Bayer assesses Middle East chemicals landscape

Market size hampers investment into the region's plastics sector

Bayer chemicals production is centred in Europe, the US and Asia. Above, Bayer's chemical park in Leverkusen, Germany. Oliver Berg / picture-alliance / dpa / AP Images

Insufficient market size and slow growth rates are hampering industry investment in the Middle East, said a senior figure at the German chemicals giant Bayer.

Plunging natural gas prices also make the US petrochemicals sector increasingly competitive against Arabian Gulf players that gained their market share on the back of low energy costs.

In spite of a push by Gulf governments to diversify into downstream industries, the 150-year-old company has no plans to build production facilities in the region, said Richard Pott, the board member at Bayer in charge of the Americas, Africa and the Middle East.

"The attractiveness of this region could come from [cheap] raw materials, not only energy," said Mr Pott. "But you have to be clear that the market is not really here at the moment."

Modern plants tend to be "world scale" and become unprofitable when not running near full capacity, he added.

Led by Saudi Arabia, governments in the Gulf have made big strides in creating a petrochemical industry in an effort to diversify their economies away from oil revenues.

Regional players such as Saudi Basic Industries Corporation have grabbed a big share of the global market for basic products, and the focus is starting to shift to more specialised plastics that feed into consumer goods production.

Bayer has focused its chemicals production in Europe, the US and Asia, where demand for its products is strongest. A boom in natural gas production, driven by new extraction techniques that allow the tapping of shale rock formation coupled with a recovery of the economy, is revitalising the American chemicals and petrochemicals industry.

"Five years ago, no one seriously considered production in the US. This picture has changed because of the completely different situation regarding energy prices," said Mr Pott. "There will be new investments in crackers, and we can see that some of our clients are coming back."

Low energy prices will also equip US producers with the same advantages as Gulf petrochemical players, which rely on cheap natural gas allocations from their governments.

"There will be more pressure and its competitiveness will be challenged," said the Bayer board member.

The company has shifted its Middle East operations to Dubai, where it moved its headquarters from Egypt in the aftermath of the Arab Spring. Bayer's biggest growth in the Middle East comes from its healthcare division, a trend not replicated by its plastics business.

"What this region needs is double-digit growth, then we would be more likely to be discussing more activity here," said Mr Pott, referring to plastics production.

The Arab Spring and the sanctions imposed on Iran are stunting the development of the regional market, he said.