Interview: “You have to change and if you don’t change, you will be left behind

Murad: Well, generally speaking, the Middle East market has been highly dominated by the GCC countries, which are very dependent on oil and gas exploration and as a result of oil exports. And when one takes a look at the overall trends, whether it is usage trends or whether it’s technology trends, it tends to be dominated by oil and natural gas production, which means that these represent anywhere from 20 to 30% of the total demand for coatings and the types of applications tend to be very much in tune with heavy duty protective marine applications. A lot of corrosion resistance is obviously needed, also saltwater resistance and chemical resistance.

That also lends towards certain construction trends because these are also now impacting construction materials and infrastructure to support the region from the standpoint of its citizens, but also the expatriates that come in from the standpoint of engineering firms. We then have the construction activity related to infrastructure, roads, highways, bridges, all of which lends towards the further activity from the standpoint of the types of technologies that would be for concrete applications, asphaltic and applications supporting all of that infrastructure. When we look at the construction activity in terms of decorative as well as the protective and marine, those two combined wind up making up approximately 75% of the demand. Leaving the OEM sector at about 25% of the demand, this is a stark difference from the developed parts of the world where the OEM sector is highly driven by transportation applications. Automotive bus, truck, rail, aerospace finishes, tend to represent anywhere from 30 to 35% of the OEM demand. These numbers tend to be relatively small in the Middle East

The other aspect is there are other OEM applications that are not produced in the region, so furniture is a small part, coil is a small part and other durable goods manufacturing tend to be smaller parts. This is the stark difference between the Middle East compared to other developed economies like Germany or the US or China. The fact is that it’s very heavily dominated by the infrastructure to support oil related construction activities, to support oil exploration. I think one of the other fundamental differences is, while there is a tremendous amount of oil exploration in the region, the majority of that oil is shipped out of the region to be processed in other parts of the world – Europe, North America, Asia, Southeast Asia in particular. And the region itself depends heavily on cracking natural gas. What’s fascinating to me is that they wind up having to reimport the fundamental building blocks that would be necessary for producing resins, for example, or pigments or other additives. Those are all imported back into the country. And this causes a higher price.

Generally speaking, they wind up paying about a, let’s say 35% to 40%, higher price than if they were to crack that oil and get those higher molecular weight entities that are needed for the coatings industry or the adhesive industry or other related industries that use these higher molecular weight moieties C4 and beyond C4, C5, C6, C10 and of that nature, those are all reimported back in the country. And that’s all because they’re cracking primarily natural gas. There’s very little oil that’s cracked there. That puts significant pressure on the local producers because, not only is the supply chain then stretched, but they’re having to pay higher import costs. You’re having to pay more from the standpoint of the actual raw material costs for making paints and coatings and they’re paying the import fees for all compounds as a result. When we look at the typical profitability in the region of coding companies, it tends to be significantly lower than other developed parts of the world. So those are some of the major issues that underscore the region’s ability in terms of producing paints and coatings on a competitive bases to other parts of the world.

There are a number of activities going on in the region that are spurring higher demand and leading to higher GDP. Saudi Arabia has a vision 2030. Included in that vision is not only considerable amount of infrastructure spending on construction. But there’s also significant activity to localize production. A program that’s called IKTVA, which basically means that they want to source from within Saudi Arabia and drive investment inside of Saudi Arabia. And that is leading to is leading to more foreign investment that’s coming in. In order for people to comply with this IKTVA program, other GCC countries also have their own initiatives to diversify away from relying exclusively on the vast majority of their GDP on oil. When you look at UAE, and in particular Dubai, they are trying to drive tourism into the country and essentially trying to build the tourism industry around entertainment and other facets that would bring in as many as 23 to 25 million new tourists into the region for finance, financial activity, banking infrastructure.

Those have been programs that have been instituted to make Dubai the financial capital of the Middle East and bring in not only investment, bring in tourism, but also bring in a lot of headquarter facilities for major companies around the world, which brings in expats and increases spending, so those types of activities have all been well received. They’re now well entrenched from the standpoint of diversifying away from oil revenues and ultimately these programs will bring in the investment in other OEM related activities. It will be a trickle-down effect. Countries that are investing in infrastructure are trying to improve the social standing of their citizens as they continue to go up that middle class ladder. Then it begins to draw local production for cars, furniture, and other durable good’s manufacturers. This is where ultimately the OEM sector will begin to grow and begin to look like other parts of the developed world. It’s an evolutionary process, but they’re well on their way in in trying to achieve that.

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Event tip: Daniel Murad will give a keynote on “Coatings in the Gulf Region: Trends and perspectives” at the conference of the Gulf Coatings Show. The new industry event, which take place from October 17-19 in Sharjah, offers an exhbition, conference and short courses.

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What is the reason for the Middle East starting these initiatives only now?

Murad: Well, I think what it comes down to essentially is that there is so much demand for oil in the early years over the last 100 years, they’ve been generating 85% to 90% of their GDP coming from oil revenues. The realization finally set in in the last decade that this cannot continue over the next 100 years. And so, in some respect, they’ve been spoiled by that. Now the realization that fossil fuels, as seen by other parts of the world, is going to be declining overtime and that realization really didn’t come into play until the last, I would say starting in probably 2012, 2013, that time period in the last 10 years. We did a huge project there in 2014, 2015, 2016 time period. It was incredibly eye opening to find that so little attention was being paid to these fundamental areas that support growth for the middle class. The middle class is very small relatively speaking in comparison to other parts of the world. And you know as well as I do, the middle class is extremely important to GDP growth and small business activity. That didn’t exist and combined with the political volatility in the region over so many decades this really made it into a risky place for foreign investments to come in. Those have been the types of symptomatic issues that they have been dealing with which has made them relatively late in the process.

How is the current situation with the pandemic, the rising energy process and the lack of raw materials influencing the Middle East?

Murad: They were hit extremely hard. So, to put things in perspective, the GCC countries today make up about 75% of the total demand in the Middle East. Saudi Arabia being the largest in total in the Middle East, represents somewhere around 40% of the total in the Middle East. And then the remaining GCC countries make up the remaining 60%. Saudi Arabia was hit close to 25% demand loss. Prior to that, it was hit by 15% demand loss even prior to Covid and then Covid hit. So literally in a period of two years, they lost about 40% of their demand. Of course, the war in Syria impacted Syria. The war in Iraq impacted them. Lebanon has been hit extremely hard, so when you look at the Middle Eastern continent the northern part of all those countries were severely hit not only prior to Covid , but as a result of the various conflicts that we’re taking place, then add Covid on top of that. They still haven’t recovered. There are still parts of the Middle East that have not recovered.

The GCC countries have recovered and the GDP growth that you see today at five point some odd percent income from the Middle East is primarily being driven by the GCC countries, and that’s primarily because of oil prices began to go up above $60.00 sixty U.S. dollars per barrel. When oil goes up above $60.00 per barrel, companies begin to invest in the infrastructure to maintain those oil assets. When it drops below $60.00, they let those oil assets go and they delay projects. Oil hit above $60.00 a barrel in August of 2021.  From August of 2021 until today, oil shot up well over $100. It’s come back down a bit, but that has given them the additional revenues, if you would, to restart the construction activity and the investment activity in the region prior to that it was severely impacted. That’s one aspect. The other aspect, as you mentioned is they are reimporting a lot of these fundamental building blocks into the region. The prices of these fundamental building blocks have gone up anywhere from 35% in some instances to 350% in other instances. Epoxy resins, polyurethane resins – those are extremely important for the oil infrastructure and for protective and maintenance applications. Those prices have shot sky high as well as things like TDI, MDI being short, being put on allocation and acrylates put on force majeure. Those fundamentally keep the region from being able to even supply the demand that they have. They’re short of product and this is not just a Middle Eastern issue.

This is a global issue and now we have a dangerous situation where we have stagflation. Prices are sky high, inflation is incredibly high, demand is low and declining. That’s primarily because of the central banks raising interest rates, trying to slow down inflation. That impacts the discretionary spending. The amount that the typical consumer has remaining in their pocket has declined considerably, so we have inflationary prices and low demand. Also, we’re facing the war between Russia and Ukraine and the impact that has on energy prices, the impact that it has on the European chemical producers, is immense. Immense, because Europe basically relies heavily on the close European nations to be able to supply them with the majority of these materials. We see energy prices in Europe potentially doubling here in the wintertime.

We potentially see rolling blackouts. By rolling blackouts I mean cutting energy intentionally in certain sectors. The chemical sector uses a tremendous amount of energy. It’s one of the biggest energy users. So, imagine having Covestro in Leverkusen or BASF in in Ludwigshafen, not being able to run those huge monomer facilities around the clock. That has some immense repercussions throughout the industry, all while prices are sky high and demand is very low. We’re looking at yet another high-risk situation this winter that’s going to be very tough for the industry and very tough for the Middle Eastern region because they rely so much on Europe. These chemical facilities have extremely high fixed costs. They’re designed to be run around the clock. They can reduce output down to around 75%, 70% utilisation. What if starts to go below that? Like if we hit 65% or 60% utilization because of lack of energy availability. They will shut those plants down as it doesn’t make sense for them to keep operating if capacity utilization goes down to let’s say below 65%. When we looked at Covid, those facilities dropped to around 70% capacity utilisation very quickly, in a matter of three months. It doesn’t take much for it to impact them very heavily. Once they shut down, it’s not as easy to bring them back up. It takes several months to bring them back on stream after they shut down. So, this is something that we must keep our eyes on very, very closely.

You will be the keynote speaker at the Gulf Coatings Show. What can we expect there?

Murad: First you can expect me to give you a global perspective. From the global perspective I will talk about the fundamental drivers that drive demand on a global basis. Then I will talk specifically about the region and some of the differences that we spoke about in question number one this morning. I’ll cover the demand. I’ll cover the future forecast. I’ll cover technology trends that are going to be impacting not only the coatings industry, but the region specifically. From there, I intend to speak about the changing landscape in terms of the competitive environment and the changing landscape from the standpoint of how all these factors are driving consumer behaviour which impacts future demand but also drives the way companies think in terms of how they run their business. Also, I will talk about securing supply chains and business continuity planning. Things of that nature. My intent is to start at a macro level and then narrowed down towards the Gulf and specifically how things will change in the future.

Which role do you think the Gulf Coating Show can play in terms of communication exchange among experts in the Middle East?

Murad: I think what the Gulf needs is a professional and consistent event that brings the exhibitors as well as the industry experts and companies that are potential investors and draw them to the region. The importance here is to raise awareness amongst companies within the region, but also towards potential foreign investors. Sop that they see that there are a lot of moving parts and there is quite a bit of revolutionary activity taking place in the coatings industry from the standpoint of technology substitution, from the standpoint of new chemistries coming on board and also from the standpoint of the potential implications of new generations of coatings consumers and what their expectations are, that one cannot be stagnant. You have to change and if you don’t change, you will be left behind and if you as an organizstion don’t change, then the next person will change, and they will be the winners. I think those are important fundamental messages. That not only people from within the region need to hear, but also the foreign investors need to see how much development activities are taking place in the region to attract their investment and track their attention.

If you could have one wish for the coating’s world for the Middle East, what would that be?

Murad: If I could have one wish for the Middle East it would be that the Middle East would somehow magically make their middle class much larger in less than one year time. To somehow create this huge middle class, a force that will drive growth substantially into the future. I think that would be immensely important for the region. If I could have one more wish it would be for peace to be in the region. So that the people there can live peacefully and could enjoy life like the rest of us do and enjoy freedoms that the rest of us do .

Find out more and see the presentation of Daniel S. Murad at the Gulf Coating Show in Sharjah, UAE.