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Thu 18 Dec 2008 04:00 AM

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Ahead of the pack

The regional downstream race is now a marathon, not a sprint.

The regional petrochemicals sector faces tough challenges in the coming months, but has the chance to emerge from the financial crisis relatively unscathed.A drop in demand for PET and associated polymer products may deliver a timely warning to the regional downstream sector. In years when demand continues to grow inexorably it's all too easy to draw a graph, continue the upward curve, and judge that in five years time the market will be 50% bigger again.

A correction of optimism is what has been delivered, but the fundamental arguments for a strong Middle Eastern petrochemicals industry remain the same.

A reflection on the scale and pace of developments is arguably a good thing. A petrochemical plant that cost US$65 million five years ago cost around $100 million in mid-2008.

That project cost inflation would not allow the same plant to produce superior, or more product, but the start-up cost would hang over the operator for a greater number of years.

Also, a slow-down in the development of some of the region's mega-projects is likely to be just that. Consumer demand has not dropped off a cliff, it's just stuttering.

This gives companies the chance to hold off certain phases of their grand plans, and will allow for future capacity expansions to be financed in a more agreeable lending climate. Added to that, there's very little good that comes from 20 projects which all do the same thing entering the marketplace at once.

The potential export market remains vast, and transhipment costs will almost definitely fall over the coming economic cycle. Oil at $120 plus was driving freight rates skywards, and smaller exporters were left feeling the pinch.

These shipping costs will no doubt fall in 2009. Add to this a favourable logistical situation with unparalleled access to cheap crude oil, and the notion of the region as a booming export driven value-added petchem production hub is still perfectly achievable.

Those players that have managed to get their plants on-stream will be able to take advantage of the fact that projects not yet started in Europe and Asia are now highly unlikely to come through in the next five years.

When the global economy starts to pick up again, Middle Eastern producers will have managed a tough breakthrough period but will be able to capitalise on their position.

Ultimately core fundamental strengths will enable the regional downstream march to continue into the next decade.

Daniel Canty is the editor of Oil & Gas Middle East.

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