GCC petrochemical industry under threat from protectionism

The GCC petrochemical industry is under significant threat from new protectionist tariffs in key markets as higher-cost producers in Asia and Europe seek shelter from the sector's worst downturn in decades, industry officials said. China and India have imposed tariffs on imports from Oman and Saudi Arabia after accusing Gulf producers of "dumping", which is the term for exporting petrochemicals below cost. Europe is considering similar measures against firms from three countries, including the UAE.

Firms in overseas markets say GCC companies are receiving government subsidies for energy and natural gas that give them an unfair advantage. The allegations of dumping are "baseless", but tariffs in big markets can still do damage to GCC producers, said Abdulwahab al Sadoun, the secretary general of the Gulf Petrochemicals and Chemicals Association. "Dumping means you either sell at a price that is lower than your production costs, or that you are selling on the international market at a price lower than on your local market," he said. "All these claims are baseless from that perspective."

The EC announced on September 9 that it would open a 15-month investigation into allegations that the UAE, among others, sold PET, a common plastic, at prices on the EU market low enough to cause "material injury to the [EC] industry". The firm under investigation is JBF RAK, the UAE's only PET producer. Rohit Maindwal, the firm's president for marketing, said yesterday he was confident the company would win the case.

"It will be a long-running process," he said. "I'm very sure we will come out without any tariffs." JBF RAK, a joint venture between an Indian firm of the same name and the Ras al Khaimah Investment Authority (RAKIA), is producing close to full capacity at 320,000 tonnes per year, he said. In late June, China announced it would investigate claims that Saudi firms were dumping methanol on their market. The country's government has put a provisional tariff on Saudi exports that will be refunded if the allegation is found to be without merit.

In August, India placed tariffs on petrochemical exports from Saudi Arabia and Oman, ranging between 100 per cent and 800 per cent. Although the protectionist measures were unlikely to withstand an appeal under the rules of the World Trade Organisation, they could still hurt GCC firms in the time it takes to resolve the dispute, said Jean-François Seznec, a visiting associate professor at Georgetown University who specialises in Gulf economics.

"This is potentially dynamite because the Gulf, and the Saudis in particular, have invested tens of billions, if not more, in developing an industry where they have a natural advantage, and they've developed this on the basis that the market for this industry is China," he said. Most of the complaints hinge on the extremely low prices that GCC producers pay for natural gas, the feedstock for producing a range of plastics and other petrochemicals.

But much of the gas sold to petrochemical firms is produced along with oil, meaning gas production costs are extraordinarily low, Mr al Sadoun said. "It is not a subsidy, because there is no cost incurred," he said. Cyclical downturns in heavy industry were inevitable and some firms with higher costs would fold, he added. "They will not shut down their production facilities, or they will not lower their operation levels," he said of Gulf producers. "You're meant to have the downturn, and during the downturn only the fit will survive."

cstanton@thenational.ae