GCC & Asia: Widening And Deepening Trade Interdependence

BMI View: We expect the GCC's reliance on Asia as a destination for its oil exports to deepen over the coming years, as the traditional destinations of Europe and the US see little growth in hydrocarbon imports. We also forecast the GCC to become a key metals exporter as the region seeks to diversify earnings away from oil. Finally, despite nationalisation efforts, we expect the GCC to remain a key source of remittance earnings for much of South Asia as construction activity in the Gulf continues apace.

Economic relations between the Gulf Cooperation Council (GCC) and the larger economies of Asia (primarily Japan, South Korea, China and Japan) will continue to develop and diversify. The relationship between the two blocs has traditionally been in hydrocarbons, and while we see energy links continuing and expanding, there are several other sectors where we see growth potential, most notably in construction, remittances and metals.

Oil exports from major GCC producers to Asia have increased over the last decade, as the traditional demand markets of Europe and the US have seen a slowdown in import growth. The US has benefitted from a significant increase in oil output due to its highly successful shale developments, lessening its requirement to import lighter crude oil blends. While the Middle East generally produces slightly heavier crude slates, there are few options to increase oil exports to North America with the region being increasingly well supplied. Furthermore, if the construction of the Keystone XL pipeline moves forward, exporters such as Saudi Arabia will face greater competition for market share from Canadian producers. Similarly, European oil demand is stagnating due to the aftermath of the recession, growing energy efficiency and a decline in demand from the increasingly uncompetitive refining sector. While Europe will remain a major oil import market, oil consumption growth is expected to remain largely flat.

Eastern Shift In Oil Demand
Global - Net Oil Imports By Region (mn b/d)

BMI View: We expect the GCC's reliance on Asia as a destination for its oil exports to deepen over the coming years, as the traditional destinations of Europe and the US see little growth in hydrocarbon imports. We also forecast the GCC to become a key metals exporter as the region seeks to diversify earnings away from oil. Finally, despite nationalisation efforts, we expect the GCC to remain a key source of remittance earnings for much of South Asia as construction activity in the Gulf continues apace.

Economic relations between the Gulf Cooperation Council (GCC) and the larger economies of Asia (primarily Japan, South Korea, China and Japan) will continue to develop and diversify. The relationship between the two blocs has traditionally been in hydrocarbons, and while we see energy links continuing and expanding, there are several other sectors where we see growth potential, most notably in construction, remittances and metals.

Eastern Shift In Oil Demand
Global - Net Oil Imports By Region (mn b/d)

Oil exports from major GCC producers to Asia have increased over the last decade, as the traditional demand markets of Europe and the US have seen a slowdown in import growth. The US has benefitted from a significant increase in oil output due to its highly successful shale developments, lessening its requirement to import lighter crude oil blends. While the Middle East generally produces slightly heavier crude slates, there are few options to increase oil exports to North America with the region being increasingly well supplied. Furthermore, if the construction of the Keystone XL pipeline moves forward, exporters such as Saudi Arabia will face greater competition for market share from Canadian producers. Similarly, European oil demand is stagnating due to the aftermath of the recession, growing energy efficiency and a decline in demand from the increasingly uncompetitive refining sector. While Europe will remain a major oil import market, oil consumption growth is expected to remain largely flat.

Growing Dependence On GCC
South Korea & Japan (RHS) - Oil Imports From GCC ('000b/d)

In response to this, GCC producers have gradually re-oriented their supply to Asian markets as oil demand growth in this region has been stronger. In particular Japan and South Korea have seen growth in GCC imports as the natural resource-poor countries remain highly import dependent. Indeed, in 2012 South Korea and Japan received 70% and 80% of their oil imports from the GCC, respectively compared with 55% and 58% in 2003. While Japan is streamlining its downstream sector and improving consumption efficiency, and is therefore unlikely to see particularly strong oil demand growth in the future, we see other export markets gain greater precedence, notably in South and East Asia.

Diminishing Demand From US
United States - Oil Imports From GCC ('000b/d)

Kuwait, the UAE and Saudi Arabia are all looking to increase oil export capacity. The demand for oil from Asian markets will therefore be key to monetising any increase in oil output from the Middle East, and we expect competition between Middle Eastern countries for Asian markets to heighten. In particular India and China will be targeted as their large refining sectors and vast populations drive demand, though other economies such as Pakistan, Thailand and Indonesia are expected to provide significant opportunities. With the Middle East holding the majority of the world's oil and Asia the majority of the world's demand growth, we expect an increasing percentage of oil produced in the Middle East to land in Asia over the coming decade.

Diversification Into Metals Exports

As part of a broad plan across the region, GCC countries are looking to diversify their economies away from oil into, among other sectors, metals. As well as diversifying revenues streams this is also to support their growing infrastructure and construction. To this end, the UAE, Qatar, Saudi Arabia and Oman have extensive plans to bolster aluminium and steel production. Indeed, after China, the UAE, Qatar and Oman saw the three largest increases in annual aluminium production in the world, of 923kt, 606kt and 268kt, respectively produced in 2012 compared with 2007.

UAE and Saudi have the most aggressive expansion plans in aluminium and steel and only part of this will be consumed domestically. Our commodities research team expect the Gulf to be one of the few growth markets for metals exports, with the obvious destination being the rapidly growing construction industries of China and India.

GCC Moving Into Metals
Global - Largest Aluminium Production Increase 2007-2012 (Excluding China) '000 tonnes

On the back of growing metals production and export capacity to Asia, Oman is developing the port of Sohar as the country's key dry bulk port. The port also boasts a bulk terminal for the handling of dry bulk minerals and is set to offer facilities for the export of dry bulk goods such as limestone and clinker. The port will, in BMI's opinion, develop into a regional dry bulk hub, playing a similar transhipment role to that of the UAE's port of Jebel Ali in the container shipping sector. This will see Sohar importing iron ore in bulk for the production of iron ore pellets and then exporting them throughout the region. The port will cater for the construction demands of the MENA region, but also those in Asia.

Bullish Construction Outlook To Bolster Remittances

An increasingly important relationship between the GCC and Asia is remittances - a connection which we expect to deepen given our bullish forecast for construction growth across the region. For Asian economies, remittances from the Gulf are an economic lifeline. Total remittances from the GCC to Asia reached around US$60bn in 2012, with Indians constituting the largest expatriate community in the region given historical ties and amounting to around 6 million people. For many South Asian economies, remittances from the GCC are a primary source of foreign currency inflows. Indeed, remittances in the Philippines, Sri Lanka and Pakistan are between three to four times larger than Net FDI inflows, and about 40% larger in India.

Economic Lifeline To Remain
Global - Remittances From GCC (2012)

These inflows to South Asian economies are only likely to increase as we remain bullish on the region's construction sector. Indeed, whilst GCC countries are pursuing workforce nationalisation plans to reduce their dependence on foreign workers, we do not envisage this having a significant impact on expat inflows to the construction sector (See: 'Saudisation, A Year On' February 3). Therefore remittance flows will continue to be bolstered by growth in construction across the region Indeed, according to our Key Projects Database, Saudi Arabia alone has over US$389bn of projects in the pipeline - from projects waiting to be awarded such as the new lines of the Mecca Metro to projects such as the planned construction of sixteen nuclear power stations which are still at very early planning stages. We also see considerable scope for growth in the energy sector, with billions of dollars worth of contracts already awarded or in the pipeline, in addition to growing religious tourism which will prompt a 60% increase in hotel capacity over the coming years. In the two largest construction markets in the GCC, Saudi Arabia and the UAE, we forecast average real growth forecast over the next decade at 6.9% and 4.8% per annum, respectively.

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