Europe Reports

Eyeing the Middle East

By Sean Milmo | August 10, 2006

The steep rise in oil prices has created a construction boom in the Middle East, resulting in the regions increased demand for coatings.

While Western European paint producers struggle to make money from sluggish demand in domestic coatings sectors, they are fortunate to have two rapidly expanding neighboring markets.

One of these is Eastern Europe where sales have been increasing at double-digit rates in some segments.

The other is the Middle East, which accounts for only four percent of the world's coatings market by value, according to figures from Akzo Nobel. But its paint consumption is one of the fastest growing worldwide.

In some of the Middle East countries bordering the Mediterranean Sea imports of coatings have more than doubled over the last five years. The strongest rise in demand, however, has been in the oil and gas producing countries of the Gulf area, where the steep rise in oil prices has triggered an unprecedented construction boom.

This year the total value of ongoing construction schemes in the six Arab countries in the Gulf Co-operation Council (GCC)-Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Bahrain and Oman-is expected to exceed over one trillion U.S. dollars, an increase of approximately 70% within 12 months.

Saudi Arabia and the UAE have between them commissioned building projects worth over $500 billion during the last two years.

In addition to large sums of money being poured into new housing and office buildings, a lot is also being invested in new infrastructure and equipment and plants for the oil, gas, refining and petrochemicals sectors. Qatar, which has a population of only approximately 700,000 but with the third largest gas reserves in the world, is planning to spend roughly $56 billion over the next five years on energy and industrial projects.

The large protective coatings market being created by the Gulf's oil and gas industry is particularly attractive to European, as well as North American and Japanese, coatings manufacturers because it requires global technical standards. In fact its needs are even tougher because of the region's climate which necessitate resistance against hot temperatures, UV rays and potential abrasion from sand and dust.

In the architectural sector, Gulf countries are applying safety and environmental standards similar to those in force in Europe and North America. Reinforcement steel or rebars in buildings have to be coated as a protection against acid in cement, while intumescent fire-resistant coatings are needed in tall buildings.

Specialist paints which help property developers in the Gulf comply with new building regulations are commanding higher margins than other paints. Problems stemming from defects in buildings following their construction are occurring with "an alarming frequency" in the area, said Robert Jackson, senior board member of Bodycote MTS Middle East, which runs a network of materials testing laboratories in the region.

While multinational coatings companies can use innovative technologies to establish a powerful presence in certain Middle East markets, they are increasingly facing competition from local producers as well paint manufacturers from India, China and other emerging Asian economies outside Japan.

For all paint companies the main target is the architectural sector which constitutes approximately 65-70% of coatings sales in the Gulf. Because of the absence of any sizeable industries outside of the oil, gas and related sector, much of the remainder consists of protective coatings for infrastructure, pipelines, refineries and petrochemical plants.

By far the biggest coatings market in the Gulf is Saudi Arabia whose population of approximately 25 million is considerably larger than any of the other GCC states. In a recent report on the coatings sectors of Saudi Arabia and the UAE, the London-based research organization IRL estimated the country's annual paint demand to be 800,000 metric tons.

"The size of the Saudi coatings market is already almost the same as that of France," said Terry Knowles, an IRL researcher. "We expect Saudi demand to almost double by 2010, when it will be considerably larger than some of Europe's biggest markets."

Some analysts reckon, however, that the current Saudi figures for coatings could be distorted by the massive upsurge in construction expenditure. After this has ended, demand may well settle down to a lower level.

Nonetheless, the big leap in paint consumption in recent years has helped to create a number of indigenous coatings companies which are tough rivals to Western operators. In the protective coatings sector, these include Saudi Industrial Paint Co. (Sipco), which has close ties with Saudi Aramco, the Saudi national oil company, and Arabian Pipes Co. (APC), a manufacturer of pipes and their coatings.

The UAE coatings market, which is dominated by the emirates of Dubai and Abu Dhabi, amounts to 132,000 tons, according to IRL. It is growing at 16% a year so that it will more than double in volume by 2010.

Dubai, which is a frenzy of construction activity with approximately 1,5000 cranes operating on its building sites in July this year, has become a hub of paint production and trade in the Gulf region. It also supplies the potentially large market of neighboring Iran, the world's fourth biggest oil producer with a population of approximately 70 million.

"It has very good logistics and is well placed geographically to serve markets both in the Middle East and in Asia," said Hans Courtier, a consultant at Irfab Chemical Consultants, Brussels, Belgium. "It imports a large amount of powder coatings, for example, but exports even bigger quantities. If European paint companies want to sell big volumes in the Gulf they need a production base in a place like Dubai."

Jotun, the Norwegian paint company, which probably has the largest market share in the Gulf of European producers after a 30-year presence in the area, opened a 40,000 million liter-a-year plant at Al Qouz, Dubai, two years ago. It has its worldwide headquarters for powder coatings in Dubai which also serves as its Middle East and South-East Asian base for decorative, marine and protective paints.

The company, which conducts a strategy in the area of being a "single source solution provider," announced in April that it had won three coating contracts worth $19 million in the UAE, including one for a new terminal at Dubai International Airport.

Some leading international players in decorative paints are taking a cautious approach to the Gulf market because they want to wait and see how the market develops after the current construction bonanza.

ICI operates in the Middle East, including the Gulf, a network of locally owned companies to which it licenses its Dulux brand and its technologies while ensuring that they run their production plants to their own quality standards.

"You can't build a strategy for a market on the basis of a construction boom," says Tony Myers, managing director for ICI Paints' Middle East and Africa business. "We are interesting in substainable markets with large populations with rising disposable incomes. With promising markets in the Middle East we could consolidate our licensees into the company."

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