Middle East Petrochem Projects Face Crippling Cost Increases

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Researched by Industrial Info Resources (Sugar Land, Texas)--At the second annual forum of the Gulf Petrochemicals and Chemicals Association (GPCA) in Dubai, Chairman Mohamed Al-Mady (also Vice Chairman and CEO of Saudi Basic Industries - SABIC) said that there was concern over the construction cost bubble that the region was currently experiencing. He said that capital costs had "gone through the roof" and that when capital costs had risen so much, it was difficult to achieve acceptable financial targets. He said the situation would lead to some project delays and probably some project cancellations over the next few years. He added that the present bubble would deflate, as it was not sustainable at present levels.

Costs have ballooned by as much as 70% over the last five years and by 30% in the last three years. Building costs have been driven by the global rise in materials, including steel, and competition between contractors working on $2.4 trillion of projects that is pushing up wage levels. Al-Mady said that Sabic had canceled an upgrade project at Arabian Petrochemical, and Saudi Arabia Mining said in September that the cost of a phosphate venture with Sabic had risen 62% to $5.6 billion.

"I believe our industry is approaching a period of overbuilding that is accompanied by weaker markets," he said. "Simultaneously, we may see slowing of the global economic growth that is driven by a slowdown in the GDP growth in the U.S. Our industry has experienced these periods of overcapacity and slow growth numerous times in the past and has worked through them successfully and emerged stronger. I am certain we will do so once more.

Domestic inflation was increasing upward pressure on salaries and economic growth in traditional sources of labor, such as India and the Philippines was causing competition for skills and the dilution of talent was affecting the quality and scheduling of construction. When the cycle goes down, companies would be left with a heavy burden of cost which they will find it difficult to deal with unless they fire some employees, Al-Mady said.

One of the greatest challenges facing the industry was the environmental and health sector. Al-Mady said the regulatory environment for the chemical industry was growing more intense. Increasingly, government regulators are placing the burden on the chemical producers to provide proof that their products do not harm humans or the environment. He said that this would require the industry to be more pro-active in the future than it has been in the past and would call for greater commitment of human and financial resources for the industry. He added that he was confident the industry could work through these issues and provide greater benefits to society.

For related information, see November 5, 2007, article - Investments into Arabian Gulf expected to Increase Despite Rising Oil Prices and October 9, 2007, article - Contax Identifies Market Signals as Middle East Project Costs Escalate.

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