New Middle East capacity threatens European chemical industry
An international KPMG study highlights the squeeze that European chemical companies are facing. The rapid expansion of the Middle Eastern chemical industry could mean global overcapacity as a recession looms. In order to remain competitive, European companies need to consider innovation, offshoring and M&A.
European chemical companies need to raise their game if they are to compete with their Middle Eastern rivals, according to a KPMG report released today. "With an abundant supply of cheap oil and gas reserves, Middle Eastern chemical companies can access natural resources at greatly discounted prices when compared to their Western neighbors", says Erik Willems, Sector Leader Chemicals & Pharmaceuticals at KPMG Switzerland.
Strong growth of chemical companies in the Middle East
"Middle East-based companies have made the most of their natural resources and transformed their business from a supply of raw material to heavyweight, global petrochemicals production. Our research shows that 53 plants could come onstream by 2012 which, if taken together with investment in Asia, could lead to European players being marginalized on the global market", says Willems. The Middle Eastern chemical industry grew at 9 percent per year during the decade from 1997 to 2007. We forecast that the region will grow at an average 9.5 percent per year until 2020; more than twice the global average.
Declining innovation in Europe
The chemical industry is the third biggest industrial sector in the EU and yet innovation levels have been falling due to high levels of regulation and difficulties in attracting a sufficient skills base to the industry. The European market is also highly fragmented and ripe for consolidation. While the credit crisis has impacted M&A levels in all industries, KPMG research shows that this could act as a catalyst to drive further market consolidation as well-capitalized trade buyers take advantage of the lack of competition from financial investors such as private equity houses. There are self-help steps that European companies can take to bolster their position in the short-term, such as offshoring, but the challenge to the market is to make the most of an historic upper hand in innovation and team up with Middle Eastern companies to access their resource advantages.
Intensify international collaboration
While M&A may be a difficult path to follow, a more readily accessible partnership is possible through joint ventures. Middle Eastern and Western companies have announced collaborations which provide expertise, access to technology and process innovation without the increased complexity that a takeover could potentially bring. "Selecting appropriate partners in the region, establishing symbiotic relationships and effectively managing the resulting joint ventures will be the key to reaping the rewards now offered by Middle Eastern engagement, "says Willems.
Zurich, December 15, 2008
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