International Molding ReportThe tipping scale: Weighing the paradigm shift in resins (Web-expanded content)

Increased Middle Eastern resin production and plastic part manufacturing signal changes for Western molders.

The cost of natural gas—the primary feedstock for 70% to 80% of U.S. resin manufacturers—and the shift east in manufacturing are continuing to take a toll on North American and European manufacturers. A new forecast shows that by 2009, Middle Eastern polyethylene will sell on the U.S. market for less than North American production costs, and that by 2008, the U.S. will become a net PET importer.

As the U.S. loses market share, the Middle East will continue to pick it up. Already, 2005 is expected to usher in this new era, with the Middle East set to become the world’s largest producer and exporter of petrochemicals and plastics. Total resin exports are expected to surpass 40 million tons by year’s end.

While U.S. resin producers are still expected to flourish over the next several years as PE demand continues to rise about 4% annually and PET demand by roughly 6%, the longer-term outlook increasingly places the Middle East in the leadership position for resin production. It is projected that over the next five years, half of the world’s new ethylene production capacity will be built in the Middle East.

What this will mean for U.S. molders depends on several different factors—what end market they supply, where they locate production, the level of sophistication of the resin they use, and the speed at which the Middle Eastern plastics industry consolidates and diversifies.

Resin Production, Consumption

Currently, Middle East resin producers are still in the process of developing more advanced production, mostly through joint ventures with western firms like Dow. As a result, U.S. molders that primarily rely on special grades or more advanced resins may not feel significant effects from the increased Middle East production.

However, governments like Saudi Arabia’s are investing significantly to develop more sophisticated and diverse resin production. It’s estimated, for example, that members of the Gulf Cooperation Council (GCC)—which include Kuwait, Bahrain, Saudi Arabia, Oman, the United Arab Emirates, and Qatar—will invest around $40 billion over the next five years to further develop petrochemical industries. These efforts could impact the price competitiveness of U.S. molders over the next decade.

Also, Middle East resin manufacturers have not significantly consolidated operations yet; as a result, the industry faces excess production and tight margins. These problems should mitigate and margins should increase for Middle East producers as the industry consolidates. In the process, U.S. molders can expect Middle East production to become more organized and to target specific end markets more aggressively.

Of course, while some of these developments should theoretically produce lower resin prices for U.S. molders, a shift in the production location also means U.S. molders will pay higher relative prices than manufacturers closer to the source of production, i.e., their European competitors, who will also benefit from the stronger purchasing power of the euro.

Still a greater threat for U.S. molders involves Middle Eastern efforts to diversify its plastics industry to include greater production of finished plastic goods. Current estimates, presented in April at the Nexant ChemSystems 20th Annual Planning Seminar on the Middle East Petrochemical Industry in Dubai, put the region’s resin consumption at around 7.5 million tons per year, of which roughly 3 million tons are converted into end products. These rates are significantly less than those of Europe, which turns 13.8 million tons into end products.

A Middle East molding market that has access to cheaper feedstock and energy will have greater pricing power than its U.S. counterparts. This could encourage North American molders to consider relocating a portion of their production to this region, especially those molders selling to Asian markets.

Of course, every market has its problems and potential costs. Middle East terrorist organizations could begin targeting vulnerable gas pipelines and terminals, thereby dramatically raising the cost of natural gas; they could also threaten the production facilities themselves.

Additionally, many of the raw materials used in resin production still must be imported into the region, and are subject to market fluctuations not controlled by these energy-rich nations.Finally, a drop in world energy prices, which many analysts still see as possible, could slow investment in the plastics market and potentially threaten some of the more fragile Middle Eastern regimes.

With all these factors in mind, a look now at a few of the key Middle Eastern markets will help U.S. molders to identify potential new export markets and investment opportunities.

Israel

A quick look at the numbers for 2004 shows a healthy plastics market in Israel, where overall sales of plastic and rubber products grew by 10% in 2004, to $3.21 billion. This total also represents a 4.7% increase in domestic sales to $1.61 billion and a 16% jump in exports to $1.6 billion. U.S. molders can expect to continue to benefit from the 1985 U.S.-Israeli Free Trade Area Agreement, which over time has eliminated virtually all tariffs on bilateral trade, although competition between U.S. manufacturers and their much closer European rivals remains tight.

U.S. molders looking to establish a manufacturing presence in this market, or exporters looking for overseas sales, can be assured of receiving the same legal treatment as local investors, as well as benefiting from the numerous incentive programs designed to elicit foreign investment. U.S. molders operating here will also reap the benefits of Israel’s developed high-tech industries, including world-class resin manufacturers.

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Now that the country’s high-tech market shows signs of recovery, Israel’s electronic components market should be another hot end-market for processors. Estimates for 2004 show a roughly 16% increase over 2003, with active and passive components each growing by 17.5%, according to US&FCS data.

It’s now estimated that Israeli electronic component imports reached almost $1 billion in 2004, much of which went to satisfy the demand of international research and manufacturing companies, which have been lured here by Israel’s tech-savvy population.

Processors supplying the medical equipment market will want to take note of Israel’s market, valued at $550 million. It’s an attractive market for exporters as Israel imports more than 90% of its medical equipment. The country’s advanced medical facilities and comprehensive national health program have generated a particularly high demand advanced medical equipment and supplies.

For U.S. processors supporting the auto industry, Israel remains a lucrative market, as 2004 sales were forecasted to reach $1 billion. However, of the estimated 2.3 million cars in Israel, only around 4.8% were North American, as European and increasingly Asian manufacturers continue to dominate the market.

Turkey

Despite the ongoing conflicts in its neighboring countries of Iraq and Afghanistan, and despite renewed concerns over civil strife with its internal Kurdish population, Turkey’s plastics industry continues to grow at impressive rates. According to SelVuk Aksoy, president of PAGEV, the Turkish plastics industry association, the country’s domestic plastics market is expected to grow 12% to 16% in 2005, putting it on pace to become the third largest plastics processor in Europe and Eurasia by 2010.

Currently, Turkey is the sixth largest plastics consumer in Europe, using 2.8 million metric tons annually. Much of this consumption feeds the nation’s 6000-plus plastics processors, which are largely concentrated in the packaging, pipes and tubes, furniture, textiles, footwear, table and kitchenware, and OEM parts industries. Several of these segments, like the appliance and automotive sectors, are experiencing double-digit export growth.

According to data from PlastEurasia Istanbul 2004, the value of direct exports of finished and semifinished plastic products has reached $1 billion; and when indirect exports in the form of OEM components and packaging for other goods are included, total plastics exports top $3 billion.Molders interested in setting up shop in Turkey should note that the Turkish plastics industry still relies heavily on imported European downstream petrochemical components and foreign technologies to manufacture products for the domestic and central Asian markets. This dependence has driven up production costs, especially with the rising euro. However, as the Middle East petrochemical and resin industries mature, Turkey should benefit from its close proximity.

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Looking at key end markets, U.S. molders working in the medical sector stand to benefit from the trend of privatization in Turkey's health care sector. As more private health facilities develop, U.S. suppliers should have a better chance to win new contracts while avoiding the complicated procurement requirements imposed by government-run facilities.

Another hot end market for molders is housing and construction. Aside from the growing domestic housing shortages, which are projected to reach 1.5 million units within the next several years, Turkish construction firms operate in throughout Central and Eastern Europe, Russia, the Caucases, Central Asia, and the Middle East, generating increased demand for the domestic manufacturers of building materials.

As Turkey’s telecommunications network continues to open itself up, U.S. molders supplying this industry will increasingly find Turkey a profitable market. Already the Turkish Telecommunications Authority has issued licenses for more than 40 companies for long distance telecommunications services.

According to US&FCS data, Turkey’s Information Technology market (IT) was valued at $4 billion in 2004, and is expected to reach nearly $4.85 billion by the end of 2005. With more than 6 million personal computers in Turkey, PC sales are still the main driver for gross sales.

As Turkey’s domestic automotive production and imports have increased, the country’s automotive parts industry has grown significantly. However, domestic parts manufacturers still only capture around 40% of Turkey’s automotive market, a vehicle market of roughly 7.5 million. Local producers have instead focused more attention on foreign markets, exporting around 51% of their local production.

Saudi Arabia

Official estimates released last December put the value of Saudi Arabia’s finished plastic products market at roughly $320 million annually, or nearly 1% of the world’s finished plastic product exports, estimated at $40 billion. This output is generated by the roughly 760 plastics processing plants in the Kingdom and more than 580 downstream resin manufacturers. These figures mark Saudi Arabia as the leading plastic parts producer in the region.

Looking to expand its global footprint in the plastics market, the government of Saudi Arabia is aggressively promoting the development of this nonenergy industry. This commitment was recently articulated in a strategic plan announced in October 2004 by the Authority for Investments in the Petrochemical Industry.

One of the plan’s primary goals is to increase investment in the plastics industry by granting numerous exemptions to domestic and foreign investors, a strategy that makes sense considering the enormous growth already achieved in the petrochemical and resin markets.

However, U.S. molders drawn to the Kingdom by the lure of cheap energy and feedstock should note that despite the abundance of cheap natural gas, Saudi resin manufacturing facilities still obtain nearly 60% of their raw materials from the global markets, and these materials still represent around 60% to 70% of the factories’ total input. This foreign dependency has at times forced local producers to curb production.

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Estimated at more than $1 billion in 2004 and growing by 5% annually, Saudi Arabia’s desert climate and soaring population have made it the largest market in the Near East/North Africa for U.S.-sourced air-conditioning and refrigeration equipment and parts.

Saudi Arabia also leads the regional market in automotive and part sales. According to US&FCS customs data, Saudi Arabia imported more than 300,000 automobiles and vehicles valued at more than $3 billion last year, with U.S. manufacturers picking up a 30% share, second only to Japan.

United Arab Emirates

Many molders may already be familiar with this market as a result of the annual ArabPlast conference, which was again hosted in the city of Dubai; but for those readers not yet up to speed on this market, here are a couple of its highlights.

To augment its profitable energy sector, UAE has roughly 10% of the world’s proven oil reserves as well as substantial ethane feedstocks. Also, the government has invested heavily in the development of alternative industries including plastics, and has striven to become the premier business center of the Middle East as well as its global shipping hub. As a tribute to its success, the port at Dubai is now the third busiest port in the world.

This drive to diversify has also inspired a very business-friendly environment, exemplified by the absence of corporate taxes and minimal import duties. As further evidence of this open environment, each of the seven emirates has one or more free trading zones, many designed with the physical and technological infrastructure necessary to attract specific industries, including plastics.

The commitment to develop a world-class plastics industry was evident earlier this year, when the Dubai-based Jebel Ali Free Zone Authority (Jafza) launched its latest project. Called the South Zone, this project will focus on the development of eight clusters of industrial businesses, including one cluster devoted to plastics, as well as several others targeting important downstream industries like medical products, food and beverages, beauty products, and pharmaceuticals.

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The UAE has a comprehensive, technologically advanced, government-funded health service and a developing private health sector. The Ministry of Health’s (MOH) budget in 2003 was $455 million, with roughly 5% of this being allocated for medical machines, tools, and supplies.

In 2003, the UAE market for medical equipment and supplies was estimated at $328 million, with U.S. imports accounting for 28.5% of this total. Since January 2003 the government has imposed a standard 5% import duty on medical equipment.

US manufacturers of computers and peripheral products maintain a 12% share of the UAE market—a percentage that does not include imports from U.S. companies manufacturing outside the United States. Currently computer assembly plants in the Jebel Al Free Zone (Jafza) assemble Acer and Supra brands, and HP is also considering establishing a manufacturing presence in UAE. There are no import restrictions on the computer industry, although there is a standard 5% customs duty for U.S. computer imports.

Like Saudi Arabia, a hot construction market and a severe desert climate make the UAE a lucrative market for air-conditioning and refrigeration equipment. Molders supplying this industry can expect to continue reaping the benefits of the construction boom, as it is estimated that over the next five years total public and private investment in the UAE construction industry will reach $30 billion.

Similarly, U.S. manufacturers of plastic building supplies will want to cash in on the UAE construction bonanza, a phenomena that should be sustained over the next five years, in part through the government’s planned $30 billion expenditures for new infrastructure projects, as well as for new governmental, commercial, and residential buildings. Proposed projects over the next five years include the expansion of Dubai and Abu Dhabi International Airports ($6 billion), three Palm Islands ($3 billion), Dubai Festival City ($1.8 billion), Dubai Port Expansion programs ($1.3 billion), Jumeirah Beach Residence ($1.4 billion), Dubai Healthcare City ($1.8 billion), and Emaar Development Properties ($7 billion).

UAE high per capita income (more than $20,000) and the government’s active program to promote the country as a leading sporting and vacation destination has made it an attractive market for sporting goods as well as for manufacturers supplying the leisure/recreational industry.

Egypt

During May’s ninth annual African Arabian Exhibition for Plastics, Chemicals, and Rubber Machinery & Products (Plastex 2005), Egypt had the opportunity to highlight its growing role in the Middle East plastics market. Although the country currently imports around 83% of its resin, the domestic industry is growing steadily and is forecasted to see annual growth rates of 10% over the next several years.

Consumption rates for resins and finished plastic products reached around $1.65 billion in 2003 and are expected to climb significantly as domestic manufacturing expands.

Molders looking at this market will be encouraged by a few additional macro factors:

On the flip side, investors should not ignore some of this market’s less attractive attributes, like an excruciatingly slow privatization program and its discouragingly high import tariffs. Another common gripe among exporters is Egypt’s cumbersome customs and ports procedures.

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Between new governmental initiatives and private spending, Egypt will spend more than $2 billion annually through 2007 on environmental equipment and services. This increased fiscal attention is expected to sustain growth rates of roughly 40%, a key development considering U.S. suppliers capture around 40% of the Egyptian import market.

U.S. & Foreign Commercial Service data tell us that there are roughly 3.5 million vehicles in Egypt, with an average life span of 10 years—a life expectancy that promotes the need for continued maintenance. To address the growing need for car parts, the government has recently lowered import tariffs on many automotive parts and accessories.

Estimated to be worth around $670 million annually and projected to grow by 12% over the coming two years, the Egyptian medical supplies market has attracted the attention of many U.S. plastics medical producers, who hold around a quarter of the total market share.

US&FCS projects for the Egyptian packaging equipment market foresee annual growth rates of roughly 20% over the next few years. While current imports come mainly from Europe and Asia, the falling dollar should help U.S. suppliers increase their 5% market share.

The Egyptian food processing equipment market is expected to experience a modest 3% growth over the next couple of years. U.S. firms should benefit from both the falling U.S. dollar and government plans to sell off public interests in this sector.

Telecom Egypt (TE), the state telecommunications firm, has plans to add a million new land lines annually through 2007, a pace that could accelerate as TE’s monopoly on fixed lines expires at the end of 2005. Suppliers to Egypt’s cellular and wireless markets face a much more open and dynamic market.

Over the last five years more than 150 new oil and gas discoveries have been made in Egypt. These new discoveries have generated increased demand for new oil and gas facilities and infrastructure, including a Natural Gas Liquefied project and several gas-to-liquid projects.

Spawned by generous Egyptian tax incentives to foreign developers, the numbers of hotels, resorts, and other tourist facilities has skyrocketed in recent years, a development that is expected to sustain a 10% annual growth rate for hotel and restaurant equipment.

As the demand for electrical power generation in Egypt grows by 6% to 7% annually, the Ministry of Electricity has developed plans to create more than 10 new power plant projects though 2010. All these projects will be open to bids from U.S. firms and suppliers.