Middle East: Trade Outlook for 2022
With the 15th Gulf Petrochemicals and Chemicals Association (GPCA) forum due to take place in Dubai next month, we are taking a detailed look at the Middle East in this report and how the region has fared over the pandemic. We also examine how the export hub is poised to continue growing over the next few years, as more refineries and chemical plants come onstream, and how these volumes will be absorbed into the global market.
The Gulf Cooperation Council (GCC) economies - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE - are expected to post an aggregate growth of 2.2% in 2021, supported by a global economic recovery of 5.6% and the gradual recovery of global oil demand and rising oil prices, according to recent World Bank estimates. For the whole of the Middle East, the International Monetary Fund (IMF) forecasts a 2.7% GDP growth for 2021 in its latest World Economic Outlook report, recovering from the 4% decline seen in 2020.
Certainly, the higher prices seen on crude oil are helping buoy the economic outlook for the region into 2022. The Middle East is the home of several major oil producers, and Saudi Arabia alone accounts for about 15% of global crude output. According to the GPCA,
"Higher oil output combined with an improved oil price outlook are boosting fiscal revenues in the region, as hydrocarbons generate significant revenue for the GCC.”
After the disruption of COVID-19 on the global markets, petrochemical output and consumption is also in a period of swift recovery as consumer demand into end-user markets picks up. If we look at the export numbers for specialised products out of the Middle East over the past 18 months, however, it shows a fairly resilient pattern.
On average, monthly specialised products volumes out of the region were around 3.5 million tonnes in 2019. This number dipped slightly during the first half of 2020, with the initial lockdown phase in China—the region’s largest export market—being felt. However, there was a sharp upturn in Chinese manufacturing activity in the second half of the year, and a softening products market weighed down on chemical freight rates to make deep-sea trade more viable. Monthly export volumes in H2 2020 averaged at just over 4 million tonnes, which actually helped boost the annual number for the year compared to 2019.
Looking back at 2021, we have seen rising freight rates ex-Middle East in both major directions in line with improved activity. This has been most noticeable in Q4, with the surge in bunkers pricing helping push numbers higher. However, the strength seen on the westbound routes this year was what caught many in the chemical tanker market by surprise. Smaller parcel rates from the Gulf into ARA are up by more than 50% this month compared to January 2021, and were on an upward trend through the first few months of the year when rates into the Far East faced downward pressure amid an uncertain outlook around Chinese economic sentiment.
The key reason for this strength on the westbound lanes was due to unforeseen weather impact on chemical and refining output in the US Gulf. For the last 6-7 years, the deep-sea chemical trade has become increasingly centralized around low-cost production in the US Gulf and the Middle East. The has helped raised the average haul number for the chemical fleet over this time, as more volumes are moving from these export hubs into locations further afield such as Asia and ARA.
Our expectation is that the average haul for 2021 will be static or even slightly lowered from the previous year, and this is largely due to the lack of US Gulf export capability due to the hurricanes and polar storms seen since late 2020. This not only created some demand into the US from the Middle East to cover some of the lost base chemical production, but also more import requirements from regions such as Europe that have grown more dependent on US exports of chemicals like styrene, methanol and glycols.
Whether this will repeat itself in 2022 remains unclear for now, but the impact of heavy storms and hurricanes in the US Gulf have become more regular in recent years. Even when the refiners and petrochemical producers adequately plan for these ahead of time as they did in Q3 2021, there is still the risk for the prolonged loss of output.
In any event, exporters in the Middle East should be looking to diversify beyond the key Chinese import market next year in order to maintain growth.
China is facing a period of uncertainty around its economic strategy as the country looks to rebalance some of the social inequality that has so far been baked into its rapid expansion. The continued push for self-sufficiency and the potential impact of its environmental goals around carbon emissions will also determine chemical import requirements next year and beyond.
The ongoing diversification of Middle Eastern chemicals trade will also be crucial to support the next wave of capacity expansions on the horizon. While some of these units have been delayed because of the pandemic, we expect to see some more volumes enter the market in 2022. SABIC is currently in the process of starting up its new 700,000 monoethylene glycol (MEG) unit at Al Jubail, while other refining-based petrochemical lines are set to begin operations next year.
The refineries like Jizan are likely to target Europe with CPP volumes, but there will also be more chemical feedstocks like benzene and PX looking for a home: Jizan alone will bring more than 900,000 tonnes of new annual aromatics capacity, just as the Chinese PX market starts to become more balanced internally.
Other projects in the region are slated to come online between now and 2025, with more of a focus on specialty chemicals that have a healthy global growth forecast. Cheaper operating costs in the Middle East will support export activity, but both charterers and shipowners will have to plan ahead and develop the relationships required to establish the business.