To a large extent, the global plastics supply chain originates in the Middle East in the form of low-cost raw materials that become processed goods in China's low-wage but modern and large-scale factories. And those products end up in major consumer markets in North America, Western Europe and the like.
But that could change.
The Middle East could begin shipping finished goods directly to end markets, eliminating Asian manufacturing countries as the middlemen. Mike Smith, director of polyolefins studies with Houston-based Chemical Market Associates Inc. discussed that possibility at CMAI's World Petrochemical Conference, held March 21-22 in Houston.
Improving standards of living in China and India will lead to significant increases in consumption, he said. Meanwhile, as the Middle East develops infrastructure, the region will begin to participate more broadly in the plastics industry.
Smith said China has set an example that the Middle East can follow. The model is to start at a low level and rise: China's exports of finished plastic goods have gone from less than 4.4 billion pounds in 1995 to almost 19.8 billion pounds in 2006.
The Middle East has been evolving toward diversifying economically and adding value. From early exploitation to refining in the 1950s, to steam crackers in the 1980s, to resin production since the 1990s, the plastics processing sector is still in its infancy there, but it represents the next logical step in the development of industry in the region.
Developing its plastics processing businesses will give the Middle East the ability to add value to its existing product portfolio, diversify its economy, create employment and supply domestic markets. And its biggest advantage over Asia is the cost of feedstocks.
``The typical Middle East producer is at the very low end of the cost curve,'' Smith said. The higher the oil price, the greater cost advantage of the Middle Eastern resin producers compared with their counterparts in the rest of the world.
Capacity in the region is still growing, primarily in Saudi Arabia, and will exceed the import demand in Asia by 2009.
``Instead of dumping the excess in North America and Europe in the form of pellets, it would be sensible to turn some of the excess into finished goods,'' Smith said.
Smith also thinks North America and Europe will continue to outsource the manufacturing of finished plastic products.
In his analysis, Smith said the Middle East has technology, equipment, top-quality resin and a potential labor pool. Saudi Arabia, in particular, houses a young population. Opportunities also come from cheap bank loans, expanding domestic markets, a hunger for export markets, a favored trade climate and little or no local competition.
However, high freight costs from the Middle East to global end markets, the lack of skilled personnel and political instability in the region could hinder growth. And, Asian processors can be expected to defend their markets with aggressively competitive pricing of their own.
Polyethylene and polypropylene, which together account for more than 60 percent of the global thermoplastics demand, will grow tremendously in capacity in the next few years. Therefore, polyolefins as well as PET, polystyrene and PVC, Smith said, will be a focus for the Middle East.
As for manufacturing, it would make sense for Middle Eastern processors to produce plastic films and stackable items, because of high packing density of those products for sea shipping, he said. ``Parts with a higher labor component may also be attractive targets,'' Smith added.
Among the hundreds of plastics processing companies in the Middle East, most are small, family run and produce on a limited scale for local markets.
``A wave of processed goods being produced economically in the Middle East and shipped to the consumer markets around the world is on the horizon,'' he said.
The success will depend primarily on the ability of local leaders to attract potential investors, and the size of the wave ``could be substantial,'' Smith said.