key market for NPC. This rapid rise of olefins output in the Gulf region will have a large impact on the global market, with a likely drop in prices. A weakness has been the rising cost of plant construction, which could undermine the profitability of these new operations and place questions over the commercial viability of some plants. Plants in Saudi Arabia and the UAE are likely to be the most affected as both countries, until recently, experienced increasing demands on the construction sector. In Saudi Arabia, the cost of the petrochemical and refinery expansion project by Saudi Aramco and Sumitomo Chemical at Rabigh more than doubled to US$9.8bn, while the cost of the Saudi Kayan project almost tripled to nearly US$10bn. But with demand for construction and building materials weakening amid the global economic slump, the region could benefit from a decline in construction costs in the next few years. Business Monitor International Ltd Page 21

23 Table: Announced Ethylene Cracker Projects In The Gulf Region Country Company Location Capacity ( 000 tpa) Onstream Abu Dhabi Borouge II Ruwais 1, Iran NPC No.5 Kharg Island Amir Kabir No.6 Bandar Imam 520 Onstream Marun No.7 Bandar Imam 1, Arvand No.8 Bandar Imam 1, Arya Sasol No.9 Assaluyeh 1,000 Q407 Jam No.10 Assaluyeh 1,300 Q407 Kavyan Petrochemical No.11 Assaluyeh 2, Persian Gulf Petrochemical No.12 Assaluyeh 1, Ilam Petrochemicals No.13 Ilam No.14 Assaluyeh 1, Boushehr Petrochemical No.15 Assalyueh Kuwait Olefins II Shuaiba Oman OPIC Sohar 800-1, Qatar Qapco Mesaieed Ras Laffan Olefins Co Ras Laffan 1, QP-Honam Mesaieed 900 On hold QP-ExxonMobil Ras Laffan 1, QP-Shell Ras Laffan 1, Saudi Arabia Petrokemya 960,000 Q109 Petrokemya 1,300, Sharq Jubail 1,300,000 Q308 JCP Jubail 300,000 Q108 NCP 1,200, Petro-Rabigh Rabigh 1,300,000 H109 Ras Tanura Integrated Petrochemical Co Ras Tanura 1,200, Saudi Aramco/Sabic Yanbu 2015 Saudi Ethylene and Polyethylene Co - (SEPC) 1,000,000 Q408 Saudi International Petrochemical Co - (Sipchem) 1,350, Saudi Kayan Petrochemical Co 1,350, Yanbu National Petrochemical Co - (YanSab) Yanbu 1,300,000 H208 Source: Chemical Week Business Monitor International Ltd Page 22

24 There is a danger in over-reliance on Asian markets, which are likely to see a moderation in growth as many new petrochemical plants come online. At the same time, these markets will see a rise in petrochemicals capacity, raising the prospect of global over-capacity. China is a particular case for concern. It is the main target for new capacity, but it is ramping up its own domestic production as well. It is also committed to propping up the sector. In February 2009, Beijing approved a plan to revive growth in China s petrochemical producers as part of its stimulus efforts. Business Monitor International Ltd Page 23

25 UAE Market Overview The UAE s share of petrochemicals production in the GCC is estimated at 7.0%. The industry makes up 22% of the country s manufacturing sector, with local production meeting 60% of domestic plastic demand. The petrochemical sector is valued at AED18bn (US$4.9bn), providing an important source of material for the plastics industry. The UAE is the second-largest producer of plastic products in the GCC after Saudi Arabia. Around 260 companies are involved in plastic manufacturing in the UAE, with a combined capacity of 300,000tpa. Borouge 2 is to join its predecessor by the end of this decade, representing the second major development of the UAE s petrochemical sector. Borouge 1, the US$1.2bn complex a 600,000tpa cracker and a twoline 450,000tpa PE unit was brought onstream in December 2001 at Ruwais, Abu Dhabi. Borouge 1 is a 60:40 JV between Borealis and Adnoc, and was the first plant in the Middle East and Asia Pacific to use Borealis proprietary Borstar bimodal polymerisation technology. The technology allows production of high, medium and linear low-density PE products that are used in flexible and rigid packaging, and the pipe, wire and cable industries. In April 2008, it was reported that Borouge had initiated a feasibility study to expand its polyolefin operations further. The planned Borouge 3 development would expand production by an additional 2.5mn tpa of polyolefins and would include a LDPE unit. It is believed that the extra capacity will help the company to keep up with demand for special polyethylene and propylene in the Middle East and Asia. The UAE has a strong and growing base chemicals sector, which utilises methane, ethane and gas liquid feedstock in the petrochemicals units. In common with other Middle East nations, UAE benefits from low-cost, accessible oil and gas reserves, although its feedstock availability is less than some of its neighbours in the region. Feedstock is available at reduced rates under a government measure designed to promote the non-oil sector, providing producers with a cost advantage for export markets. On the downside, this has caused problems in trade with EU members, with Brussels citing subsidised feedstock supplies as giving an unfair advantage. Abu Dhabi is keen to develop a petrochemical sector and wants to encourage investment in special economic zones. Table: The UAE s Petrochemicals Sector Cracker Capacity Data, ( 000 tpa) f 2010f 2011f 2012f 2013f Borouge I, Ruwais Abu Dhabi Borouge II, Ruwais Abu Dhabi na na na na 1,450 1,450 1,450 1,450 f = forecast; na = not available. Source: Borouge, BMI Business Monitor International Ltd Page 24

26 Petrochemicals Business Environment BMI s risk scoring in the petrochemicals sector is based on dynamic scores that reflect on future growth as well as current capacities and the size of the internal market, along with investment risk assessments of the political, economic and regulatory environments. The UAE petrochemicals industry business environment is fairly attractive in regional terms due to abundant, cheaply extractable feedstock supplies, a low risk business environment in general, and the fact that it is well placed geographically to export to Asia. However, a narrow production portfolio and current low production capacity relative to potential feedstock are primary reasons for a constrained growth. In BMI s Middle Eastern Petrochemicals Business Environment Rankings matrix, the UAE has a score of 58.4 points, 5.8 points behind Qatar and 2.1 points ahead of Kuwait. The UAE s score has fallen 1.3 points this quarter due to deterioration in its country risk ratings. However, it has risen from fourth to third place as a result of a larger decline in Kuwait s score. The two states have jostled for third place in recent months, but Kuwait as suffered as a result of policy reversals in the refining and petrochemicals sectors which has adversely affected its market risk score, while its overall country risk rating as fallen, in line with global economic trends. BMI believes that it is unlikely the UAE will raise its ranking further with Saudi Arabia and Qatar continuing to lead the Middle East rankings over the next five years, even with the additional capacity provided by the second phase of the Borouge complex in However, it is likely to hold on to its third place, with the expansion of Borouge and the proposed Chemaweyaat 1 bolster its petrochemicals capacities. Table: Middle East And Africa Petrochemicals Business Environment Ratings Limits of potential returns Risks to realisation of returns Country Petrochems market Country structure Limits Market risks Country risk Risk Petrochemicals rating Rank Saudi Arabia Qatar UAE Kuwait Iran Israel South Africa Egypt Turkey Algeria Nigeria Scores out of 100, with 100 highest. Source: BMI Business Monitor International Ltd Page 25

27 Limits Of Potential Returns This rating is a composite of our score for the domestic Petrochemicals Market and the Country Structure score, which assesses physical, financial and trade infrastructure. In this category, the UAE scores 52.3 points, the fifth-highest in the region and 0.9 points ahead of the regional average of 51.4 points. In terms of BMI s Petrochemicals Market rating, which measures our combined scores for current capacity in ethylene and polymer production as well as five-year growth projections for cracker capacities, the UAE scores 43.3 points, 3.4 points below regional average. Abu Dhabi-based Borouge plans to increase its polyolefins production capacity to 620,000tpa in 2008, from 574,000tpa in 2006 and 518,000tpa in Increased capacity will be provided by the installation of a sixth furnace, which will provide extra ethylene. It is targeting production at 2mn tpa by 2010 at its Ruwais plant. The 1.45mn tpa Borouge 2 cracker, due onstream in 2010, is set to provide much of the feedstock for the increased capacity. Meanwhile, in February 2009, Abu Dhabi launched the company that will oversee the development of the largest petrochemicals complex in the world. Chemaweyaat has been established with initial capital of AED500bn (US$135.9bn). Ownership will be split between IPIC (40%), Abu Dhabi Investment Council (40%) with the remainder held by the Adnoc. When the development is completed it will have the capacity to export 6mn tonnes of petrochemicals per year. It is estimated that the first phase of construction scheduled to commence in will need around US$20bn in investment. In terms of the UAE s Country Structure rating, which measures financial and physical infrastructure and trade bureaucracy, the UAE scores 69.1 points, the second-highest level in the Middle East and Africa after Israel and 8.9 points ahead of the regional average. On the financial front, UAE provides good opportunities. There are a large number of free zones, primarily located in Dubai, which offer tax holidays and relaxed conditions on foreign ownership. However, the nation needs to strengthen its financial system to fully leverage the opportunities presented by new projects and companies. Meanwhile, the UAE s economy is facing falling demand for exports, weakness in the construction market, job losses and increased investor caution, which will have a negative impact on domestic sectors such as petrochemicals. In February 2009, Abu Dhabi's economic advisory board claimed that a country-wide stimulus package is necessary to head off recession. The report, released on February 8 by the Abu Dhabi Council for Economic Development (ADCED), called for a 'comprehensive economy stimulant package', covering the UAE as a whole and encompassing public spending on infrastructure and mega projects. If implemented such a plan could involve sizeable investment in the petrochemicals sector, which is seen as a way of diversifying revenues. Business Monitor International Ltd Page 26

28 Risks To Realisation Of Returns This rating comprises the ratings for Market Risks and Country Risk, weighted towards Market Risks. In this category, the UAE scores 72.7 points. In the Market Risks category, which measures the regulatory environment of the petrochemical sector, the UAE scores 70 points, 6.5 points above the regional average. Regulations concerning the petrochemicals sector are in line with the regulatory system governing investment and trade in other parts of the economy, but the development of the petrochemicals sector is constrained by the availability of ethane feedstock, which is dependent on imports from Qatar. The UAE's investment climate is becoming more clement for foreign direct investors: the federal government, led by Abu Dhabi, has made significant headway in the past five years in increasing the role of the private sector. Mohammed Omar Abdullah, secretary of the department of planning and economy, stated in February 2009, that the Abu Dhabi government is planning to take significant steps to support investment in the region. The government will introduce several new laws to encourage investments from local and foreign investors in this era of global economic downturn. Yet the overall legal framework continues to favour local over foreign investors. The average tariff rate is just 4%, while free trades zones offer numerous incentives, such as exemptions from taxes and duties. The WTO has urged the authorities to prioritise the rationalisation of the trade regime in line with plans for uniform customs procedures among the six members of the GCC. In terms of its Country Risk rating, which covers the long-term economic, financial and political risks and the structure of the economy, the UAE scores 73.8 points. This is the highest score in the region and 14.0 points above the regional average. Growth has been driven, over the last few years, by ample oilderived liquidity, which has boosted government and consumer spending power and investment, and enabled the government to provide a very favourable tax environment for businesses operating in the emirates. We see all of these factors continuing: the government is not going to risk political stability by cutting spending, particularly when it can afford not to. Meanwhile, in the event of a deteriorating economic scenario, Abu Dhabi would be likely to mobilise its huge financial resources the value of its sovereign wealth fund was estimated at US$875bn pre-credit crunch to engineer some form of rescue package, either directly or via the federal government. The UAE s Business Environment Outlook Introduction The UAE has some of the best physical infrastructure in the Gulf region, and combined with its relatively open economy and low tariff regime, it has established itself as a major trade hub. However, the breakneck speed of its recent economic expansion has raised some problems; construction of housing, Business Monitor International Ltd Page 27

29 transport links and other facilities has struggled to keep pace with population growth, leading to congestion, supply bottlenecks and rising house-price inflation. The latter remains a major concern in the business community, as currency depreciation against the euro in particular has raised operating costs and increased the difficulty of attracting skilled foreign workers. Latest Developments A recent spate of events has raised concerns over the UAE's business environment, adding to existing questions surrounding its political stability. As ever, the construction and real estate industries are at the heart of the matter. A riot by labourers in Ajman on March 31 came hot on the heels of a violent protest by workers in Sharjah in mid-march. The riots in Ajman saw 400 workers from a local engineering company attack company vehicles and refuse to return to work. Although less severe than the Sharjah protest, where 1,500 workers burnt cars and buses and damaged the offices of contractor Drake & Skull, the Ajman incident once again centred around pay levels. The labourers reportedly demanded an AED200 monthly hike in their food allowance to reflect the recent increase in food prices in the UAE. Meanwhile, in Dubai in early April 2008, local property developer Damac announced that it was pulling out of its Palm Springs beachfront development, part of the larger Palm Jebel Ali manmade island project being led by Nakheel. The Palm Springs development was already severely behind schedule construction had not even begun at the end of March, despite an original completion deadline of December The decision provoked consternation and anger among investors; a group of almost 60 UK-based investors reportedly gave Damac until April 11 to change its mind regarding the cancellation or face legal action. The ultimatum appears to have worked: on April 16, the company announced that it had reversed its cancellation decision. This episode appears to have sparked fear among many would-be investors in the UAE. In a poll carried out by Arabian Business, two-thirds of respondents said that the cancellation had made them reconsider buying property off-plan and had made them very cautious about the Dubai property market. The remaining third said that they might consider buying before construction had begun but that it would depend heavily on the reputation of the developer involved. Dubai has a large secondary market for offplan real estate, which many investors have used to buy into the Palm Springs development (paying the original buyers a significant premium). At a time when risk aversion among real estate investors is rising, Dubai has also been hit by several major property fires. On 26 March 2008, an explosion at an illegal fireworks warehouse killed eight people and caused an estimated AED600mn worth of losses to businesses in the Dubai Industrial City area. Under its obligation to support Dubai's industrial sector, the city's management has been forced to make 1.5mn square feet of warehouse space available at a reduced rate to businesses affected by the blaze. This was followed on April 1 by a fire at the Naif Souq in the Deira district of Dubai. The blaze, reportedly started by an electrical fault, destroyed more than 200 shops. Business Monitor International Ltd Page 28

30 Foreign Direct Investment Foreign Investment Policy The UAE's investment climate is becoming more clement for foreign direct investors: the federal government, led by Abu Dhabi, has made significant headway in the past five years in increasing the role of the private sector. Yet the overall legal framework continues to favour local over foreign investors a fact that partly reflects the benign macro environment in light of the country's substantial oil revenue windfall. This has endowed local and regional Gulf investors with substantial liquidity, disincentivising the search for new FDI sources from outside the region. Change may be on the way. In June 2007, the government said a new companies law would open some areas within the services sector to full foreign ownership while also allowing greater foreign participation up to 100% in other areas such as financial services. This is likely to be enacted in At present, foreign shareholders may only hold up to a 49% equity interest in limited liability companies; indeed, all companies established in the UAE are required to have a minimum of 51% national ownership, although profits may be divided differently. In the insurance sector, companies must be 75% owned by a UAE national or 100% by a UAE corporation. Full foreign ownership is generally only allowed within economic free zones. In order to do business in the UAE outside the free zones, a foreign business must usually have a UAE national sponsor, agent or distributor, which once chosen, has exclusive rights. In order to bid for federal projects, a contractor must be at least 51% owned by UAE nationals, and tenders must be accompanied by a bid bond an unconditional bank guarantee for 5% of the value of the bid. However, government tendering practices do not live up to international standards, and re-tendering is common. On the positive side, the absence of income tax compensates for the restrictive investment environment. FDI figures remain difficult to verify, though data from UNCTAD claims that FDI inflows totaled US$8.4bn in 2006, with much of it attracted to the booming real estate and construction sectors. The UAE is now the Gulf s second-biggest FDI destination after Saudi Arabia. Perhaps even more impressive, given the massive investments made by UAE firms and individuals outside the Emirates, the country has more inward FDI stock by foreigners than nationals outward FDI stock in foreign countries. According to a Dubai Chamber of Commerce & Industry report in 2007, during , the average net inward FDI flows as percentage of gross fixed capital formation was 17% for UAE. Abu Dhabi is preparing to offer international oil companies access to its gas deposits for the first time. In 2007, Abu Dhabi National Oil Corporation announced plans to set up a new operating company in partnership with IOCs to extract, process and supply some 3bn cubic feet a day (cf/d) of onshore sour gas. Until now, the main destinations for FDI have been ICT and software, tourism and textiles. The main sources of FDI are the UK, the US and India. Business Monitor International Ltd Page 29

31 Industry Trends And Developments Abu Dhabi The UAE s petrochemical developments are concentrated in Abu Dhabi, which owns the fifth-largest oil reserves in the Middle East and hosts most of the olefins and polymer production capacity in the UAE. Despite the global economic downturn, Abu Dhabi continues to press ahead with its plans to develop its petrochemicals industry and has made strategic acquisitions in the downward market. In February 2009, the government-owned International Petroleum Investment Company (IPIC) agreed to buy Canada s Nova Chemicals, one of North America s largest plastics producers. In April 2009, Nova Chemicals shareholders agreed to sell the company to IPIC for US$2.3bn. The deal, which will allow Nova to work independently of IPIC, was expected to be completed in late May or early June. In mid-may, the EU regulatory authorities approved the acquisition. Under the agreement, IPIC said it would provide a US$250mn credit backstop facility to maintain Nova s liquidity. In Q109, Nova Chemicals posted a net loss of US$123mn compared to a net profit of US$52mn in Q108. The company s sales revenue stood at US$818mn, down 57% y-o-y. Its olefins and polyolefins business segment reported adjusted EBITDA profit of US$13mn, up from the adjusted EBITDA loss of US$210mn in Q408 but lower than adjusted EBITDA of US$246mn in Q108. The decline year-on-year was related to a higher rate of decline in selling prices than feedstock costs, leading to a fall in margins at a time of falling sales. In April 2009, Dubai Multi Commodities Centre (DMCC) announced that three Asian petrochemical companies began operations in Dubai as part of the DMCC free zone, including PTT Polymer Marketing DMCC (owned by Thailand s PTT Polymers), Titan DMCC (owned by Malaysia s Titan Chemicals Corporation) and SCG Plastics DMCC (owned by Thailand s SCG Chemicals). They are using the DMCC as a base to market products throughout the region, taking advantage of a 50-year tax holiday, 100% business ownership and full ownership of business premises guaranteed as part of the zone. IPIC has been investing in companies worldwide with the aim of developing Abu Dhabi s petrochemical sector. In January 2009, IPIC CEO Khadem al-qubaisi said the company plans to increase its portfolio, currently worth around US$12bn to US$15bn, to as much as US$20bn over the next five years, according to reports. Among other recent investments, in October 2008 it bought a 70% stake in German firm MAN Ferrostaal AG, which builds petrochemical, oil and gas plants. The acquisitions come as Abu Dhabi prepares to develop Chemaweyaat, the world s largest petrochemical complex. According to reports, the ruler of Abu Dhabi signed in February 2009 a decree that established a joint venture between IPIC, the Abu Dhabi Investment Council and Adnoc to build the Business Monitor International Ltd Page 30

32 complex. The first phase of the Chemaweyaat project, which includes a naphtha cracker, will receive US$20bn in investment. The complex, to be located at Taweelah in Abu Dhabi, is expected to begin operations in Manufacturing at the Abu Dhabi Polymers Park is expected to start by the end of June More than 60 plastics manufacturers are expected to be based at the industrial park by 2015, with investment anticipated to hit US$4.5bn by that time. More than 60% of the products made at the park will be for export, according to Emirate News. Meanwhile, Borouge, a joint venture between state-run Adnoc and European petrochemical giant Borealis, is moving ahead with its expansion plans. The multi-billion dollar Borouge 2 project one of the largest petrochemical projects in the Middle East is due for completion in Borouge 2 will raise production capacity from the current 600,000tpa to 2mn tpa of polyolefins. It will include one 540,000tpa Borstar technology-enhanced PE unit and two 400,000tpa Borstar PP units. The new expansion will be located next to Borouge s existing petrochemical complex in Ruwais. The new capacity will be marketed mainly to the Middle East and Asia Pacific, targeting high-end applications in the pipe and high performance packaging areas. The work for the front-end engineering design (FEED) for an olefins conversion unit was awarded to ABB Lummus Global. Meanwhile, the FEED for the polyolefin units was awarded to Fluor Mideast. Maersk Logistics is acting as Borouge s consultant to advise on the supply chain concept for Borouge 2 products. Borouge is continuing to invest in operations in China to expand the market for the complex in Ruwais. In December 2008, the company began construction on a new logistics hub and compounding facility in Shanghai, China. The logistics hub is due to begin operations in May The plant will produce 50,000tpa and serve the automotive and electrical appliance sectors. Borouge also announced plans in October 2008 to build a logistics hub in Guangzhou, China. Borouge has said that it expects to take further advantage of the country s status as the world s fastest growing automotive market and its drive to become the biggest car producer in the world within the next 10 years. Borouge is planning a new petrochemical complex to be located at Ruwais, with new facilities coming onstream in The expansion project would complement the Borouge 2 polymer project. The company is also considering starting base chemical production. If all these projects are realised, Ruwais would become one of the largest plastics and chemical production complexes in the world. In April 2009, Borouge announced plans to commission a front-end engineering and design study for the Borouge 3 project to boost total production capacity to 4.5mn tpa. The project aims to expand its polyolefin manufacturing capacity by 2.5mn tpa in Q413. It will comprise an ethane cracker and PP and Business Monitor International Ltd Page 31

33 PE units. According to Borealis, Borouge 3 will capture additional feedstock availability resulting from the upstream refinery and gas processing expansions of Adnoc. Dubai And The Northern Emirates Dubai is the second most important emirate in terms of both production and trade. The emirate contributes around 70% of the UAE s foreign trade in petrochemicals products. Of the 260 plastic manufacturing plants in the UAE, just over 100 are located in Dubai. Nearly half of Dubai s plastic manufacturing capacity is dedicated to the production of plastic pipes. The number of petrochemicals and plastic companies located at Dubai s Jebel Ali Free Zone increased by over 70% between 2000 and 2005, at an annual rate of around 14.6%. However, just 40% of raw materials used in the Dubai plastics industry are sourced from the UAE, with the rest imported from Europe, the GCC, Asia and South America. Its port facilities handle much of the petrochemicals and plastics exported from the UAE. Dubai-based global port operator DP World was set to open Terminal Two at its Jebel Ali port facility at the end of February The terminal will allow Dubai s Plastics Sector the port to accommodate the extra 2006 containers from the Port of Rashid, which is transferring some of its operations to Jebel Ali. Packaging Containers 4% Sheets 4% Misc 6% 18% The new container facility will increase Jebel Ali's handling capacity by 5mn twenty-foot equivalent units (TEUs), bringing the port's total annual TEU Fibreglass handling capacity to 14mn TEUs. Jebel 20% Ali is DP World s flagship port, and container throughput has been growing Source: MIST News steadily. In 2005 the facility handled 6.39mn TEUs. By 2008 it was handling 12mn TEUs. Pipes 48% The completion of Terminal Two will add extra capacity to port and will enable Jebel Ali to meet increased throughput demand if necessary. The terminal was designed with a view to taking on the operations of the Port of Rashid, and container operations at the Rashid started being transferred to Jebel Ali in the third quarter of Jebel Ali will be capable of handling 14mn TEUs a year, but BMI questions whether in the current downturn, the demand will be there. A number of shipping companies have been cutting their Asia- Europe routes and this has had an impact on the Middle East s port sector, as a number of Arabian Gulf Business Monitor International Ltd Page 32

34 ports were stop-offs on these routes. Meanwhile, news that two major shipping companies, Maersk and CMA CGM, are prepared to go round the Cape of Good Hope rather than the Suez Canal in a bid to save costs does not bode well for Middle Eastern ports. DP World s senior vice president of commercial and corporate strategy is quoted by Emirates Business as saying that although Jebel Ali will continue to grow this year, regional container throughput will decline to single digits in 2009, before re-bounding in Smaller emirates are also benefiting from growth in the petrochemicals sector, despite the lack of upstream activity. The country s third-largest emirate, Sharjah, started up its first petrochemical plant in early 2008 an ammonia unit located in the Hamriya free zone with a capacity of 1,180 tonnes per day. The plant was bought second-hand from the US by the client, Green Dome Petrochemicals, and is being built by Petron Emirates Contracting and Manufacturing Company. It is part of a US$200mn investment by Green Dome s parent company, Oman Chemicals and Pharmaceuticals Company. A urea unit with a capacity of around 1,000 tonnes per day will be integrated with the ammonia plant and was due to come online in Growing demand for plastic bottles and containers is encouraging growth in capacity in polymer production. In Ras al-khaimah, JBF Industry a JV between JBF, a major polyester producer in India, and government-controlled Ras Al Khaimah Investment Authority (RAKIA) began production of PET film chips in March 2008, producing 200 tonnes per day. The PET film chip line was to start in December 2007 but was delayed due to technical reasons. The plant also produces 600 tonnes of PET bottle chips daily. Meanwhile, Fujairah Plastic Factories, the UAE s top producer of polymer films for packaging and plastic bags, is aiming to double production in It currently manufactures around 24,000tpa of polymer films at its plants in Sharjah, Ajman and Fujariah. A fourth factory came online in Fujairah s new industrial zone in Q108. In the first phase, it will have a capacity of 12,000tpa, but is set to reach 24,000tpa by 2009, potentially doubling the firm s output of polymer films by the end of the decade. Much of the growth will be stimulated by foreign demand, with the company exporting 70% of its production a level it hopes to maintain. The firm s directors believe that a rapid increase in capacity is essential to maintaining competitiveness. Rising oil prices have led to higher polyethylene prices and have pushed up baseline costs for plastics producers. Raw materials LDPE and HDPE typically comprise 80% of costs for polymer film producers. Fujairah Plastic Factories is hoping that it can muscle out rivals from the market by increasing capacity and becoming more flexible and responsive to demand. Related Industries Developments The UAE is set to upgrade two oil refineries by end-2011 in order to meet rising domestic demand for refined products. According to the International Energy Agency (IEA) s timetable for scheduled upgrades Business Monitor International Ltd Page 33

35 in global refining capacity, the two refineries to be upgraded are the Ruwais refinery in Abu Dhabi, which is operated by Adnoc, and the Jebel Ali refinery in Dubai, which is operated by Emirates National Oil Company (ENOC). Although concerns over slowing global oil demand growth, particularly in Asia, mean that export-oriented refinery projects in the Middle East are being postponed or shelved, refinery upgrades and expansion projects designed to supply the domestic market are proceeding as local refined products consumption continues to rise. Middle Eastern regional oil use of 8.24mn b/d in 2001 rose to 10.61mn b/d in It should average 10.86mn b/d in 2008 and then rise to around 12.10mn b/d by The UAE accounted for 4.24% of 2007 regional consumption, with its market share expected to be 4.57% by The Ruwais refinery originally had capacity of 120,000b/d. An upgrade project to expand capacity was completed in 2005, including refits of existing units and expansion of units for production of unleaded gasoline and low-sulphur fuel oil. The plant processes crude oil and condensate into light products mainly for export to Japan and elsewhere in Asia. Fuel oil from Ruwais is sold as bunkers by Adnoc and also used for domestic electric power generation. According to the December 2007 Oil and Gas Journal Worldwide Refining Survey, Ruwais had crude distillation capacity of 350,000b/d plus vacuum distillation capacity of 56,680b/d. The IEA report says the upgrade is scheduled to be completed in Q411. The Jebel Ali refinery has a 70,000b/d LPG-naphtha hydrotreater and a 36,000b/d crude catalytic reformer. The expansion is due to be completed in Q109. The UAE had planned a massive expansion of its refining capacity to meet rising Asian demand for transport fuels. Two major developments were planned: an expansion of the Ruwais plant capacity to 817,000b/d and a new build refinery in Fujairah. Abu Dhabi's investment arm IPIC and US major ConocoPhillips signed a deal in 2006 for the new refinery with 500,000b/d capability. Conoco pulled out in 2007 citing rising costs, however, and IPIC announced in March 2008 that the plant s capacity would be reduced to less than 200,000b/d. Since then it has been looking for a new European partner for the project but has reported no progress. The global financial crisis and concerns over the rate of Asian growth means this project is unlikely to proceed. The Ruwais project upgrade looks more secure, although it is uncertain as to whether capacity will be expanded to as much as 817,000b/d. In addition, it may make sense to delay the project in order to take advantage of falling construction costs, meaning there could be some risk to the completion date of Q411 being achieved. Rocketing domestic demand is providing the impetus behind a huge boom in Abu Dhabi s gas industry. Over the last decade, gas consumption in Abu Dhabi has doubled. The development of natural gas fields also results in increased production and exports of condensates, which are not subject to OPEC production quotas. Dubai s gas consumption has been growing by nearly 10% annually due to expansion of the emirate s industrial sector, a switch to gas by its power stations, and the need for an enhanced oil recovery (EOR) system based on gas injection for its mature oilfields. Overall UAE gas consumption is Business Monitor International Ltd Page 34

36 forecast to reach at least 64bcm by Production of gas is on the rise, with 80bcm achievable by 2012 providing exports of 15.7bcm. The UAE is considering revising its system of oil and gas concessions to spur technological development and introduce more competition into its upstream segment. Once Adnoc has concluded its sour gas licensing round with international oil companies (IOCs), it is expected that the company will focus on reforming the concessions system as it seeks to boost production capacity from 2.9mn b/d in 2006 to 3.5mn b/d by 2011/2012. BMI estimates that actual production is likely to be around 3.2mn b/d by We assume 2007 production averaged 2.85mn b/d (including gas liquids), providing exports of 2.56mn b/d. There is risk on the downside to these estimates, and whether a reform of the country s concessions will provide the boost the UAE needs to achieve its output targets is questionable. Table: Major UAE Oil And Gas Concessions Concession Location Output Capacity Expiry Equity stakes Abu Dhabi Co for Onshore Oil Operations (ADCO) Operates onshore and in shallow coastal waters of Abu Dhabi 1.4mn b/d mn b/d 2014 Adnoc 60%, BP 9.5%, Royal Dutch Shell 9.5%, Total 9.5%, ExxonMobil 9.5%, Partex 2% Abu Dhabi Marine Operating Co (Adma-Opco) Operates offshore Abu Dhabi 510, ,000b/d 550,000b/d 2018 Adnoc 60%, BP 14.66%, Total 13.33%, Japanese Oil Development Co. 12% Zakum Development Co (Zadco) Operates Upper Zakum, Umm Al Dalkh & Satah fields 550,000b/d 600,000b/d 2018 na Zadco Upper Zakum na na 2026 Adnoc 60%, ExxonMobil 28%, Japanese Oil Development Co 12% na = not available/applicable. Source: Reuters Currently there are a number of large concessions in the UAE covering multiple fields, held by Adnoc as majority stakeholder in partnership with IOCs. IOCs from Japan, France, Britain and elsewhere own up to 40% of the energy sector in Abu Dhabi, the only Gulf oil producer to have retained foreign partners on a production sharing basis. As well as holding the majority stake in all upstream oil ventures, Adnoc is currently planning a limited further opening of oil production to foreign firms. The initial asset sale involved 28% of the offshore Upper Zakum field to US major ExxonMobil. Several options are being considered for the concessions, including splitting them into their individual fields and issuing competitive tenders for the fields development. Although the concessions are not due to expire until 2014 at the earliest, it is expected that renegotiations will begin early. This may provide the opportunity for smaller players to get a toehold into the UAE s upstream segment and may open the door Business Monitor International Ltd Page 35

37 Plastics Futures for national oil companies (NOCs), particularly from Asia, to get involved. Nevertheless, the UAE is unlikely to take any action that will put at risk its solid relationship with existing IOC partners. The Dubai Gold & Commodities Exchange (DGCX) was due to introduce plastics futures contracts on February but postponed the launch after receiving feedback from members of the plastics industry. Although the product is ready to launch, the plastics industry needs more time to prepare for trading the contracts, particularly in light of the current economic climate, James Bernard, executive director of plastics at the Dubai Multi Commodities Centre, said when the postponement was announced. A total of 12 futures contracts in plastics were to be launched, covering all polymers across the Middle East and Asia. The first contracts to be traded were for LDPE and PP, with the DGCX claiming the move would offer protection against market instability. Malcolm Wall Morris, CEO of the DGCX, said the exchange would keep working to help ready industry participants and launch the contracts when the industry is prepared. Dubai Multi Commodities Centre has a 51% stake in DGCX while India s Financial Technologies Group and Multi Commodity Exchange (MCX) holds a 49% stake. Business Monitor International Ltd Page 36

38 Industry Forecast Scenario Table: The UAE s Petrochemicals Projects Product Investors Capacity (000 tpa) Location Completion Ethylene Borouge 1,450 Ruwais, Abu Dhabi Q310 Propylene Borouge 800 Ruwais, Abu Dhabi Q310 LLDPE Borouge 540 Ruwais, Abu Dhabi Q310 PP Borouge 800 Ruwais, Abu Dhabi Q310 Source: BMI The GCC produces approximately 30% of the most commonly used petrochemical products and accounts for 7% of worldwide production. However, by 2010 this is expected to rise to 20% of global production. The UAE in particular is investing heavily in its petrochemicals industry and is expected to triple capacity over the next decade. Borouge is targeting production at 2mn tpa by 2010 at its Ruwais complex. The 1.45mn tpa Borouge 2 cracker, due onstream in 2010, is set to provide much of the feedstock for the increase in capacity. According to plans announced in April 2008, Borouge is exploring Borouge 3, which would entail an additional 2.5mn tpa of polyolefins capacity coming online by end This would more than double the company s overall capacity to 4.5mn tpa. However, expenditure on the Borouge 2 project has increased nearly twofold from initial estimates to US$4.5bn, including the US$1.8bn Borstar technologybased polyolefins units, and US$1.3bn ethylene and metathesis plants. Two of the new units will make PP, each with 400,000tpa capacity, and one unit will have a 540,000tpa polyethylene capacity. The expanded complex will be the largest plastics and petrochemicals complex in the Middle East and one of the largest in the world. Presently, Borouge supplies 35% of its output to the Middle East, with the rest exported to Asian markets. The company is hoping that Asian markets will absorb the increase in output. Borouge is anticipated to grow to twice its current size by 2020, with further development after Borouge 2. Between , it aims to boost capacity potentially by 2mn tpa through However, Borouge has abandoned its plans to expand its portfolio by including basic petrochemicals. Adnoc and Borealis had been looking at a plan to build a propane dehydrogenation facility and a major cumene-phenol complex. The commitment to the Borouge 3 project indicates that the partners are confident of a turnaround in the global economy and that the complex is competitive enough to survive against European and Asian rivals. The PP plants are expected to consume propylene supplied by local refineries. The LDPE unit, Borouge s first, will supply the wire and cable infrastructure market. However, exact capacities, including the Business Monitor International Ltd Page 37

39 cracker, have not been disclosed, although BMI believes it will be as large as the Borouge 2 cracker, which has a production capacity of 1.5mn tpa. Combined polyolefins capacity will be 2.5mn tpa, of which BMI believes up to 1mn tpa will be PP. BMI has projected start-up for commercial production is Q114. Another major upcoming development is the proposed 7mn tpa Chemaweyaat Complex 1, which includes a 1.5mn tpa naphtha cracker, and aromatics, phenol and derivatives plants at Taweelah, to be completed in It is envisaged the complex will be the world s largest grassroots integrated chemical project, although by end-2008 no further details were available on the complex s capacities. BMI believes it is unlikely that the cracker and related units will be completed before One of the chief problems the UAE s petrochemical sector will face is not necessarily a lack of competitiveness, but a lack of feedstock. The UAE is also expanding its upstream capacities. Overall UAE crude production could reach 3.23mn b/d by We are assuming total 2009 production averaging 2.92mn b/d (including gas liquids), providing exports of 2.43mn b/d. This represents a decline from the estimated 2008 level, thanks to OPEC policy. Overall UAE gas consumption is forecast to reach 66.7bcm by Production of gas is on the rise, with 90.0bcm achievable by 2013, providing exports of 23.3bcm. Borouge is confident upstream supply will be sufficient for its expansion programme. Although BMI has in the past voiced concerns that Borouge 3 could be scaled back or scrapped altogether due to a lack of feedstock, Borouge s feasibility studies show that there is enough feedstock to supply the planned plants without having to rely on heavier feedstocks such as naphtha. At the same time as Borouge s cracker is due to come online in 2010, growth in Asian markets is due to moderate. Nevertheless, Borouge anticipates that polyolefin demand in the Middle East and Asia is expected to grow by 6-8% per annum until 2010, and should absorb the capacity expansions. Borouge has no PP production capacity as yet, although it does market Borealis PP products regionally. However, Borealis is a leading international PP producer and innovator, and recently produced the first Borstar PP cups using propylene from Lurgi s methanol-to-propylene (MTP) process at Statoil s methanol plant in Norway. Whether Borouge is a candidate for the new MTP process largely depends on the availability of methanol a possibility, given the volumes of competitively priced products within the region. Meanwhile, the global petrochemicals industry is being roiled as a slump in economies around the world curbs demand and financing for research and expansion tightens. The current environment is expected to weed out less competitive participants and drive consolidation in the sector. According to a survey of chemicals CEOs conducted by PriceWaterhouseCooper s in late 2008, two-thirds of respondents said they expect to postpone investments due to an anticipated rise in the cost of financing. One-third of the survey respondents said they expect to complete a cross-border merger in the next year. Business Monitor International Ltd Page 38

40 However, in the UAE the slowdown in construction activity could result in lower capital expenditure costs for large-scale projects, providing that funding can be secured. High capital expenditure requirements have discouraged investment in the UAE, and this situation could now begin to change. Meanwhile, the liquidity situation should be better in the UAE than many other markets, because many of the major projects are government-owned. However, those that do rely on private financing from banks can expect greater scrutiny and may even face postponement. Sustained demand growth in the Asia Pacific region, led by China s increasing demand for imported chemicals products, continues to be a major factor so far as the global petrochemicals sector s demand is concerned. Asia is a key export market for Borouge, as clearly indicated by Adnoc and Borealis s decision to establish a separate company in Singapore to market Borouge s output. A slowdown in the rapid industrialisation programmes in China, which could have a severe effect on the global petrochemicals environment, and particularly on Middle Eastern exporters such as the UAE, which is building up capacity in order to target China, remains a threat. Meanwhile, China s planned stimulus package for its domestic petrochemicals sector should help the industry develop in the country, and could potentially help the country to challenge the Middle East in this area. Table: The UAE s Petrochemicals Sector, e 2010f 2011f 2012f 2013f Oil production ( 000b/d) 2,915 2,965 3,025 3,100 3,200 3,300 3,425 Oil consumption ( 000b/d) Oil exports ( 000b/d) 2,465 2,495 2,536 2,591 2,679 2,766 2,872 Gas production (bcm) Gas consumption (bcm) Gas exports (bcm) Refining capacity ( 000b/d) 620 1,000 1,000 1,000 1,000 1,500 1,500 Ethylene capacity ( 000tpa) ,650 2,000 2,000 2,000 Polypropylene ( 000tpa) ,940 1,940 1,940 1,940 Polyethylene capacity ( 000tpa) e/f = estimate/forecast; na = not available. Source: Borouge, BP Statistical Review of World Energy, BMI The UAE has a considerable potential for growth in the plastic industry due to the abundant availability of feedstock. Development of a domestic petrochemicals industry is now gathering pace, which could considerably enhance the growth of small and medium enterprises (SMEs) in the sector. A major growth opportunity for the plastic industry is expected to come from the export market. Large volume plastic Business Monitor International Ltd Page 39

41 products, such as plastic pipes used in construction, are unlikely to grow beyond domestic demand. However, packing products such as plasma bags, sheets, covers and strips have considerable potential for being exported from the country to several major markets in the world. Government policy both at federal and emirate level is focused on economic diversification away from oil. While Dubai is focusing on construction, air transportation and tourism, Abu Dhabi (home to Adnoc) wants to create a non-oil industrial base, including a larger petrochemical sector. Macroeconomic Outlook Growth Outlook Weakening We believe that the UAE will avoid an economic contraction in 2009, but only just. Further negative news in the property market has shaken investor and consumer confidence, and growth in these two components of GDP will drop considerably. The coming year will be a difficult one for the UAE. We have revised down our growth forecasts once again on the back of a worsening export sector, weakness in the construction market, job losses and increased investor caution. It is possible that the country could fall into recession defined as two consecutive quarters of negative growth during the year, but this will be difficult to assess given the lack of quarterly data provided by the central bank. Overall, we believe that real GDP will grow by 1.0% in 2009, rising to a healthier 3.4% in Much of the worst news will come out of Dubai; this is the Emirate that is most closely integrated with the global economy and the one that has experienced the most rapid growth in recent years. Abu Dhabi has greater natural wealth thanks to its oil reserves, but economic weakness in Dubai will undoubtedly have some feed-through effects across all Emirates. Once again, the property and construction market, particularly in Dubai, is integral to our view. Bad news has been emanating from the sector for several months, and we have previously highlighted before the likelihood of price falls in the residential sector in particular, due to oversupply and weakening investor confidence. What has changed during the last quarter is the stance of property developers. As recently as October or even November 2008, most major developers were insisting that all their construction plans remained on track, that financing was not a problem and that they remained confident of finding buyers for all new projects. Construction Cancellations Multiply Now, however, developers are publicly acknowledging the harsh conditions that they face, admitting that projects may be delayed or cancelled and shedding staff (or warning of future job losses). In December, Nakheel, one of Dubai's largest property developers (and fully controlled by the government), delayed its Trump International Hotel and Tower project indefinitely. This sent shockwaves around the industry for two reasons. First, the project was set to be one of Nakheel s flagship developments, had attracted Business Monitor International Ltd Page 40

42 worldwide media attention and was backed by high profile investors. Second, it already had full funding in place, construction contracts had been awarded and some units at the development had already been sold. The delay is a major blow to Dubai s international reputation, particularly when combined with Nakheel s postponement of other key projects. Much of the Palm Jebel Ali, the second of the firm s palm-shaped island projects, has been delayed, as has the Dubai Waterfront and Gateway Towers on the Palm Jumeirah. These setbacks have reinforced the sentiment that no development in Dubai is safe, a feeling illustrated by other major project cancellations. Tatweer has told contractors to halt work on its Healthcare Towers, Sama Dubai has put the Jumeirah Hills project on hold and the Dubai government itself has put a halt to work on the Meydan Racecourse grandstand (which was already in the advanced stages and due to be completed ahead of the Dubai World Cup horserace in 2010). Fewer Flamboyant Investments In light of these developments, we are now far more bearish on investment spending than we have been in the past. This is admittedly also partly due to base effects after three years in which real growth in gross fixed capital formation (GFCF) averaged an estimated 14.3% annually, an eventual slowdown was inevitable. However, the sharp contraction in project financing was the major factor in the downward revision of our forecasts. Some growth will still occur indeed, there are still many construction projects ongoing, while government-funded investment will continue in key sectors such as infrastructure. Dubai s government announced in early January 2009 that it would ramp up spending on transport, such as the expansion of the Dubai Metro project, new road building and improvements to Dubai s port facilities. The spending plan proves that the authorities are prepared to fall into fiscal deficit in order to shore up the economy Dubai is expecting a budget shortfall of AED4.2bn, or 1.3% of its projected GDP. For the UAE as a whole, we are forecasting government spending to increase by 5.0% y-o-y in 2009, moderating slightly to 4.0% in However, with financing far more difficult to come by and buyers far more cautious, we expect a temporary halt to the sort of megaprojects that have made the UAE famous over the last 10 years. Consumers To Rein In Spending The outlook for private consumption is also less positive. First, job losses are expected during Staff are already being shed at many property companies Nakheel, for example, made 500 of its workforce redundant in December The aforementioned project cancellations will lead to lower employment not just at master developers, but also at construction companies, utilities providers, property management firms and myriad other companies that have expanded on the back of the property boom. UAE nationals will be largely insulated, due to generous government benefits; indeed, the majority of the citizen workforce is already employed in the public sector, which is set to expand over the forecast Business Monitor International Ltd Page 41

43 period. So job losses will be concentrated among foreign workers. And whereas in most countries, rising unemployment would usually lead to an automatic increase in government welfare spending, the vast majority of foreign nationals have no right to any form of benefit payments. Faced with a weakening job market, many may therefore return to their home countries, resulting in a contraction of the total number of consumers. It is too early to judge how far this trend will go, but we certainly believe that the rapid growth in population necessary for the government to fulfil its own economic expansion plans is unlikely to occur over the next two to three years. Even if the scale of job losses remains fairly small, the proliferation of bad news globally, lower property prices and less generous remuneration packages are likely to rein in consumer spending during 2009 and to a lesser extent in Risks To Outlook Aside from the property market, the major risks to our forecasts stem from external factors. As a regional trade hub, the UAE is highly exposed to economic developments across the Middle East, and the Gulf in particular, via its re-export and shipping revenues. Should the region s slowdown prove deeper or longer than currently expected, the UAE is unlikely to be capable of bucking the trend. On the political front, the conflict between Israel and Gaza has pushed up oil prices slightly. However, given falling global demand for energy, this will have a limited impact on the UAE s export revenues, while the fighting (and the inflammatory rhetoric emanating from Iran) will only serve to raise awareness of political risk among foreign investors. Table: United Arab Emirates Economic Activity, e e 2010f 2011f 2012f 2013f Nominal GDP, AEDbn Nominal GDP, US$bn Real GDP growth, % change y-o-y GDP per capita, US$ 2 33,703 40,218 44,254 57,249 51,430 57,849 63,965 69,274 70,540 Population, mn e/f = estimate/forecast. Source: 1 Central Bank of the UAE; 2 Central Bank of the UAE, BMI; 3 Ministry of Economy Business Monitor International Ltd Page 42

44 Company Profiles Abu Dhabi National Oil Company (Adnoc) Overview Adnoc is an integrated oil company established in 1971 by the emirate of Abu Dhabi, the site of 94% of the UAE's crude reserves. The company and its subsidiaries are responsible for the exploration and production of oil and gas, providing support services to the hydrocarbons industry, the operation of oil refineries and gas processing facilities, chemicals and petrochemicals plants and the storage and distribution of refined products. Adnoc s chemicals directorate was formed to implement the company s diversification plans in the petrochemicals sector. The business objectives of the directorate are to add value to Adnoc s natural resources through petrochemicals/chemicals establishments, identify market opportunities, develop strategic business plans, negotiate with potential JV partners, coordinate with the existing ones and implement research and development (R&D) programmes. In the petrochemicals sector, Adnoc operates a 60:40 JV with Denmark s Borealis, known as Borouge, which has 600,000tpa of ethylene capacity and 450,000tpa of PE capacity. Ruwais Fertiliser Industries (Fertil), a 67:33 JV between Adnoc and Total, operates a nitrogen fertiliser plant and markets ammonia and urea primarily to Company Data Address Abu Dhabi National Oil Company (Adnoc) PO Box 898 Abu Dhabi United Arab Emirates Tel: +971 (2) Fax: +971 (2) Web: Key Statistics Year established: 1971 Key Personnel Chairman: HH Sheikh Khalifa Bin Zayed Al- Nahyan Chief Executive Officer (CEO): Mr Yousef Omair Bin Yousef customers in Asia. Adnoc holds a two-thirds stake, with the remainder held by the French major. The Fertil plant was commissioned in December 1983 and is the sole producer of ammonia and urea in the UAE. Located in the Ruwais Industrial Zone, close to Adnoc s Jebel Dhanna oil terminal, Fertil was established to produce fertilisers for local use and export, using onshore associated lean gas from the Bah and Asab oil fields, as well as nonassociated gas from the Thammama field. In July 2007, Pakistan s Descon Engineering signed a contract with Ruwais Fertiliser Industries for engineering, procurement and construction (EPC) works. The project will increase the urea production capacity of Fertil by 50% and the project will be completed within two years. The EPC contract is worth US$177mn. The plants have fully integrated utility units with storage facilities. At present, ammonia production has reached 1,340 tonnes per day (tpd), and urea 1,850tpd. The company had granted a project management contract, worth US$3mn, to Worley Parsons to debottleneck the company s 690,000tpa urea unit by 90,000tpa, and to revamp its 350tpd carbon dioxide recovery unit in Abu Dhabi. The projects were likely to be completed by the end of The company exports about 600,000 tonnes of urea annually, including surplus ammonia. Fertil s export markets change from year to year, as many Business Monitor International Ltd Page 43

45 buyers look for short-term contracts or spot deliveries. The company sells through traders, including ConAgra and Toepfer, to customers in most countries, while India and Sri Lanka use tenders to purchase urea. India is expected to become an important market for Fertil in the future as insufficient gas supplies are likely to make it necessary for India to import more urea. Further, the domestic UAE agricultural market reportedly purchases about 12-15% of Fertil s annual urea production. Adnoc and Austria-based AMI are to build a US$200mn melamine plant in Ruwais. Due onstream in the second quarter of 2009, it will produce 80,000tpa using urea feedstock from Fertil. Business Monitor International Ltd Page 44

46 Abu Dhabi Polymers (Borouge) Overview Borouge was established in 1998 to manufacture and sell PE for use in technically demanding applications, primarily in the flexible and rigid packaging and construction industries. Borouge is a JV owned by Adnoc and European polyolefins producer Borealis. Borealis was formed in 1994 when the Norwegian company Statoil and the Finnish oil company Neste merged their European petrochemicals operations. Borouge sources feedstock from the adjacent Adnoc refinery and Gasco plants. In October 2005, IPIC and OMV acquired 50% of Borealis from Norway-based Statoil for about US$1.11bn. The increase in IPIC s stake to 65% from 25%, and OMV s stake to 35% from 25%, makes both the companies complete owners of Borealis. Statoil is expected to remain as a long-term feedstock supplier to Borealis. Borouge has invested US$40mn to expand its PE capacity in a US$1.2bn petrochemicals complex in Abu Dhabi, and produce 580,000tpa of PE. Due to this expansion, the company fully converted its ethylene production into PE products, which helped in meeting the needs of the packaging and pipe industries in regions such as East Africa, Middle East and the Pacific, along Company Data Address Abu Dhabi Polymers Borouge Tower, Shaikh Khalifa Energy Complex Corniche Road Abu Dhabi U A E Tel: Fax: Web: Key Personnel CEO: Abdulaziz Alhajri Vice-President, Corporate Support: Laurence Jones Vice-President, Supply Chain Management: Mohamed al-rayyes with the North East and South East Asia. The facility comprises a 600,000 tonne ethane-based ethylene cracker and two PE plants, each with an annual production capacity of 225,000 tonnes of linear high, medium and low-density PE. Borouge planned to increase its polyolefins production capacity to 600,000tpa in 2007 and 620,000tpa in 2008, from 574,000tpa in 2006 and 518,000tpa in Increased capacity will be provided by the installation of a sixth furnace, which will provide extra ethylene. It is targeting production at 2mn tpa by 2010 at its Ruwais plant. The Borouge 2 cracker, due onstream in 2010, is set to provide much of the feedstock for the increase capacity. The new facilities will also produce PP, although the exact figure is not known. The expanded complex will be the largest plastics and petrochemicals complex in the Middle East and one of the largest in the world. Presently, Borouge supplies 35% of its output to the Middle East with the rest exported to Asian markets. The company is hoping that Asian markets will absorb the increase in output. Borouge s products are used for the manufacture of plastic film and moulding packaging for the pharmaceuticals, food and beverages, cosmetics and chemicals industries. The products are also used for the manufacture of highpressure pipes, agriculture, mining, water, gas and sewage distribution, as well as coating of steel pipelines. In addition to promoting its own PE products, Borouge also oversees the distribution and marketing of Borealis s speciality polyolefins in the Middle East and Asia Pacific. Business Monitor International Ltd Page 45

47 Borouge 2 is due for completion in The project will raise production capacity from the current 600,000tpa to 2mn tpa of enhanced polyolefins. It will include one 540,000tpa Borstar technology-enhanced PE unit and two 400,000tpa Borstar PP units. Borouge 2 is a multi-billion dollar project one of the largest petrochemical projects in the Middle East. The new expansion will be located next to Borouge s existing petrochemical complex in Ruwais, and is expected to be complete in The new capacity will be marketed mainly to the Middle East and Asia Pacific, targeting high-end applications in the pipe and high performance packaging areas. The work for the front-end engineering design (FEED) for an olefins conversion unit was awarded to ABB Lummus Global. Meanwhile, the FEED for the polyolefin units was awarded to Fluor Mideast. Maersk Logistics is acting as Borouge s consultant to advise on the supply chain concept for Borouge 2 products. In January 2007, Borouge began the first stage of the construction process, when it formally signed a US$1.3bn contract with Linde Engineering/CCC for the construction of a new ethylene cracker. The contract was awarded to Linde/CCC on a lump sum turnkey basis, with preliminary work already under way and completion scheduled for In June 2007, Borouge signed US$3.1bn of contracts for the Borouge 2 complex, with Tecnimont (Italy) and Tecnicas Reunidas (Spain). The contract with Tecnimont, worth approximately US$1.86bn, is for the construction of three new Borstar technology polyolefins units and associated material handling facilities, laboratory facilities and marine works. The contract with Tecnicas Reunidas, worth an estimated US$1.23bn, is for the construction of the offsite and utility facilities for the expanded plant, and is awarded on a convertible lump sum turnkey basis. Preliminary work began in mid-2007 and both contracts are scheduled to be completed in Also in July, Samsung Engineering won an order worth US$300mn to build an olefins conversion unit, which is scheduled for completion by mid These contracts increase the momentum of the Borouge 2 expansion. Meanwhile, tenders to develop an ABB Lummus Global-process metathesis facility at the planned Borouge 2 complex have been submitted by CTCI, Petrofac International, Daelim Industrial and Samsung Engineering. The plant will make 750,000tpa of propylene. Borouge has already signed a US$1.3bn contract with Linde Engineering for the construction of a new 1.5mn tpa ethylene cracker. In June 2008, Abu Dhabi Ports Company (ADPC) announced that it had signed a memorandum of understanding (MoU) with Borouge to provide port services at ADPC s Khalifa Port, which is currently in development. Khalifa Port is part of one of the largest offshore port and industrial zone developments in the world, and is being designed to serve the growing industrial and commercial sectors in Abu Dhabi. Under the agreement with Borouge, ADPC will ensure that there are sufficient facilities at the new port to cope with Borouge s throughput. Borouge currently has a throughput of around Business Monitor International Ltd Page 46

48 600,000 tonnes of polyethelene per year at the Mina Zayed port In October 2008, Borouge announced that it was building a logistics hub Guangzhou China. The new facility will begin operations when Borouge 2 comes online and will ensure local logistics services for Borouge s Chinese customers. Borouge is looking to expand in China and in February 2009, announced that it was planning a 50,000 tonne plastics plant in the country. In December 2008, Borouge began construction on a new logistics hub and compounding facility in Shanghai, China. The logistics hub, due to begin operations in May 2010, will receive 600,000tpa. The plant will produce 50,000tpa and serve the automotive and electrical appliance sectors. Borouge also announced plans in October 2008 to build a logistics hub in Guangzhou, China. Business Monitor International Ltd Page 47

49 Abu Dhabi Fertilizer Industries (Adfert) Overview Adfert was established by ITT Emirates (64%) in association with Chilean fertiliser producer SQM (36%). Adfert ranks among the 20 leading UAE businesses in terms of net worth. The company started commercial production in It has a production capacity of 60,000tpa of water-soluble fertilisers, and 140,000tpa of granular compound fertilisers. The company also produces liquid and suspension fertilisers. About 70% of its production is consumed locally, with its clients being private farmers and the Ministry of Agriculture and Fisheries. In order to minimise imports, Adfert started producing raw materials at its AED20mn (US$5.44mn) facility in mid The raw materials include monoammonium phosphate, urea phosphate, mono-potassium and trace elements. It exports its output mainly to other GCC countries, including Syria, Lebanon, Egypt, Iraq, Turkey, Greece and Italy. The company currently has a capacity of approximately 96,000 mt, which is broken down as follows: water soluble fertilizer, 48,000mt; NPK granular Company Data Address Abu Dhabi Fertilizer Industries Corniche Street, P.O.Box Abu Dhabi United Arab Emirates Tel: +971 (2) Fax: +971 (2) Web: Key Statistics No. of employees: 350 Year established: 1997 Key Personnel General Manager: Yousef al-tawil fertilizer, 40,000mt (the production line was introduced in 2007); liquid and suspension capacity, 7,000mt; and trace element and foliar capacity, 1000mt. In 2007, the company launched a new granular fertilizer production line. Business Monitor International Ltd Page 48

50 Country Snapshot: UAE Demographic Data Section 1: Population Population By Age, 2005 (mn) Population By Age, 2005 And 2030 (mn, total) Male Female Source: UN Population Division Table: Demographic Indicators, f 2020f 2030f Dependent population, % of total Dependent population, total, ,212 1,373 Active population, % of total Active population, total, 000 2,323 2,516 4,561 5,381 Youth population*, % of total Youth population*, total, ,091 1,075 Pensionable population, % of total Pensionable population, total, f = forecast. * Youth = under 15. Source: UN Population Division Business Monitor International Ltd Page 49