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Chemicals in the MENA Region

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July 2010

For your Queries Economic Research Department Marwan Mikhael Head of Research [email protected] Tel: +961 1 737 247 Ext: 1421 Fax: +961 1 737 414 Mahmoud Harb Senior Economist [email protected] Tel: +961 1 737 247 Ext: 1440 Fax: +961 1 737 414 Cynthia Zeilah Analyst [email protected] Tel: +961 1 737 247 Ext: 1413 Fax: +961 1 737 414 Walid Sayegh Analyst [email protected] Tel: +961 1 737 247 Ext: 1409 Fax: +961 1 737 414 Malak Hawa Analyst [email protected] Tel: +961 1 737 247 Ext: 1422 Fax: +961 1 737 414 Research Department [email protected] Tel: +961 1 737 247 +961 1 747 812 Fax: +961 1 737 414


Table of Contents For your Queries ..................................................................................................................................... 3

Table of Contents ................................................................................................................................... 4

Executive Summary ................................................................................................................................ 6

1 Introduction ...................................................................................................................................... 8

2 Global Industry Profile ...................................................................................................................... 9

3 Product‐wise Industry Overview ..................................................................................................... 11

3.1 Petrochemicals .................................................................................................................................11

3.1.1 Ethylene ...................................................................................................................................................... 14 3.1.2 Propylene .................................................................................................................................................... 15 3.1.3 Benzene ....................................................................................................................................................... 17 3.1.4 Styrene ........................................................................................................................................................ 17 3.1.5 Methanol .................................................................................................................................................... 17

3.2 Agrochemicals ..................................................................................................................................18

3.2.1 Nitrogen ...................................................................................................................................................... 21 3.2.2 Potash ......................................................................................................................................................... 22 3.2.3 Phosphate ................................................................................................................................................... 23

3.3 Plastics .............................................................................................................................................26

3.3.1 Polyethylene ................................................................................................................................................ 27 3.3.2 Polypropylene ............................................................................................................................................. 28

3.4 Paints and Coatings ..........................................................................................................................29

3.5 Tires .................................................................................................................................................30

3.6 Industrial gases ................................................................................................................................31

4 Key Industry Factors ........................................................................................................................ 33

4.1 Factors Important for the Industry’s Growth ....................................................................................33

4.2 Technology .......................................................................................................................................33

4.3 Regulations and Environmental Challenges ......................................................................................33

5 Industry Trends in the MENA region ................................................................................................ 35

5.1 Governments’ Efforts to Diversify Economies ...................................................................................35

5.2 Cheaper Feedstock: MENA’s Advantage ...........................................................................................36

5.3 Crude Oil vs. Natural gas ..................................................................................................................36

5.4 Trends in Feedstock Allocation .........................................................................................................38

5.5 Geographical Shift in Production ......................................................................................................39

5.6 Presence of International Players .....................................................................................................40

5.7 Alliance with China ...........................................................................................................................40

5.8 Impact of the Financial Crisis ............................................................................................................41

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6 Opportunities and Challenges ......................................................................................................... 42

6.1 Opportunities ...................................................................................................................................42

6.1.1 Government Policies ................................................................................................................................... 42 6.1.2 Demand Growth from Emerging Economies ............................................................................................... 42 6.1.3 Devlopment of End Products ....................................................................................................................... 42

6.2 Challenges ........................................................................................................................................42

6.2.1 How Long will the Feedstock Advantage Last? ........................................................................................... 42 6.2.2 Pollution and Government Actions ............................................................................................................. 43 6.2.3 Impact of Electricity Costs in MENA ............................................................................................................ 43 6.2.4 Lack of Skilled Personnel ............................................................................................................................. 44

7 Future Outlook ................................................................................................................................ 45

8 Appendix ......................................................................................................................................... 46

8.1 Country Briefs ..................................................................................................................................46

8.1.1 Bahrain ........................................................................................................................................................ 46 8.1.2 Egypt ........................................................................................................................................................... 47 8.1.3 Jordan ......................................................................................................................................................... 48 8.1.4 Kuwait ......................................................................................................................................................... 49 8.1.5 Lebanon ...................................................................................................................................................... 50 8.1.6 Oman .......................................................................................................................................................... 50 8.1.7 Qatar ........................................................................................................................................................... 52 8.1.8 Saudi Arabia ................................................................................................................................................ 53 8.1.9 The United Arab Emirates (UAE) ................................................................................................................. 57

8.2 MENA Chemical Company Profiles....................................................................................................59

8.2.1 Saudi Arabian Basic Industries Corporation (SABIC) ................................................................................... 59 8.2.2 Saudi International Petrochemical Company (Sipchem) ............................................................................. 60 8.2.3 Industries Qatar (IQ) ................................................................................................................................... 61 8.2.4 Boubyan Petrochemicals Company (BPC) ................................................................................................... 62 8.2.5 Saudi Arabian Fertilizer Company (SAFCO) ................................................................................................. 63 8.2.6 Arab Potash Company (APC) ....................................................................................................................... 64 8.2.7 Jordan Phosphate Mines Company (JPMC) ................................................................................................. 65 8.2.8 Saudi Industrial Investment Group (SIIG) .................................................................................................... 66 8.2.9 Egyptian Financial and Industrial Corpoartion (EFIC) ................................................................................. 67 8.2.10 Qurain Petrochemical Investment Corporation (QPIC) ............................................................................... 68

8.3 Acronyms .........................................................................................................................................69


Executive Summary The chemical industry is among the most vital industries in the modern world economy, converting raw materials like oil, natural gas, metals, and minerals into more than 70,000 different products. The industry is directly or indirectly related to multiple critical sectors such as agriculture, manufacturing, construction, and services, among others. In fact, the industry itself consumes about 26% of its own output for various types of output and end‐products. Major industrial consumers include rubber and plastic producers, textiles, apparel, petrochemicals, pulp and paper, and primary metals. The chemical industry can be broadly categorized into base, consumer, specialty, and fine chemicals groups and is worth around USD 3 trillion. The industry is mostly dominated by companies in the EU and the US. Polymers and plastics, especially polyethylene, polypropylene, polyvinyl chloride, polystyrene, and polycarbonate constitute about 80% of the global output. As a result, the dynamics of the industry are closely related to the movement of crude oil prices, in addition to the macroeconomic environment. Oil prices have more than doubled from the lows during the crisis a year ago on expectations of a slow but definite recovery. Accordingly, petrochemical prices are on the upswing, thereby raising hopes of better times ahead for the larger chemical industry. By the end of January 2010, the benchmark Platts Global Petrochemical Index, which tracks the cost of major petrochemicals such as ethylene, propylene, and benzene, rose to about USD 1,200 per ton, the highest since October 2008 and up almost 150% since the low in December 2008. These commodities feed into plastics and synthetic textiles and, in turn, into a variety of common consumer goods. However, some industry analysts are choosing to temper the enthusiasm associated with the price run with skepticism about the ensuing inflation. The cost of naphtha—the basic building block for the petrochemical industry—was up to USD 723 per ton, up almost 223% from a 6‐year low of USD 224 in late 2008 as per the Northwest Europe Prices. According to the International Energy Agency (IEA), naphtha consumption rose 1 mn barrels per day during 2009 led by China, which saw demand rise nearly 75% YoY in late 2009. The capacity utilization of the broader chemical industry is back to an 18‐month high of 76%, up from the low of 68.1% recorded in January 2009. Since then, the prices of important intermediates like polyvinyl chloride, benzene, ethylene, and propylene have spiked to multi‐month highs compared to the levels in 2008. In fact, the spread between naphtha and ethylene prices is the highest since 2007, according to ICIS.com. The chemical industry consumes large amounts of energy, non‐renewable feedstock, and water during production. The industry is notorious for spewing large quantities of the most dangerous kinds of pollutants into the environment, implying serious health hazards to end‐users and even non‐users. The high emissions of greenhouse gases such as methane, nitrous oxide, and carbon dioxide continue to aggravate the issue of global warming. In response, however, an increasing number of end‐use industries are turning toward bio‐plastics as a corporate social responsibility initiative. One of the world’s largest cola brands recently kicked‐off a marketing campaign in select countries introducing a PET bottle that is made from 30% biodegradable material. In another case, a top cell phone manufacturer introduced a handset partly made of biodegradable plastics. The drive to use biodegradable shopping bags, hybrid cars, and bio‐plastics is picking pace and is likely to gather further momentum. Accordingly, chemical manufacturers are responding with investments into technology upgrades and innovation to reduce the impact on the environment. Between 2005 and 2009, the market for global biodegradable polymers doubled in size and is forecast to grow further, according to a report by SRI Consulting, which also projects 13% annual growth over 2009‐14. Double‐digit annual growth is likely in Europe, North America, and Asia over the next several years. One of the biggest questions before the chemical industry is the concern over the addition of significant production capacities in the Middle East and Asia region. Given the strategic advantage of access to cheaper feedstock and energy, the MENA region’s industry has performed well over the years. The net profit of SABIC, the world’s top chemical company by market value, soared during 4Q09 on the back of higher prices and sales volumes across product categories. According to the management, the company’s outlook for 2010 looks promising as well, with new production facilities coming online, in tandem with the global economic recovery. Qatar, the largest producer of low‐density polyethylene in the Middle East, is looking to raise petrochemical production to 19 mn tons per annum by 2012. With such massive capacity expansion plans in the pipeline, the MENA region is expected to play an increasingly important role in the global petrochemical industry. The region is estimated to increase its ethylene capacity at a CAGR of 17% and propylene capacity at a CAGR of 26% as against the world’s average CAGR of 3.3% and 5.1%, respectively until 2012. The success of the region’s chemical industry is based on the cost advantage and robust demand growth, which has been the prime reason behind the shift in the industry’s epicenter from the west. Emerging markets like China and India are expected to be Asia’s largest

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consumers and re‐exporters of a number of finished products. The chemical industry in the MENA region enjoys the backing from governments and access to abundant and cheaper feedstock. The GCC region is estimated to possess nearly 40% of the world’s proven oil reserves and 23% of total proven gas reserves, as a result of which the region will remain a key supplier for several years to come. The eastward shift in demand is yet another critical factor that has favored the region, given its proximity to emerging markets in Asia. Such fundamentals are not likely to change soon and despite short‐term issues amid the gradually recovering economic situation, the industry remains upbeat and poised for strong growth in the longer run.


1 Introduction

For over a century, the chemical industry has played a central role in the economic and industrial development of most developed countries around the world. According to the American Chemistry Council (ACC), the chemical industry accounts for 10% of total U.S. merchandise exports, providing direct employment to 850,000 people and accounting for 11% of the country’s patents. The sector is unique compared to other sectors in multiple ways. Unlike many other sectors where small‐ and medium‐sized companies play a significant role, the large‐scale production of basic chemicals is concentrated with large companies. Furthermore, given the extensive vertical integration, the broader industry itself consumes most basic chemicals and some intermediate products. Another unique element about the industry is related to the various by‐products that are produced during the manufacturing process, which in turn find use in multiple applications. The chemical industry can be classified in several ways. Bloomberg includes the industry under the “Material” category and classifies it as Commodity Chemicals, Diversified Chemicals, Agricultural & Fertilizer Chemicals, Industrial Gases, and Specialty Chemicals. On the other hand, the Standard Industrial Classification (SIC) categorizes the industry into Chemical & Fertilizer, Mineral & Mining, Chemicals & Allied Products, Chemicals & Chemical Preparation, Gum and Wood Chemicals, Industrial Inorganic Chemicals, Industrial Organic Chemicals, Medical Chemicals & Botanical Products, and Pesticides & Agricultural Chemicals. The North American Industry Classification System (NAICS) has even more categories than the SIC. While these classifications are intended to facilitate better understanding of the industry, they often lead to issues of non‐standard nomenclature. Therefore, for the purpose of this report, we have broadly classified the chemical industry as Petrochemicals, Agrochemicals, and Other Chemicals, based on end products and the business focus of major players in the MENA region. Such classification results from the fact that basic petrochemicals and fertilizers account for the major chunk of the industry in the MENA region. The Other chemicals category includes Plastics, Paints & Coatings, Tires, and Industrial Gases. We have not covered the pharmaceutical sector, since the modern advances in biotechnology have created a clear segregation between the pharmaceutical and chemical sectors.

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2 Global Industry Profile

The global chemical industry is fairly mature with predictable supply and demand cycles. The demand for ethylene ‐ a key input for most chemicals ‐ has grown annually at an average of 1.5 times the world’s GDP growth, according to Morgan Stanley. The industry is cyclical in nature, as is the case with most capital‐intensive industries, which have long project lead periods and output strongly related to economic factors. The industry’s dynamics are strongly correlated to the economics of oil, along with climatic and environmental factors. The industry peaks when production is comparable with demand, resulting in high utilization rates and operating margins. As expected, the troughs are characterized by reduced demand, overcapacity, and increased costs. According to the European Chemical Industry Council (CEFIC) Chemdata International, worldwide chemical sales (excluding pharmaceuticals) stood at USD 2,871 bn during 2008, having grown at a CAGR of 6.78% since 1991. During the period, Europe, North America, and Japan lost market shares to China and other emerging economies in Asia, as reflected also in the growth of production across these geographies. The MENA regions’ share lies between 1‐2% of the total sales with Saudi Arabia accounting for 0.69% in 2008; Saudi’s contribution was 0.45% in 1991.

Between 1997 and 2007, Asia pacific, Latin America, North America, and EU registered average annual production growth rates of 5.7%, 3.2%, 1.4%, and 1.3%, respectively. In the more recent 5‐year period from 2002 to 2007, the Asia pacific region clearly surpassed the other regions in terms of production growth, helped by inspiring economic growth figures.

‐5%

0%

5%

10%

15%

20%

25%

91‐92 93‐94 95‐96 97‐98 99‐00 01‐02 03‐04 05‐06 07‐08

Sales Growth of Chemical Industry

Source: CEFIC Chemdata International, Blominvest

Europe33%

North America21%

China17%

Japan7%

Other Asian Countries

14%

Others8%

Chemical Sales in 2008(USD 2871 bn)

Europe39%

North America28%

China3%

Japan14%

Other Asian

Countries9%

Others7%

Chemical Sales in 1991(USD 941 bn)

Source: CEFIC Chemdata International, Blominvest Source: CEFIC Chemdata International, Blominvest

100

125

150

2002 2003 2004 2005 2006 2007

Prod

uction

Index

(Base Year 200

2)

Production Growth Across Regions

EU North America Asia Pacific Latin America

Source: CEFIC Chemdata International, Blominvest


As percentage of sales, the average capital expenditure in the Asia Pacific, countries under the North American Free Trade Agreement (NAFTA), and the EU stood at 9.5%, 4.9%, and 4.6%, respectively over 1997‐2007. These trends clearly indicate that the industry’s epicenter has been gradually, but definitely, shifting toward Asia. The global chemical industry is fairly fragmented, with the top 10 companies accounting for less than 12% of industry sales, while the top 25 companies make up less than 18% of the total. Moreover, the revenue percentage of top companies has increased only marginally in recent years, primarily because of consolidation. However, top chemical companies command more influence than what is apparent in the market shares, given their numerous partnerships as technology leaders.

0%

5%

10%

15%

20%

25%Ch

ina

Russia

Ukraine

Argentina

Brazil

Israel

Malaysia

Romania

Czech …

Mexico

Bulgaria

Singapore

Saud

i

Average

growth(%

)

Sales Growth of Chemicals(2002‐2007)

3

5

7

9

11

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

% of sales

Capital Spending in the industry (1997‐2007)

Asia Pacific NAFTA EU

Note: Saudi ranks Source: CEFIC Chemdata International, Blominvest Source: CEFIC Chemdata International, Blominvest 37th among the list of world sales producers.

15 35 55 75 95

SumitomoLinde

Israel CorpAkzo Nobel

DuPontSABIC

MitsubishiDow Chemical

BayerBASF

Sales (USD'bn)

Top 10 Chemical Companies by Sales (2009)

Source: Bloomberg, Blominvest

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3 Product‐wise Industry Overview

3.1 Petrochemicals Petrochemicals are broadly classified as olefins, aromatics, and synthesis gas, which are further processed to generate various end products. The basic primary inputs for petrochemicals are crude oil and natural gas. However, when naphtha is used as the main feedstock, the end product range is more extensive compared to that in the case of natural gas. On the

other hand, natural gas‐based production involves lower costs compared to naphtha‐based production. Ethylene, propylene, and butadiene are the major olefins. Ethylene and Propylene can be derived from both crude oil and natural gas. Aromatics are unsaturated hydrocarbon compounds with a chain structure and can be produced either as by‐products from olefin plants and refining units, or most commonly through catalytic reforming. Benzene is the most basic aromatic compound, while toluene and xylene are derivatives of benzene with different molecular structures. Benzene is used to produce intermediates such as ethyl benzene (for styrene used in insulation, cups), cumene (for phenol used in coatings and adhesives), and cyclohexane (for nylon). Toluene is used to produce polyurethane that is widely used in bedding and insulation. Competition among the players is restricted partly by regulations and, to some extent, by huge capital requirements for new projects. Lack of substitutes for end products such as plastics, paints, and synthetic rubber translates into reduced price elasticity for petrochemical products. Additionally, buyers tend to be diverse and fragmented across sectors and geographies. The possibility of new players entering the market is restricted by massive capital requirements, economies of scale, the long learning curve for achieving safety and efficiency of the production process, and distribution networks, in addition to geopolitical and regulatory hurdles. The number of oil and gas suppliers around the world is rather limited, as a result of which profit margins of petrochemical producers significantly depend on price negotiations. Historically, the prices of petrochemical products have exhibited a direct correlation to GDP growth. The global financial crisis and the fall in oil prices hit the petrochemical industry hard, with prices tumbling sharply during the second half of 2008. However, key petrochemical prices have bounced back recently following the recovery in oil prices ‐ a key driver for prices of naphtha and other petrochemicals. The higher volatility in oil prices vis‐à‐vis gas prices results in higher variability in input costs for naphtha‐based producers, as a result of which producers vary the prices of end products. In line with this, the run‐up in crude oil prices during 1H08 resulted in higher margins for gas‐based producers in the MENA region, as the cost of gas was far lesser than that of naphtha. For instance, SABIC, a natural gas‐based producer, saw its gross margin decline from 35.7% in 3Q08 to 14.5% in 4Q08 before bouncing back to 18.3% in 1Q09 and 26.2% in 2Q09, following the movements in oil and petrochemical prices. On the other hand, Indian petrochemical major Reliance Industries Limited, which uses gas and naphtha, had relatively stable margins as petrochemical prices are set according to oil prices.

Basic Petrochemicals Product Chain

Source: KMEFIC Research, Blominvest

Value Chain of Basic Petrochemicals Intermediates Applications

Ethylene

Low Density Polyethylene Bottles

High Density Polyethylene

Ethylene Dichloride Polyvinyl Chloride Pipes

Ethylene Oxide Ethylene Glycol Automotive Antifreeze

Ethyl Benzene Styrene Tires, Footwear

Propylene

Propylene Oxide Polyesters, Polyurethane Fibers, Foam

Polypropylene Resins Pipes

Isopropyl Alcohol Acetone Plastics, Paints

Acrylonitrile Poly Acrylonitrile Coatings, Cosmetics

Butadiene Polybutadiene Rubber Tires, Golf Balls

Source: NBK, Blominvest


"How could it be that an industry that fostered so much innovation, produced too many desirable consumer products, and was characterized by such remarkable growth over such a short period of time turned out to be so unprofitable for so many of its participants?"

‐ Peter H. Spitz Petrochemicals: The Rise of an Industry

Source: Sluyterman (2004)

Naphtha cracking is the primary process used for the production of ethylene and propylene. As a result, prices of these basic petrochemicals follow those of naphtha, which in turn is obtained by cracking oil. Consequently, natural gas prices have a lesser impact on these olefins, 53% of which are produced using naphtha. Prices of derived petrochemicals such as styrene, benzene, and toluene are based on the prices of basic petrochemicals derived from crude oil and natural gas. On the other hand, methanol is mainly derived from methane by cracking gas, as a result of which its prices are mostly based on the movement of natural gas prices in international markets.

Emergence of the Petrochemical Industry in the MENA region For years, the petrochemical sector has been witnessing occasional overcapacity, increasing participation of developing countries, and issues regarding pricing policies and government regulations. Because of the cyclical nature of the industry, the problem of overcapacity still persists and is likely to remain so at least until 2012, according to estimates by Chemical Markets Association Inc. (CMAI). The US is the largest petrochemical producer in the world, followed by Western Europe and Japan. Before 1980, these regions dominated the industry, accounting for over 80% of the world’s production. However, their market share fell to just about half by 2005, as oil rich countries in the MENA region emerged stronger on the scene and started playing a key role in transforming the industry. The MENA region replaced the US as a dominant exporter of chemical products, while Europe turned to a net importer.

50100150200250300350400450

Jan‐04

Jul‐04

Jan‐05

Jul‐05

Jan‐06

Jul‐06

Jan‐07

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Price Index

Price Correlations of Oil, Naphtha and Gas

Oil Naphtha NYMEX Gas

Note: Prices indexed to Jan’04 prices Source: Bloomberg, Blominvest

0500100015002000250030003500

Jan‐04

Jul‐04

Jan‐05

Jul‐05

Jan‐06

Jul‐06

Jan‐07

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Jan‐10

Price (USD

/ton)

Price Correlations of Basic Petrochemicals

Ethylene Propylene Butadiene

0200400600800

10001200140016001800

Jan‐04

Jul‐04

Jan‐05

Jul‐05

Jan‐06

Jul‐06

Jan‐07

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Price (USD

/ton)

Price Correlations of Other Petrochemicals

Styrene Benzene Toulene Methanol

Source: Bloomberg, Blominvest Source: Bloomberg, Blominvest

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The prominence of the MENA region in petrochemical exports and that of China in consumption will continue to shift the epicenter of the industry toward the east. In the near future, the industry expects massive capacity additions in the Middle East and emerging economies of Asia. The MENA region is investing heavily to increase ethylene capacity in order to take advantage of low feedstock costs, diversify the regional economies, and create more jobs. However, low utilization rates and profit margins are likely to prevail at least until 2012. The region is also investing into propylene production in order to use heavier cracker feedstock. Most of the capacity additions are expected to be absorbed by the increased demand from China. However, uncertainty remains over the industry’s excess capacity and the pricing pressure on products. Saudi Arabia accounted for 73.5% of the overall 66.5 mn tons capacity in the MENA region as of 2008. As major capacity additions continue, we expect the country to play a prominent role in the region. According to the Gulf Petrochemical and Chemical Association (GPCA), Kuwait has managed to develop a solid petrochemical base on the back of abundant oil reserves and government support. Qatar is also adding significantly to its petrochemical assets in order to drive further value from its massive gas reserves. Oman has been adding capacity for methanol and polypropylene with multiple units currently under construction. The UAE is in the process of increasing its production capacity for polyethylene and polypropylene with the setting up of an ethane cracker and a naphtha cracking complex. The profitability of the MENA‐based chemical producers started declining in early 2005 due to increased pricing pressure from Chinese producers. With the planned capacity additions in 2007 and 2008 coinciding with the financial crisis, the worldwide industry went through a phase of tough challenges. However, cheaper feedstock and government support provided opportunities for MENA producers to sustain margins and add capacities through 2012. Despite reduced profitability during 2008, MENA producers performed relatively better than their international counterparts. However, the reduced demand led to overcapacity in 2008, resulting in low capacity utilization and suppressed margins for producers. The global utilization rates of petrochemical producers are expected to remain below 90% at least until 2012. As a result, capacity reduction and closure of inefficient facilities are likely to occur in developed countries, as producers look to cut costs in order to remain competitive.

Saudi Arabia73.5%

Qatar10.4%

Kuwait5.4%

Egypt4.7%

Oman3.2%

UAE 2.1%

Bahrain0.8%

Country‐wise MENA capacity in 2008(66.5mn tons)

Source: Global Research, Blominvest

0%

30%

60%

90%Mar‐05

Sep‐05

Mar‐06

Sep‐06

Mar‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Gross Margin % of MENA Chemical Companies

SABIC Sipchem Industries Qatar SAFCO Arab Potash

Note: 2010‐12 data is based on Source: Company Reports, Bloomberg, Blominvest Bloomberg Earnings Consensus

81%

84%

87%

90%

93%

2007 2008 2009E 2010E 2011E 2012E

Global Utilization Rates by Product

Ethylene Polyethylene Propylene Polypropylene

Source: HSBC, Blominvest


3.1.1 Ethylene Ethylene is widely used for producing polyethylene, ethylene oxide, ethylene dichloride, and ethyl benzene. About 60% of the world’s demand for ethylene is driven by polyethylene. Between 1990 and 2008, demand for ethylene grew at a rate of 1.5 times the world GDP growth rate during the period. The current ethylene demand is expected to grow at a CAGR of 2.7% until 2013, down from 4‐5% seen over the last two decades. Production of ethylene on the back of significant capacity additions is set to beat demand at least until 2013.

The largest addition in capacity will come from China, which is expected to add 8.7 mn tons by 2013. Saudi Arabia is likely to follow with an additional 7.6 mn tons during this period. From 1995 to 2008, ethylene capacity increased by around 22 mn tons in Asia Pacific and by around 13 mn tons in the Middle East. Going forward, Asia will add 12.7 mn tons by 2013 with 5.8 mn tons (4.3% of global supply) getting added during 2010. Saudi Arabia, other MENA countries (Kuwait, Qatar, and the UAE) and Iran are expected to add 4.4 mn tons (3.3% of global supply) during the year. The MENA region is expected to increase its share of global ethylene capacity from 11.5% in 2007 to 21.2% by 2013, with more than 40 large ethylene crackers already in operation or coming online in the near future. In line with the share of ethylene capacity additions, most of the investments will continue to be in the MENA region, China, and the Far East. The market share of Asia is expected to increase from 30% in 2008 to 34% in 2013, even as the market shares of North America and Europe are set to decline over this period. SABIC plays a prominent role in the world’s ethylene market, accounting for 8% of total production as of 2008. Based on a crude oil price of USD 103 per barrel, CMAI estimates production costs in the Middle East to stand around USD 300 per ton. On the other hand, production costs in other countries range from USD 870 per ton in Southeast Asia to around USD 1,200 per ton in Europe. The global ethylene capacity utilization is expected to remain below 90% until 2013 and is likely to lead to closure of inefficient facilities in order to ease pricing pressure and facilitate long‐term growth. HSBC estimates that for every USD 10 per barrel change in crude oil prices, the marginal cost of ethylene production changes by USD 120 per ton. NBAD estimates cash costs of USD 200‐250 per ton for Middle East producers. The cash costs of ethylene production for companies that procure

Polyethylene59%

Ethylene Oxide14%

Ethylene dichloride

12%

Ethylbenzene

7%

Others8%

World Ethylene Demand by End‐use (2008)

0

30

60

90

120

150

2007 2008 2009E 2010E 2011E 2012E

Mn Tons

World Ethylene Capacity and Demand

Demand Capacity

Source: Morgan Stanley, Blominvest Source: J.P. Morgan, Blominvest

Asia30%

Middle East12%

North America28%

Europe24%

Others6%

Market Share of Ethylene capacity (2008)

Asia34%

Middle East21%

North America20%

Europe19%

Others6%

Market Share of Ethylene capacity (2013e)

Source: Morgan Stanley, Blominvest Source: Morgan Stanley, Blominvest

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July 2010

crude oil at market prices are estimated to be USD 450‐460, USD 600‐625, and >USD 900 per ton for crude oil prices of USD 20‐30, USD 50, and >USD 90 per barrel, respectively. Ethylene is traded in limited quantities as it is highly explosive and requires pressurization and refrigeration during transportation. In fact, most of the ethylene is transported in the form of derivatives. Upcoming ethylene capacity expansion in the Middle East region will export ethylene as polyethylene and monoethylene glycol (MEG). The latter is possibly the simplest way of exporting ethylene, as a result of which it is an important product for the MENA region’s export‐centric petrochemical industry. New plant startups in the region will increase the region’s MEG production capacity to three times by 2017, according to GPCA. The MENA region exports more than 75% of its ethylene production, with Asia being a key destination. However going forward, Asian markets are unlikely to absorb the capacity additions in the MENA region, given the additions in China. Therefore, the MENA region will look to diversify its export markets in the upcoming years. On the other hand, high cost producers in developed countries will likely witness a sharp decline in profit margins in an oversupplied market. The situation is likely to result in plant closures across the US and Europe, owing to higher production costs. We expect exports from the MENA region to fill some of this gap created by the decline in production. Despite factoring in CMAI’s estimates for plant closures, worldwide operating rates are unlikely to recover to above 85% until 2012, implying that the pricing pressure on ethylene producers will continue.

3.1.2 Propylene

Propylene is widely used for producing polypropylene, which accounts for 66% of the world’s demand by end use. Propylene is a highly competitive commodity business, characterized by price volatility and driven by energy prices. Historically, the demand

0

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10500

2008 2009E 2010E 2011E 2012E 2013ETons

Ethylene Capacity Additions (2008 ‐ 2013E)

Iran Saudi Arabia Other MENA countries China Other Asia

Source: Morgan Stanley, Blominvest

SABIC 8%

Dow7% Lyondell

Basell5% Exxon

Mobil5%

Shell3%

Chevron 3%

Other69%

Global Ethylene Market Share (2008)


Poly‐propylene

66%

Acrylonitrile8%

Propylene Oxide8%

Oxo Alcohols7%

Others11%

World Propylene Demand by End‐use (2008)

0

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120

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Mn Tons

World Propylene Capacity and Demand

Demand Capacity

Source: Morgan Stanley, Blominvest Source: HSBC, Blominvest


for propylene has grown at 1.1‐1.5 times global GDP growth rate. Going forward, utilization rates for propylene plants are expected to hover at 80.0‐85.9% between 2010 and 2012, implying a difficult environment for high cost producers in the US and Europe. Worldwide propylene demand is expected to grow at a CAGR of 4.2% until 2013 in line with recent growth rate of 4%. While growth rate for propylene demand has been higher than that of ethylene by 50‐100 bps, the differential has reduced recently due to higher price increases in case of the former. Analysts expect similar growth rates in demand for ethylene and propylene in the long run. The global propylene supply is expected to grow at a CAGR of 3.8% until 2013 ‐

approximately equal to the expected CAGR of 3.9% for ethylene ‐ with 5.9% growth during 2009 and 4.8% during 2010. The largest growth is likely to come from Asia with the addition of 11.2mn tons by 2013 including 3.1mn tons in 2009 and 3.8mn tons in 2010. The Middle East’s share in propylene capacity is expected to increase to 8.5% by the end of 2010 from 1.6% in 2000. As a result, the market shares of the Middle East region and Asia, in general, will increase, while those of North America and Europe will decline owing to cost pressures. As is the case with ethylene, SABIC plays an important role in the propylene market, as one of the leading producers by market share in 2008. According to HSBC estimates, propylene producers in the MENA region enjoy a cost advantage of USD 250 per ton over their U.S. counterparts. The main input cost, propane, is mostly locked through long‐term supply contracts. In the Middle East, while ethane trades at a direct multiple of natural gas prices, propane and benzene prices are calculated using a more complex formula based on natural gas prices. As long as the pricing mechanism remains unchanged, propylene and its derivatives will generate healthy margins for producers despite a cyclical trough. Propylene operating rates are dictated by utilization rates of steam crackers and oil refiners, which account for 63% and 30%, respectively of the total global production. According to HSBC estimates, naphtha feedstock produces 0.46 tons of propylene

Asia37%

Middle East5%

North America27%

Europe25%

Others6%

Market Share of Propylene capacity (2008)

Asia41%

Middle East10%

North America21%

Europe21%

Others7%

Market Share of Propylene capacity (2013e)


Enterprise5%

Lyondell Basell4%

Exxon Mobil4%

Dow4%

Shell4%

SABIC 3%

Others76%

Global Propylene Market Share (2008)


Steam Crackers63%

FCC/Splitters30%

Others7%

World Propylene Production by Source (2008)


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Propylene Capacity Additions (2008 ‐ 2013E)

Other Asia China Other MENA countries Saudi Arabia


17

July 2010

(as by‐product) for every ton of ethylene produced at normal furnace temperatures. Propylene from Fluidized Catalytic Cracking (FCC) is produced as a by‐product of gasoline and distillates. However, by‐product yields are generally lower in the case of ethylene production using ethane. Therefore, with petrochemical production being increasingly based on gas, the industry faces concerns of propylene shortage. The industry is on track to address this issue by increasing on‐purpose (as opposed to by‐product) production of propylene to about 15% of the total by 2013. Like ethylene, most of the propylene is transported in the form of derivatives because of problems with logistics and high costs. Asia will continue to be a key export market for the MENA region. On the other hand, the weakening position of U.S. producers due to cost reasons will force capacity rationalizations, and Western Europe will likely become a net importer due to low utilization rates at steam crackers.

3.1.3 Benzene China was the main driver for the worldwide benzene demand of 39.9mn tons as of 2007, according to CMAI. CMAI and consultancy firm Purvin & Gertz project the worldwide demand for benzene to reach 57mn tons by 2020. With 1.4mn tons of currently installed capacity, Saudi Arabia accounts for around 3.5% of total benzene production. HSBC estimates the kingdom’s capacity to expand by over 40% to a total of 2mn tons by 2012. Kuwait, Oman, and Qatar – countries that do not currently produce benzene ‐ are set to add 884,000 tons of annual capacity by 2012 in order to meet the local demand. Most of the capacity additions through 2011 are expected to come from Northeast Asia followed by the Middle East. According to CMAI, Middle East production costs stand at around USD 800 per ton based on a crude oil price of USD 103 per barrel. On the other hand, production costs of benzene in other countries range from USD 850 per ton in North America to around USD 1,000 per ton in Northeast Asia. Companies in the MENA region that use benzene as feedstock have a major competitive advantage over their international peers because of lower prices. HSBC estimates that benzene prices in the Middle East have been trading at a discount of 20‐25% over the last eight years compared to those in Asia.

3.1.4 Styrene According to CMAI, the global styrene market has excess capacity as demand is yet to recover from the severe setbacks on account of the financial crisis. Going forward, the growth in demand for styrene is expected to mainly come from China. However, the longer term demand prospects are weak because of changing consumer preferences and the loss of demand to packaging substitutes like non‐plastics and polypropylene/PET. As a result, styrene producers will likely undergo restructuring and consolidation in order to reduce costs and avoid price wars to sustain long‐term growth.

3.1.5 Methanol Unlike other petrochemicals, the production of methanol is relatively concentrated and is dominated by a few players. SABIC dominates the world’s methanol market, accounting for 10% of total production as of 2008. According to GPCA, the combined capacity of the top 10 producers accounted for almost 40% of the global production in 2008. Large scale methanol plants are located in the Middle East, Trinidad, and Russia – geographies with substantial reserves of natural gas. However, the MENA region is likely to soon surpass South America as the largest global supplier of methanol, with six projects coming online over the next four years. Most of the methanol is exported due to low domestic demand – a trend that is likely to continue. Nonetheless, local demand will increase eventually, given the diversification plans of the region’s governments through projects such as Sipchem’s acetyls complex.

Ineos7%

Lyondell Basell6%

BASF5%

Dow5%

SABIC 4%

Chevron 4%

Others69%

Global Styrene Market Share (2008)


SABIC 10%

Methanex9% Siberian

3%

Atlas3%

Petronas 3%

Zagros3%

Others69%

Global Methanol Market Share (2008)



3.2 Agrochemicals Fertilizers are used to supply essential nutrients to food crops and help improve the yield and fertility of soil in order to increase food production. Fertilizers are essential for optimum photosynthesis, effective use of land and water, and protection against plant disease. Almost all fertilizers are based on a combination of nitrogen, phosphate, and potash (N, P, and K), required for plant development, drought resistance, and plant and root growth, respectively. A significant portion of these components are depleted from the soil during crop harvesting and generally cannot be replaced naturally due to back‐to‐back planting cycles.

According to the International Fertilizer Industry Association (IFA), wheat is the world’s most vital cereal crop in terms of cultivated area and the amount of grain produced. During 2007‐08, wheat accounted for 25.5 mn tons (17.4 mn tons of N, 1.7 mn tons of P, and 6.4 mn tons of K), or 15.1% of total fertilizer consumption. Rice ranks second in terms of harvested area, but provides more calories per unit area than any other cereal food grain. During 2007‐08, rice accounted for 24.3 mn tons (15.7 mn tons of N, 3.8 mn tons of P, and 4.8 mn tons of K), or 14.4% of total fertilizer consumption. In the case of maize, about 50% of

N and P each and 80% of K uptake happens before the crop reaches the reproductive stage. During 2007‐08, maize accounted for 25.9 mn tons (16.9mn tons of N, 4.1mn tons of P, and 4.9mn tons of K), or 15.3% of total fertilizer consumption. Among oilseeds, soybean accounts for most of the fertilizer consumption. Soybean is not irrigated in general and is susceptible to damage during flowering and grain filling. Being a legume, soybean requires lesser amounts of N depending on how well the crop is nodulated. However, it requires P throughout the growing season and large amounts of K during the rapid vegetable growth stage.

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Oil Seeds Fruits & Veg

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Fertilizer Consumption by Crop (2007‐08)

Nitrogen Potash Phosphate

Source: IFA, Blominvest

010203040506070

China India USA EU‐27 Others

Mn Tons

Per Capita Fertilizer Consumption by Country (2007‐08)


Source: World Bank, U.S. Census Bureau, European Commission, IFA, Blominvest

19

July 2010

The consumption of fertilizers remains high in South Asia and parts of Africa where agriculture forms the economic backbone. During 2007‐08, China, India, and USA accounted for 29.8%, 13.6%, and 12%, respectively, of the world’s total fertilizer consumption. Furthermore, China accounted for 31.8% of nitrogen, 30.5% of potash, and 21.5% of phosphate consumption. India accounted for 14.6% of nitrogen, 14.6% of potash, and 9.2% of phosphate consumption. These countries rely on imports to fulfill their high demand for fertilizers. According to IFA, China, India, and other South and East Asian countries account for more than two‐third of the fertilizer usage worldwide. India and other developing countries will likely witness higher growth rates in fertilizer consumption, since their per capita fertilizer consumption rates are still among the lowest in the world. Brazil and other South American countries constitute another major consumer group. Factors driving higher agriculture commodities and agrochemical prices The following chart illustrates the interplay between supply and demand factors that have driven global food commodity prices over the years. Main factors are:

Population: The United Nations estimates the world population to reach 9.1 bn by 2050 with the addition of 30‐80 mn people every year. The increased demand will necessitate higher food production, more intensive cultivation, and aggressive application of yield‐enhancing techniques. As a result, the fertilizer industry is set to expand significantly in the future in order to meet the increased food requirements of the rapidly growing population. Scarcity of arable land: The decline in arable land due to population growth and the difficulty to expand such land without causing environmental damage have led to the need to increase yield of existing land. According to International Plant Nutrition Institute (IPNI), based on a research paper analyzing the data representing 362 seasons of crop production, yield is reduced by 30‐50% in the absence of chemical fertilizers. The efficacy of fertilizers in increasing crop yields depends on a combination of

China29.8%

India13.6%USA

12.0%

EU‐2711.2%

Others33.4%

Fertilizer Consumption by countries,2007‐08(168.7 mn tons)

Source: IFA, Blominvest

Source: U.S. Department of Agriculture, Blominvest


multiple factors that include soil fertility, climatic conditions, crop rotations, and the nature of the crop itself. With limited arable land and the continued growth in population, increasing the application of fertilizers appears to be the only feasible method of boosting food supply in the foreseeable future. Alternative Energy: High energy prices in recent years motivated governments around the world to increase their investments in developing alternative fuels. Increasingly, countries are focusing on boosting the production of biofuels to reduce their dependency on traditional energy sources. This has led to increased demand for crops used for biofuels such as corn, wheat, and sugar cane, thereby increasing the prices of agricultural commodities and feedstock. In particular, demand for ethanol, a preferred biofuel, has increased rapidly in the US. Large amounts of corn have been diverted to produce ethanol, which in turn has pushed up corn prices. Consequently, the fertilizer industry would play a critical role in responding to this additional demand on account of biofuels. Demand from emerging economies: With higher per capita incomes in recent years, people in China and India are moving toward higher protein diets. Changes in dietary patterns and increased meat consumption have resulted in the need for better crop yields and higher grain requirements for livestock. Government Initiatives: Governments around the world, especially China, have established various protectionist trade policies such as subsidy on fertilizers, elimination of agriculture tax, tariff rate quotas, subsidy on farm machinery, price support programs, direct payment to grain farmers, and subsidy on seeds. These initiatives favoring domestic agricultural production have encouraged farmers to increase crop yields, leading to a rapid increase in fertilizer consumption. Recent Developments Prices of most commodities including base metals, oil, and fertilizers remained strong until the first half of 2008. Despite a spike in feedstock costs, the need to increase crop yields in emerging economies led to higher demand for agrochemicals. However, as the financial crisis deepened, many investors liquidated their commodity holdings in response to the slowing global growth and demand. The decline in agrochemical prices during the financial crisis was on account of a number of factors. Plummeting oil prices indirectly suppressed the demand for biofuels, which in turn affected the demand for food grains and fertilizers. Farmers too came under pressure due to the credit squeeze and found it difficult to maintain their levels of fertilizer use. The reduction in fertilizer demand, particularly in North America, led to piling of inventory and easing of prices. Eventually, major industry players had to cut down production to cope with this situation and sustain price levels. Among the major consumers, China is likely to witness increased demand in the short‐term with the government increasing agricultural subsidies to support its farmers. India’s imports increased during 2008, as the government continued to heavily subsidize the application of fertilizers. Brazilian farmers were severely impacted by the financial crisis, as prices of main crops such as corn and soybean declined sharply during the last quarter of 2008, which is the primary fertilizer application season in the country. Since early 2009, buyers in North America have chosen to delay their purchases owing to the economic uncertainty. This resulted in a further decline in demand and the prices of fertilizers. By the end of October 2009, potash inventories at North American producers were 129% higher than the average in the last five years. However, there are no substitutes for base nutrients such as potash, which need to be replenished due to continuous leaching to ground water. As a result, the demand for potash is likely to pick up significantly over the next few quarters.

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Price Correlations of Agrochemicals

Ammonia Urea Potash Phosphate


21

July 2010

3.2.1 Nitrogen Inorganic chemicals, such as ammonia and urea, are petrochemical derivatives from natural gas and are used as raw materials for the production of fertilizers and cattle feed. Natural gas is the most widely used raw material for producing ammonia. Ammonia is produced by mixing nitrogen from air and hydrogen from hydrocarbons such as natural gas, naphtha, coal, and other heavier oil fractions. Ammonia units are very energy intensive, because of which the selection of feedstock is critical to overall production. Accordingly, natural gas‐based production ensures minimum investments and production costs, not to mention the least environmental hazards. Even though the production process using naphtha is similar to that using natural gas,

plant costs are higher because of an additional cracking step and the need for feed storage and treatment. In addition to higher energy consumption compared to a natural gas‐based plant, a heavy residual oil‐based plant requires partial oxidation for the conversion of residues. Coal requires higher investments and consumes more energy in addition to being a major emitter of greenhouse gases. Ammonia is the primary base material for all nitrogenous fertilizers because of high nitrogen content and is commonly processed into urea. Urea is the most widely traded and popular form of solid nitrogen fertilizer, especially in the emerging economies. According to SRI Consulting, Asia ‐ stretching from Middle East to Southeast Asia including Japan ‐ accounted for 72% of the world’s total urea consumption during 2006. Di‐ammonium phosphate, produced from urea, is a popular nitrogen fertilizer used for wheat, barley, and vegetables.

Production Flow Chart of Nitrogen

Source: SAFCO, Blominvest

China 32.4%

India8.4%

Russia8.0%

United States6.7%

Trinidad &Tobago3.9%

Others40.5%

World Ammonia Production in 2007(131 mn Tons)

China 28.6%

India9.1%

Russia8.3%

United States7.7%

Indonesia3.9%

Others42.4%

World Ammonia Production in 2003(110 mn Tons)

Source: U.S. Geological Survey, Blominvest Source: U.S. Geological Survey, Blominvest


China and India lead the production of ammonia, mainly due to the high local demand. While nitrogen fertilizers can be produced in virtually any country with the relevant feedstock supply, economies of scale, capital investment, and regulations restrict the production to a few large companies. Because of the volatile nature of raw material prices, several companies in the sector adopt hedging strategies and enter into long‐term contracts with suppliers. On the contrary, the consumer market for this sector is relatively fragmented geographically. Despite such factors that are favorable for nitrogen producers, the sector remains highly competitive due to seasonality of demand, high exit barriers, and a possible substitution by genetically modified crops that have better yield and resilience.

3.2.2 Potash Potash is an essential fertilizer that is used to fight crop disease and increase yield. Potassium Chloride is the most vital base material for potash because of its solubility and high potassium content. According to the International Center for Soil Fertility & Agricultural Development (IFDC), plants require potassium for maintaining solute movement, increasing resistance to stresses and disease, and for improving seed maturation and fruit quality. Agriculture is the main driver for potash demand, accounting for 90% of the world’s total production. With only 12 countries producing potash, supply is limited by the commodity’s scarcity and expensive mining. The percentage of production traded across country borders in the world for potash is 80%, compared to 13% and 45% for nitrogen and phosphate, respectively. Numbers indicate that most of these countries rely on imports to meet their potash requirements. During 2008, the top nine companies accounted for 89% of the world’s total production. Accordingly, the Herfindahl‐Hirschman Index (HHI) 1 calculation based on the production shares of these companies was 1042, making the sector moderately concentrated. This dominance allows producers to adjust their production capacity swiftly according to demand. Additionally, this dominance is likely to persist at least for a few years, as the entry of new players is limited. This is because it takes several years to bring a new conventional mine to production, and a few more years to breakeven the high capital investments. The total potash production was the highest ever during 2007 because of the continued strong demand and robust economic growth across the world. According to Arab Potash Co. (APC), global potash production dropped by about 4% to 51.9 mn tons during 2008 from 53.9 mn tons in 2007. The decline came during the second half of 2008 as a direct result of the sluggishness in the world economy and the decline in commodity prices.

1 Herfindahl‐Hirschman Index (HHI) is a measure to indicate the level of competition among the firms in relation to its corresponding industry. A sector with an index less than 1,000 is regarded as very competitive, between 1,000 and 1,800 is moderately concentrated and above 1,800 is highly concentrated.

Potash corp16.6%

Belaruskali15.4%

Mosaic 12.9%

ICL9.6%

Silvinit9.6%

Uralkali9.2%

Others26.6%

Potash Producing Companies in 2008 (51.9 mn Tons)

Source: APC, Blominvest

Canada35%

Russia19%

Belarus16%

Israel10%

Germany8%

Other12%

Potash Producing Countries in 2007(53.8 mn Tons)

Source: Potash One Inc., APC, Blominvest

23

July 2010

On the other hand, global potash demand dropped by about 9% to 51.2 mn tons in 2008 from 56.2 mn tons in 2007. While demand fell in Asia, North America, and Europe, that from Middle East and Africa remained stable. In general, credit problems in developed economies led farmers to reduce consumption and producers to increase inventory levels. The demand in Asia dropped 14.2% to 20 mn tons during 2008 on a y‐o‐y basis. Because of the delay in price negotiations and late signing of contracts between producers and the government, China’s imports were down to 5.1 mn tons during the year from 9.1 mn tons in 2007. Meanwhile, imports to India increased 2 mn tons during 2008. Potash consumption in Brazil decreased considerably as farmers stayed away from buying more potash owing to the weakness in the prices of main crops. Potash producers responded to the lower demand during 2008 by cutting back production and delaying greenfield expansion. In early 2009, several major companies reduced production drastically to maintain price levels. As a result, while the prices of most commodities declined during the economic crisis, potash prices remained relatively stable due to reduced production that matched the corresponding decline in demand.

3.2.3 Phosphate Plants need phosphate in order to avoid infection and reduce damage during harvest. Approximately 90% of the world’s phosphate rock is used to produce fertilizers, while the remaining is used for other industrial chemicals. Phosphate is always found in combination with other compounds in the form of phosphate rock. The rock is mined and separated from sand and clay, following which it undergoes a chemical reaction with sulfuric acid and then with ammonia to produce mono‐ammonium phosphate (MAP) and di‐ammonium phosphate (DAP).

According to U.S. Geological Survey, phosphate rock was produced in 41 countries as of 2007. Worldwide production stood at 158 mn tons in 2009 by gross weight of phosphate rock and 49.8 mn tons in 2008 by phosphate content. The prominence of the US in phosphate production has been declining in the past few years, with China emerging as the leading phosphate rock producer accounting for 35% of the world’s total production.

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Global Potash Demand

Asia North America EuropeLatin America ME & Africa CIS

Source: APC, Blominvest

China34.8%

U.S.17.2%

Morocco& West Sahara15.2%

Russia5.7%

Tunisia4.4%

Jordan3.8%

Brazil3.8%

Others15.1%

World Phosphate Rock Production in 2009 (158mn Tons)

U.S.32.1%

China20.3%

Morocco & West Sahara15.5%

Russia6.2%

Tunisia4.5%

Jordan3.3%

Israel3.1%

Others15.0%

World Phosphate Rock Production in 1994 (128mn Tons)

Source: U.S. Geological Survey, Blominvest Source: U.S. Geological Survey, Blominvest


While the reserve base of phosphate rock is estimated at 47 bn tons, economically extractable reserves stand at only 16 bn tons. The world’s phosphate consumption grew at a CAGR of 3.1% between 2003 and 2007. A similar growth rate in the future will translate into all the extractable reserves getting exhausted by 2053, assuming no new reserves come online. Although China accounts for about 23% of the estimated extractable reserves, most of the production is consumed domestically. With 36% of the estimated extractable phosphate reserves, we expect Morocco to play a prominent role in the global market in the longer run.

Regional Agrochemical Industry The MENA region has been one of the largest food importing regions in the world because of low agriculture productivity and rapidly increasing population. Aridity, difficult terrain, and harsh climatic conditions in the region make it one of the least productive agricultural regions in the world. According to a research paper published by the American University of Beirut, the Middle East receives only about 1% of the world’s total precipitation and 75‐85% of the water in the region is used in agriculture. Some countries such as Kuwait and Bahrain depend mostly on water from other countries. The MENA region requires extensive use of fertilizers to increase crop yield in order to meet the food requirements of its population. If several fertilizers are required for a certain crop, farmers use fertigation (the application of fertilizers through irrigation) in order to reduce the effort and cost. Nitrogen is applied through fertigation because of the need for large‐volume application, high water solubility, and the possibility of leaching with drainage water. However, potash and phosphate do not usually move readily, these fertilizers are applied before planting. As of 2007, Egypt accounted for 28.8% of the total fertilizer production in the MENA region, followed by Saudi Arabia with a share of 20.3%. Nitrogen fertilizers account for about 90% of total fertilizer production in Egypt and Saudi Arabia. Potash accounts for 69.5% of Jordan’s fertilizer production, which in turn accounts for 17% of total fertilizer production in the MENA region. Only a limited number of these producers are listed, while some of them operate as affiliates of larger industrial entities such as SABIC and Qatar Industries. Despite low domestic consumption, the MENA region is among the world’s key production centers for ammonia and urea, benefiting from access to cheaper feedstock and proximity to major export markets such as India. Between 2002 and 2007, the consumption of fertilizers increased at a CAGR of 3.8%. Nonetheless, the production of fertilizers in the region grew at a CAGR of 8.8% during this period. Some of the factors that contributed to the industry’s growth in the region include the initiatives by local governments to diversify their economies, the abundance of cheaper natural gas, and the high demand for fertilizers from Asian countries, especially India.

Morocco & West Sahara35.6%

China23.1%

Jordan9.4%

South Africa9.4%

U.S.6.9%

Others15.6%

Extractable Reserves of Phosphate Rock in 2009 (16bn Tons)

Source: U.S. Geological Survey, Blominvest

Egypt28.5%

Saudi 20.1%

Jordan16.8%

Qatar13.9%

Oman9.0%

Kuwait4.3%

UAE3.1%

Bahrain2.8% Lebanon

1.5%

MENA Country‐wise Fertilizer production in 2007 (9.78mn tons)

Source: FAO, Blominvest

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Phosphate Potash Nitrogen Consumption


25

July 2010

Producers in the MENA region play an important role in the world’s agrochemical sector as large suppliers of nitrogen, potash, and phosphate. The availability of cheaper natural gas benefits the regional producers, as feedstock accounts for almost 90% of ammonia’s total production costs. It takes 35 mmbtu of gas to produce 1 ton of ammonia and 22 mmbtu of gas to produce 1 ton of urea. Morgan Stanley projects average global cash cost of urea production to increase from USD 160 per ton in 2009 to USD 227 per ton by 2012. These costs exclude freight and landing costs of USD 30‐80 per ton depending on the producer’s location and destination. The cash costs to produce urea in the Middle East are estimated to increase from USD 90 per ton to USD 130 per ton during the same period. These costs are significantly lower than those in Western Europe and the US. By 2012, the Middle East is expected to become the lowest cost producer of urea in the world, since gas consumption to produce one ton of ammonia will be 37mmbtu in Middle East and 46mmbtu in Russia, according to Morgan Stanley. In 2009, average cash cost production for urea in Russia and Middle East were estimated to be USD 88 per ton and USD 90 per ton. The MENA region is one of the largest exporters of fertilizers in the world. The region consumes 43.6% of the local fertilizer production and exports the rest. Saudi Arabia is the largest exporter of fertilizers, even though Egypt is the largest producer and

consumer in the MENA region. Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE export only nitrogen fertilizers, since they do not have the resources to produce potash and phosphate. Jordan exports all three varieties of fertilizers, while Lebanon exports only phosphate. Going forward, the MENA region is expected to play a vital role in agrochemicals, with major capacity additions coming online. Most of the planned ammonia units will be forward‐integrated to produce urea, which finds favor over other fertilizers because of higher nitrogen content and ease of transportation. The region is expected to contribute 57.1% to the world’s total fertilizer capacity expansion until 2011. These estimated capacity additions will take the production capacity to 53.7mn tons and utilization rate to 94.7% by 2011.

China

Ukraine

W. EuropeGlobal Average

U.S.Middle East

Russia

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Urea Cash Cost Production vs. Gas Cost in 2009

W. EuropeUkraine

U.S.China

Global Average

Russia

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MENA Fertilizer Imports and Exports by Country in 2007

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Bahra in Egypt Jordan Kuwait Lebanon Oman Qatar SaudiArabia

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Tons

Ni trogen Potash Phosphate



According to GPCA, urea projects that are expected to come online by 2012 will add 4.6mn tons per year of installed capacity. The Maaden project will produce over 2.9mn tons per year of DAP, which will position the region as an important supplier of phosphate. Low cost capacity additions and proximity to Europe will benefit North African countries over the GCC countries, which may lead to reduced exports from GCC countries to Europe. Since 2000, the growth rate of fertilizer production in the MENA region has been higher than the world average. Fertilizer production capacity in the region grew at a CAGR of 3.5% compared to the worldwide CAGR of 2.8%. As a result, the MENA region’s contribution to global fertilizer production increased from 11.5% in 2000 to 13.7% in 2007. The major reasons for the increase in capacity were the abundance of cheaper natural gas, abundance of potash and phosphate and high demand for fertilizers from South Asia and East Asia. The rapid increase in demand from China and India for MENA fertilizer exports boosted the region’s fertilizer production, thereby increasing the region’s contribution. World demand for nitrogen fertilizer is expected to grow at a CAGR of 3.2% until 2012, while that in Asia, Latin America, Europe, and North America is likely to grow at CAGRs of 3.7%, 4.0%, 1.9%, and 1.5%, respectively.

3.3 Plastics Plastics are extensively used in industrial and consumer goods and have, in a way, become a part of modern lifestyle. Over the years, the use of plastics has been increasing rapidly, replacing metal, glass, wood, and other materials for numerous applications because of their easier handling, lower manufacturing costs, and corrosion resistance. Plastics are produced from a variety of synthetic materials included under the category of polymers. Ethane and propane, derived from oil or natural gas, are cracked into ethylene and propylene, respectively, to be combined with intermediates to form various polymers. The most important plastics are polyethylene, polypropylene, polystyrene, polyvinyl chloride (PVC), polyethylene terephthalate (PET), and acrylonitrile‐butadiene‐styrene (ABS).

Arab Fertilizer Outlook (mn tons) 2007 2016E World figures 2007

Production Exports Production Exports Production ExportsAmmonia 13 2.6 17.5 4 153.6 19.6

Urea 16.2 13.2 20 16.9 143.1 35.1

Phosphate Rocks 49 25 54 24.5 172.1 31.5

Phosphoric Acid 5.5 2.8 6.9 5 35.7 4.8

DAP 3.7 3.3 6.4 5.4 27.6 11.5

Potash 1.8 1.7 2.5 2 55.7 44.6

Source: Arab Fertilizers Association, Blominvest

Production Flow Chart of Plastics

Source: KMEFIC Research, Blominvest

27

July 2010

As opposed to basic petrochemicals, prices of plastics depend more on demand and relatively less on changes in feedstock prices. China is an important consumer as well as producer of plastics, thanks to a huge domestic market, relatively low costs, and highly productive labor. However, labor costs in China are on the rise, while feedstock costs are higher compared to those in the Middle East region. The global shipping capacity for plastics lags behind the production capacity due to a lack of adequate containers. The US has an advanced distribution system for plastics comprising hopper cars and trucks. However, producers in the MENA region and Asia still lag behind their US counterparts when it comes to modern shipping methods. The MENA region has emerged as a vital hub in global plastics trade, with the region’s plastic industry expected to increase at an impressive CAGR of 30% over the next five years. The abundance of cheaper feedstock and proximity to European and Asian export markets are key factors that have fueled the growth of the industry in the region. In addition, domestic consumption is expected to increase rapidly due to the increase in per capita income and development of other key sectors. According to Frost & Sullivan, the global demand for plastics is expected to grow at 3.7% over 2010‐11.

3.3.1 Polyethylene The supply and demand dynamics for polyethylene are similar to those of ethylene. Like the latter, capacity additions in the MENA region and other parts of Asia are likely to cause low utilization rates and profit margins until 2012. According to GPCA, polyethylene expansion projects will also include downstream processing capacity in order to support the local construction sector, increase employment, and export finished and semi‐finished polymer products. The governments of Saudi Arabia and the UAE are extending their support by encouraging plastic processing at industrial zones and polymer parks, respectively. SABIC signed a letter of intent with Mitsubishi Rayon to form a USD 1 bn joint venture for plastics. Abu Dhabi Polymers Park (ADPP) is expected to house about 60 plastics processing units by 2015, involving a combined investment of USD 4.5 bn and consuming more than 1 mn tons per annum of polymers. In the immediate term, China is likely to absorb the additional capacity of polyethylene. However, capacity expansions in China will reduce the demand for exports from the MENA region in due course. Nonetheless, the low cost production capability of MENA‐based producers will help expand the export markets to countries other than China.

Types of Plastics and Applications Polyethylene Widely used in packaging such as containers, milk and detergent bottles, bags, industrial wrapping, pallet and

agricultural film, and coatings. Polypropylene Used in numerous industrial applications, personal care products, food, film, crates and microwavable containers.

Polystyrene Used in variety of applications such as coffee cups, jewel cases, trays and foam insulation.

PET Used as industrial polyesters in lightweight, recyclable soft drink bottles; as fibers in clothing, in car tire cords and conveyor belts; into films used in video and audio tapes and x‐ray.

PVC Used in wide range products such as medical tubing, blood bags, to footwear, electrical cables.

ABS Used for appliance and telephone housings, luggage, sporting helmets, pipe fittings and automotive parts.

Source: Association of Petrochemical Producers in Europe (APPE), Various journals, Blominvest

Packaging32%

Consumer & Institutional

21%

Builiding & Construction

17%

Exports16%

Transport4%

Furniture/ Furnishings

4%

Electrical/ Electronics

2%Others4%

Plastics Demand by Sector in North America (2008)

Source: American Chemistry Council, Blominvest


3.3.2 Polypropylene North East Asia ‐ China, Japan, Korea, and Taiwan ‐ is the largest consumer of polypropylene products with an estimated share of 33%, followed by North America and Western Europe with estimated shares of 19% each in 2009. The consumption in the Middle East and Africa region, which currently stands at about 7% of total consumption, is likely to increase significantly on the back of economic growth going forward. According to GPCA, capacity additions for polypropylene are likely to be based on alternative feedstock sources and are estimated to be higher than those for other polyolefins such as polyethylene.

The Middle East region is expected to more than double its market share from 6.1% in 2007 to 12.9% by 2012, with Saudi Arabia playing an increasingly critical role given its planned capacity additions. SABIC continues to be a global force in the polypropylene market, accounting for 6% of the world’s total production in 2008. The cash costs of production and profit margins of polypropylene depend directly on the costs of propylene, a key input for production. HSBC estimates the cost of polypropylene production at USD 86 per ton in the Middle East region. In comparison, production costs in Western Europe, North America, and Asia were estimated at USD 413, USD 426, and USD 709 per ton, respectively. The calculations factor in an oil price of USD 40 per barrel and a natural gas price of USD 6 per mmbtu. Propylene accounts for more than 50% of the production costs for polypropylene. Interestingly, costs of producing propylene in the Middle East region are considered negative due to savings resulting from co‐production. Since propylene can be readily used to produce polypropylene without requiring any additional processing (saving the costs required to separate propylene), industry experts consider these propylene costs as negative in the region. The demand for polypropylene increased at a CAGR of 7‐8% over the past few years, which was higher than other polymers, due to its low cost. CMAI estimates the demand to increase at a CAGR of 6% until 2012 on the back of rising demand from China and India. MENA‐based polypropylene producers are well‐positioned to increase their market shares because of the likely increase in demand from these two countries. Currently, Saudi Arabia accounts for 12% of China’s total polypropylene imports and is expected to increase its share in the short‐term at the expense of integrated players in Korea, supported by lower production costs. However, total polypropylene imports into China from the MENA region are likely to decline due to capacity additions in China. Significant capacity additions in the MENA and other regions will ultimately lead to overcapacity in the short‐ to medium‐term. The overcapacity will pressurize the profit margins of high‐cost producers in North America and Europe, where non‐integrated players will likely be among the first to rationalize their output.

LyondellBasell7%

SABIC6%

ExxonMobil4%

Formosa4%

Ineos4%

Borealls 4%

Others71%

Global Polypropylene Market Share (2008)


Polypropylene Production Economics by Region North America Western Europe Asia Middle EastPropylene consumption (per unit of polypropylene)

1.03 1.03 1.03 1.03

Propylene costs (c/lb) 11.5 11.6 21 ‐0.2

Utilities (c/lb) 4 3.3 7.4 0.4

Direct costs (c/lb) 1.7 1.7 1.7 1.7

Other costs (c/lb) 2.1 2.1 2.1 2.1

Total polypropylene costs (c/lb) 19.3 18.7 32.2 3.9

Costs in USD per ton 426 413 709 86

Note: Assuming Crude Oil at USD 40 per bbl and natural gas at USD 6 per mmbtu. c/lb: Cents/Pound Source: HSBC, Blominvest

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July 2010

3.4 Paints and Coatings The paints and coatings segment comprises pigments, binders, solvents, and additives used for protective, decorative, industrial, residential, specialty, and other miscellaneous purposes. While pigments provide the paint color, binders hold the dried paint together, and solvents diffuse or dissolve the solids in the paint. The major raw materials include propylene‐based acryl or vinyl acryl resins, titanium dioxide; solvents such as acetone, xylene, glycols; and coal; pigments; and additives among others. The coatings market can be classified into industrial, architectural, and special purpose based on the nature of end‐use. The industrial segment includes automotive Original Equipment Manufacturers (OEM), powder, coil, wood, general industrial and packaging. Architectural segment includes Do‐it‐Yourself and professional. Lastly, special purpose segment includes automotive refinish, industrial maintenance, marine, aerospace and others. The global paints and coatings market is relatively fragmented, given the wide variety of potential customers based on end use, particularly in the manufacturing industry. Valspar, a leading paint manufacturer, estimated the share of the top 10 companies at 65% of the total market size of USD 85 bn in 2008. High fragmentation in the buyer market reduces the influence of end buyers on the paint manufacturers. In addition, the availability of several sources of raw materials reduces the influence of suppliers on paint manufacturers.

Regional Paints and Coatings Sector The demand for paints and coatings in the MENA region mainly depends on the real estate industry, which is a key non‐oil sector. During the financial crisis, the sector in MENA region survived based on the existing contracts from early 2008. Paint sector in MENA region is expected to register higher growth rates than the sector in other regions. The paints and coatings industry in the MENA region is dominated by National paints and Jotun paints, followed by several smaller players operating at various levels. However, the paint market is more competitive in Egypt with several companies operating in the country such as Pachin, Jotun, Sipes, Kapci, SCIB, Orient, and Egyptian American Paints. National Paints is the biggest producer in the MENA region. The company ramped up production in early 2009, seeing no slump in demand during the financial crisis because of existing long‐term contracts. Similarly, Jotun’s expansion plans in Saudi Arabia stayed on track even during the crisis and the company registered a growth rate of 20% during 2008. However, the company expected sales to remain flat during 2009 because of a likely drop in sales during the second half of the year. Jotun plays a prominent role in the UAE, accounting for a 40% share of the market for mega projects with orders worth USD 200mn. Some of its current projects include the Dubai Metro, Meydan at the Nad Al Sheba, Jumeirah Park and Village, Furjan Villas, and eight offshore projects.

Manufacturing Paints

Source: KMEFIC Research, Credit Suisse, Blominvest

1.51.92.02.2

3.33.53.6

4.48.0

11.0

0 3 6 9 12

MascoJotun

NipponKansaiBASF

ValsparRPM

DupontSherwin

PPG

Bn USD

Top 10 Paint Companies by Sale in 2008

Source: Valspar, Blominvest


3.5 Tires The production process for tires primarily involves synthetic and natural rubber, along with steel, fabrics, carbon black, and other petrochemicals. The sector’s revenues comprise those from the replacement and original equipment manufacturers markets for passenger and commercial automotives. The demand is mainly based on the replacement market, as a result of which the tire sector is less cyclical than the automotive sector. According to the world’s largest tire manufacturer Michelin, passenger cars and light trucks accounted for 60% of the world’s tire market in 2007, while trucks accounted for 28%. Production plants of passenger vehicle tires are fragmented across the world, while those of commercial vehicle tires are concentrated in China.

North America and Europe account for more than half of the world’s tire consumption. The three largest manufacturers ‐ Michelin, Bridgestone, and Goodyear ‐ accounted for over 49% of the total tire sales of USD 127 bn during 2007. The industry has structural entry barriers, given the economies of scale and investments required for mass production, along with extensive R&D activities. In addition, intellectual property rights through patents, trademarks, and copyrights help the major companies design and manufacture high‐margin specialized products that improve the brand value of the company. Furthermore, the presence of strong brand names with a reputation for maintaining quality and implementing environmental regulations add to the challenges faced by new players looking to enter the market.

Although the top 11 companies accounted for 74% of global tire sales during 2007, internal competition is very high, as indicated by an HHI of 890. The major multinational automobile manufacturers exercise significant influence over tire manufacturers. Furthermore, tire companies can only differentiate based on auxiliary terms like warranty and customer satisfaction, in the absence of significant product differentiators, except in the case of specialized applications. Competition in the sector increases further when automobile manufacturers alter their cost structure and exert more pressure on tire manufacturers to keep prices down. The lack of substitutes for high quality raw materials has led tire manufacturers to integrate backwards, as demonstrated by Goodyear for decades. Moreover, there is an increasing focus on reducing consumption of conventional raw materials by recycling defective and used products.

U.S.16.4%

Japan13.9%

China12.4%S. Korea

6.7%Germany6.6%

Others44.1%

Passenger Vehicle Tire Production by Country in 2006

China40.3%

U.S.10.8%

Japan10.8%

India4.4%

S. Korea4.2%

Others29.4%

Commerical Vehicle Tire Production by Country in 2006

Source: Tire Business, Blominvest Source: Tire Business, Blominvest

North America29%

Europe25%

China12%

Japan7%

Other Asian

Countries12%

Africa & Middle East 9%

South America

6%

Global Tire Market Breakdown in 2007

Michelin17.1% Goodyear

14.9%

Bridgestone

16.9%Continental

5.9%

Pirelli4.5%

Others 40.7%

Leading Tire makers by sales in 2007

Source: Michelin, Blominvest Source: Tire Business, Blominvest

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July 2010

During 2008, the demand for passenger cars and light trucks plummeted in Europe and North America, thereby affecting the demand for tires as well. The cutback in production by original equipment manufacturers (OEMs) led to a 16.5% decline in tire demand in North America itself. However, the demand in Africa and Middle East was more resilient, mainly driven by new car sales. The trend was similar in the case of truck and bus tires.

Regional Tires Sector The demand for tires depends on the number of vehicles, which in turn depends to a large extent on the population and GDP per capita. Among the countries covered in this report, Saudi Arabia, Egypt, and the UAE accounted for 39.6%, 23.0%, and 9.4%, respectively of the total number of registered vehicles (18.7mn) in 2007. The MENA region does not have a major tire manufacturing facility, as a result of which most of the demand is met through imports. Hankook is the leading tire company in Saudi Arabia with sales of around 1.19mn tires as of 2007. The direct trade of tires for commercial and passengers cars in Dubai was valued at more than AED 4.15bn in 2007, mainly from Japan, China, and India. The commercial vehicle market is expected to register a growth of 35% between 2008 and 2012 in the UAE. Qatar, Bahrain, Kuwait, the UAE, Lebanon, Saudi Arabia, and Oman continue to be attractive markets for the tire replacement business, with vehicle ownership rates that are higher than the world average. In addition, the demand for tires in the MENA region is less impacted by factors such as substitutes compared to the rest of the world, because of the lack of railway in many countries. Furthermore, economic growth and climatic conditions will keep the demand for tires high, making the region an attractive market.

3.6 Industrial gases Industrial gases are virtually essential for the entire chemical industry and find use in a wide range of processes such as petroleum refining, oil & gas recovery, steel & metals, pharmaceuticals, food processing, and glass, among others. The main industrial gases are nitrogen, oxygen, argon, hydrogen, and carbon dioxide.

North America and Europe are the biggest markets for industrial gases followed by Asia, which saw double‐digit growth even during 2008. Demand is fragmented across different sectors, whereas the supply side is highly consolidated, as indicated by an HHI of 2070 during 2007. This high concentration is likely to prevail for several reasons: • High transportation costs limit competition among the sector players.

2008 World Market Trends for Truck and Bus Tires (YoY) Replacement OriginalEurope ‐9.7% ‐0.9%

North America ‐8.2% ‐16.5%

South America +11.9% +10.2%

Asia +5.7% ‐1.8%

Africa & Middle East +5.1% +3.0%

Total ‐0.2% ‐3.9%

Source: Michelin, Blominvest

2008 World Market Trends for Passenger Car and Light Truck Tires (YoY) Replacement OriginalEurope ‐4.0% ‐7.2%

North America ‐5.3% ‐16.5%

South America +2.4% +8.2%

Asia +2.7% +1.9%

Africa & Middle East +3.2% +13.8%

Total ‐2.2% ‐4.0%

Source: Michelin, Blominvest

Manufacture30%

Chemicals16%Metallurgy

14%

Health Care12%

Electronics7%

Food6%

Refining5%

Others10%

Global Industrial Gas Demand by Sector in 2007

Air Liquide24%

Linde22%Praxair

16%

Air Product15%

Others23%

Leading Industrial Gas manufacturers by sales in 2007

Source: Credit Suisse, Blominvest Source: Credit Suisse, Blominvest


• Fragmentation of customers across different industries reduces buyer influence that translates into stable long‐term demand.

• The lack of substitutes for industrial gases in industries such as beverages increases the buyers’ willingness‐to‐pay, allowing industrial gas producers to enjoy the benefits of lower price elasticity.

• Long‐term contracts with consuming industries allow producers to have predictable cash flows. • Entry of new players is limited due to the required economies of scale and a long learning curve in order to maintain

the safety of air separation plants. The growth in sales of industrial gases depends on the performance of other sectors that consume such gases. The metal industry witnessed a boom during the first half of 2008, driven by higher commodity prices. However, the demand from metal and steel industries plunged during the second half of the year even though the bottom‐line contracted only marginally on a full year basis. The crisis had a marginal impact on profitability as distribution costs were reduced substantially in line with the global decline in oil prices. While the cancellation of some energy projects affected the demand for industrial gases, the overall scenario remained promising with continued demand from sectors such as electronics, food and beverages, and healthcare.

Regional Industrial Gases Sector Historically, the industrial gases sector in the MENA region has performed better than in other regions with above‐average growth rates. The sector registered growth up to twice the rate in emerging markets in comparison to the growth rate in major western markets. Heavy industries such as metallurgy and oil, which drove developed economies in the past, are now booming in the emerging markets. The sector is expanding rapidly in the MENA region led by increasing gas demand from several industrial and food sectors. However, despite the huge potential, the region only represents a small portion of the worldwide sales of industrial gases even though it is home to many names of international reckoning. Since 2003, Air Liquide has invested more than EUR 200mn for developing the sector in the region. In 2008, the company completed five projects in Kuwait, Qatar, Egypt, and Oman, and acquired Pure Helium, an important distributor in the region. Linde partnered with Abu Dhabi National Oil Company (ADNOC) to form Elixier and to build two air separation plants. During the financial crisis, the healthcare and food & beverages industries helped support the demand for industrial gases. However, in the longer run, the petrochemicals and manufacturing sectors will be key to shaping the demand scenario for industrial gases. Even though most end markets for industrial gases are cyclical, the major players are not exposed to pricing cycles due to the long‐term nature of contracts. The demand for industrial gases will likely remain high in the MENA region due to several factors. As crude supplies become heavier and more difficult to extract and refine, increasing amounts of industrial gases will be used in enhanced oil recovery

Summary of Gas Uses by Major End Market Nitrogen Oxygen Argon Hydrogen Carbon DioxidePrimary Metal and Fabrication

‐ For inerting and blanketing applications ‐ Oxygen fuel welding and Oxyfuel gas cutting

‐ Basic Oxygen furnace ‐ Welding and Cutting ‐ To increase efficiency smelting of nonferrous metals

‐ Shielding gas for welding of nonferrous and specialty metals ‐ Shields the steel from oxygen

‐ Convert iron ore lumps to reduced iron

‐ Stirring agent in steel ladles and vessels

Chemical ‐ To exclude oxygen and moisture ‐ Grinding of moulded plastic and rubber products

‐ Catalyst in oxidation reactions ‐ Oxychlorination processes

‐

‐ Methanol and Ammonia production

‐ Inerting, pressurizing and cooling

Petroleum Refining

‐ As inerting, pruning and blanketing agent for reactor vessels, tanks, pipelines and other equipment

‐ Regeneration of cracker catalysts ‐ Debottlenecking of sulphur recovery units and gasification

‐

‐ Hydrotreating and Hydrocracking ‐

Oil and Gas Recovery

‐ Enhanced oil recovery ‐ Drilling and well treatment

‐ Used to oxidize hydrocarbons to produce synthesis gas

‐

‐ Used in oil and gas recovery ‐

Source: Credit Suisse, Blominvest

33

July 2010

techniques. Environment legislations to lower the sulphur content in gasoline and diesel will drive the demand from refiners for gases such as hydrogen.

4 Key Industry Factors

4.1 Factors Important for the Industry’s Growth The chemical industry’s success in a particular region depends on several factors including financing; availability of cheaper land; raw material, feedstock supplies, energy and utilities at competitive prices; technical knowhow; and the availability of skilled labor at attractive costs. The industry’s success depends on other supporting factors as well, some of which are efficient transportation infrastructure; waste treatment facilities; transparent and sustainable environment legislation; stable business environment; low taxes; and proximity to attractive markets. Region‐wise, China and the rest of Asia offer significant operational advantages and high demand growth rates. For instance, Selling, General & Administrative (SG&A) expenses as percentage of sales for Sinopec Shanghai Petrochemical Company, a leading Chinese petrochemicals producer, were only 0.79% during 2008 and 0.93% during 2007. On the other hand, this expense as a percentage of sales was very high for SABIC and Dow Chemical. SG&A as percentage of sales for SABIC was 6.1% during 2008 and 5.5% during 2007; for Dow Chemical the percentage was 3.4% during 2008 and 3.5% during 2007. While the Middle East holds the advantages of low taxes and abundantly available inexpensive oil and gas resources, the US and the developed countries in Europe enjoy the advantages of relevant knowhow, efficient infrastructure, and skilled manpower. The success of the industry in recent years has been on account of cost efficiency and demand growth, which in turn led to a shift in its epicenter. China is likely to be Asia’s largest consumer and re‐exporter of a number of finished plastic products over the upcoming years. Currently, it is the world’s largest importer of several chemicals. The chemical industry in the Middle East enjoys the support of the governments and the availability of cheaper feedstock. Cost of sales as percentage of sales for SABIC was only 69.7% during 2008 and 62.0% during 2007, compared to BASF (74.6% and 72.3%) and Dow Chemical (90.4% and 86.7%). BP estimates the GCC countries to hold about 39.4% of the world’s proven oil reserves and 23% of proven gas reserves. This clearly indicates the importance of the region as a key supplier for many years to come. Other factors in favor of the region are accessibility to capital for project finance, competitive labor costs, and low corporate tax rates. In addition, an eastward shift in demand has allowed the Middle East to deliver products faster and at lower costs, given its relative proximity to Asian markets.

4.2 Technology During the last century, numerous product and process innovations by companies, universities, and national laboratories have consistently altered the industry’s landscape. Plastics have been at the center of a number of these innovations and technological advances. During the 1930s, chemists accelerated the search for new types of base materials for producing plastics. Over the years, the transition to chemicals obtained from crude oil led to the rapid development of research in this field and a huge growth in production from 1950s onwards. High performance polymers were developed during the 1970s and since then, continually evolving catalyst technologies have allowed the development of improved molecular structures. Feedstock economics dictate technological changes to a great extent. Coal was used as the main feedstock before the “Oil Age” between 1920 and 1970 when oil prices hovered below USD 3 per barrel. Environmental concerns and rising prices resulted in many chemicals being substituted by environment‐friendly and economical raw materials. However, certain technology has not changed for decades such as the Haber‐Bosch synthesis manufacturing process to produce ammonia. Over the years, chemical processes have become more energy efficient following the western world‘s efforts to reduce its oil import bills. However, in recent times, the extensive focus on cost reductions in this mature industry has hindered technological advancements and product innovations.

4.3 Regulations and Environmental Challenges The main raw materials for the chemical industry include large amounts of energy, non‐renewable feedstock, and water. The industry is among the most polluting industries, disposing huge quantities of hazardous by‐product compounds. Initiatives by the Organization for Economic Co‐operation and Development (OECD) countries, mainly those in Europe, Japan, and the US have


resulted in the formulation of a set of regulations addressing these concerns. The Montreal Protocol of 1987 and other OECD related regulations were aimed at reducing the environmental damage from chemicals that have the most severe impact. As a result, chemical companies are finding it more difficult to establish plants in OECD countries compared to emerging countries, where regulations are still rather immature and costs are relatively lower. Over the years, the industry has become more energy‐efficient, removed several hazardous materials, and increased transparency related to compliance through measures like the Registration, Evaluation, Authorization and Restriction of Chemical substances (REACH) in the EU. Strong environmental compliance has become one of the critical success factors for chemical companies operating in developed countries. For instance, operating costs of BASF for environmental protection were 1.13% (USD 1034 mn) and 1.10% of sales (USD 873 mn) during 2008 and 2007, respectively. Furthermore, the company invested USD 393 mn for environmental protection during 2008. On the other hand, Sinopec Shanghai Petrochemical Co. allocated only 0.06% of net sales (USD 5.1 mn) for environmental protection with no other related expenses during 2008. The more relaxed environmental regulations in countries like China are a definite factor behind the eastward shift in the production of chemicals. Our observation is supported by a research article published in Environmental and Resource economics in 2002, which provides evidence that the leniency in environmental regulations is a significant determinant of FDI in the case of heavily polluting industries. REACH is the first major chemical regulation worldwide that shifts the onus of proving chemical safety from the government to manufacturers. The regulation requires safety testing for thousands of chemicals, which have limited or no toxicity data. REACH has wider implications around the globe by also regulating products imported into Europe.

Costs of REACH According to a research article published in Vanderbilt Law Review, the European Commission estimated the total cost of testing and registration under REACH at USD 3.22 bn during the 11‐year phase‐in period. The Global Development and Environment Institute at Tufts University estimated REACH implementation to cost the industry about USD 4.85 bn over 11 years. On the other hand, industry‐financed studies estimate direct costs of up to USD 18.22 bn over a similar period with wide variations in estimates for indirect costs, such as potential price increases for downstream users and potential unavailability of certain inputs. The American Chemistry Council estimated that REACH compliance will cost U.S. companies about USD 400 mn, leading to an overall price increase of 0.03%, which many believe is a relatively small price to pay for preserving the environment. Even if REACH compliance costs are USD 1.4 bn per year, near the higher end of the range, such costs would represent only about 0.2% of annual industry revenues for companies operating in Europe. However, it appears to be a small price in the favor of social benefits that include reducing the cases of cancer and birth defects and saving 4,500 lives each year from occupational hazards, according to the European Commission. So far, regulations in other countries such as the Toxic Substances Control Act (TSCA) of 1976 in the US have not been reformed considerably. Considering the longer‐term social benefits and the increasing awareness about preserving the environment, we expect several other countries to actively focus on tightening regulations, which could lead to short‐term hurdles for the industry.

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July 2010

5 Industry Trends in the MENA region

The chemical industry plays an important role in the MENA region. Although a wide range of chemicals are produced in the region, the capacity is skewed towards a few products like urea, ammonia, ethylene, methanol, and polyethylene, which together accounted for 62% of the region’s total production capacity in 2006. With a number of capacity expansion plans currently underway, the share of the MENA region in the total global capacity of ethylene, propylene, and polypropylene will likely double by 2012.

5.1 Governments’ Efforts to Diversify Economies The GCC countries flourished in recent years on high oil prices, and in turn high revenues, until mid‐2008. Saudi Arabia is the world’s largest oil exporter, accounting for an estimated 21% of the total proven oil reserves as of 2008. However, governments in the GCC countries started diversifying their economies to reduce their dependence on oil‐related exports and increase employment. As a result of these efforts, the contribution of petrochemicals to Saudi Arabia’s total exports increased from 3.95% in 2004 to 5.31% in 2008. With 38% of the country’s population below the age of 15 years, Saudi Arabia faces a challenge in terms of providing employment opportunities to young nationals going forward. The country’s government is actively encouraging various economic activities and private sector participation in power generation, telecommunications, natural gas exploration, and petrochemical production. Bahrain, the most diversified among the GCC economies, developed various non‐oil sectors such as financial services, trade, and manufacturing in a bid to counter the impact of depleting reserves. The UAE captured the world’s attention with ambitious projects in the fields of construction, tourism, and manufacturing. Oman is actively promoting itself as a preferred tourist destination with significant investments to develop the relevant infrastructure. The petrochemical sector, along with transportation, is an important driver of oil demand. The dominance of transportation sector in total oil demand is particularly evident in OECD countries, where its share increased from 35% in 1971 to 55% in 2006. The balance may however shift to some extent as petrochemical production picks up further in the coming years. According to Organization of the Petroleum Exporting Countries (OPEC), global demand for naphtha in 2008 stood at 5.6 mn barrels per day (mbpd), representing 6.6% of total oil demand, compared to 8.6 mbpd or 10% of the total oil demand in 2007. The decline in

Urea16%

Ammonia13%

Ethylene14%

Methanol11%

Polyethylene

8%

Others38%

MENA's Top Chemical Products in 2006(94.4mn tons)

Source: NBAD, Blominvest

Role of Middle East in Chemicals Share of global capacity Share of capacity growth

(2007‐2012E) 2007 2012EEthylene 11.5% 21.2% 56.4%

Propylene 4.5% 11.1% 34.6%

Polypropylene 6.1% 12.9% 30.4%

Ammonia 7.3% 9.6% 22.8%

Urea 9.4% 12.3% 29.1%

Methanol 19.0% 25.0% 35.6%

Source: HSBC, Blominvest

35%

45%

55%

65%

75%

85%

Qatar

Kuwait

Saudi

Oman

UAE

Bahrain

Non‐Hydrocarbon as % of GDP (2007)

Source: CA Cheuvreux, Blominvest


demand was a direct result of the financial crisis. However, high demand growth from most developing countries is likely to help sustain demand in the medium‐ to long‐term. OPEC estimates the demand for naphtha to reach 6.2 mbpd by 2015 and subsequently grow at a CAGR of 2.3% to 8.7 mbpd by 2030, or more than 8% of global oil demand. This growth is twice that of the average expected growth in total oil demand over the same period, according to OPEC. The governments’ objective to diversify their economies, the availability of cheaper feedstock, and proximity to emerging Asian markets are driving many of the current petrochemical expansion projects that are expected to come online in the MENA region by the end of 2011. In many ways, these capacity additions are in competition with the existing world capacity instead of being based on an expected sharp increase in the world’s demand for petrochemical.

5.2 Cheaper Feedstock: MENA’s Advantage Feedstock forms the biggest cost element in the production of basic petrochemicals. According to National Bank of Kuwait (NBK), based on three reference ethylene cracker plants located on the US gulf coast, feedstock accounted for 74% of the total cash operating cost of producing ethylene when ethane was used, 84% when propane was used, and 87% when naphtha was used. The availability of feedstock at lower prices has been the main factor behind the ability of producers in GCC countries to maintain higher profit margins compared to their international peers. The trend is likely to continue in the future, given the region’s abundant oil and gas reserves. According to Morgan Stanley, cheaper natural gas makes up to 73% of Saudi ethylene feedstock, as a result of which producers have a clear advantage over their peers in other countries. Until 2000, US producers were the most competitive ethylene producers owing to the abundant supply of natural gas with high ethane content. However, since then, increasing gas prices ranging USD 3 to 13 per mmbtu has placed US petrochemical production among the highest‐cost groups in the world. On the contrary, SABIC has a long‐term contract with Saudi Aramco to supply ethane at USD 0.75 per mmbtu for ethylene production. Moreover, Saudi Aramco subsidizes prices for Liquefied Petroleum Gas (LPG) feedstock (naphtha, propane, and butane) by providing a 30% discount compared to Japanese naphtha export prices. HSBC estimates subsidized gas prices to be around USD 1.25 per mmbtu in Qatar. These subsidies in the MENA region provide the regional producers an edge over their international peers, at least in the short‐term.

5.3 Crude Oil vs. Natural gas Oil and Gas Reserves The type of feedstock used depends on the availability and cost factors, which in turn depend on the quantum of natural reserves held by a country. We expect natural gas to remain a preferred choice in Bahrain, Qatar, Egypt, and Oman, given high reserves compared to those of crude oil. As a result, the ability of these countries to diversify away from natural gas‐based chemical production is fairly limited. Cost effectiveness Naphtha‐based petrochemical units are highly people intensive, implying better support from governments in the MENA region, given their objective of increasing local employment. However, as a corollary, labor costs are high for such plants, which anyway have high set‐up and maintenance costs. Of the olefin plants in the MENA region, a significant proportion ‐ accounting for more than 16% of total petrochemical production ‐ uses ethane from natural gas as opposed to naphtha from crude oil, which is the preferred feedstock currently in rest of the world. Any significant future decline in the natural gas to oil price ratio will likely lead to a shift to ethane around the world. During 2007, ethane and naphtha accounted for 59% and 24% of the feedstock allocation in the MENA region, compared to 27% and 53%, respectively, in rest of the world. The availability of cheaper natural gas in the region is the primary reason for this difference.

0%

20%

40%

60%

80%

100%

Ethane Propane Naphtha

Feedstock & Other Costs as % of Ethylene Cash Cost on US Gulf Coast (May 2007)

Feedstock Cost Fixed Cost Variable Cost Source: NBK, Blominvest

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July 2010

Unlike the prices of crude oil that do not vary much across regions, those of natural gas differ significantly across regions depending on factors such as the nature of contracts and the secondary market. During 2008, natural gas prices in Canada averaged USD 7.99 per mmbtu, while those in the EU averaged USD 12.61 per mmbtu. The reason for the price differential is primarily the difficulty of transporting natural gas over long distances, although it can be moved with relative ease through pipelines over shorter distances on a point‐to‐point basis. In addition, natural gas prices are heavily subsidized in some regions that include the MENA region, where Saudi producers obtain natural gas at USD 0.75 per mmbtu. In contrast, crude oil can be easily shipped through tankers. Even though liquefied natural gas (LNG) can be shipped through tankers as well, safety concerns and refrigeration issues, in addition to expensive cryogenic storage tanks, have restricted uniform pricing around the world. Abundance of flared gas and limited refining capacity Until now, the MENA region has focused more on utilizing natural gas than naphtha despite vast hydrocarbon reserves. The primary reason is Saudi Aramco’s initiative many years ago to utilize abundant flared gas from oil wells. The chemical sector in the MENA region developed out of the need to use by‐products, as was the case with Western Europe and the US. However, unlike their international peers, MENA producers focused more on producing instead of refining oil. The MENA region has a relatively smaller share in the world’s total refining capacity, especially given its share of total proven oil reserves. BP estimates that Saudi Arabia, Kuwait, and the UAE accounted for 21%, 8.1%, and 7.8% of the world’s oil reserves, respectively in 2008. However, these countries accounted for only 2.4%, 1.1%, and 0.8% of the world’s total refining capacity, correspondingly. Going forward, an increase in refining capacity, especially in Saudi Arabia, and the governments’ focus on creating more jobs will boost the use of oil as feedstock.

Product Yield Product yield is an important criterion in the choice of feedstock. Ethane produces a higher proportion of ethylene compared to other feedstock, whereas naphtha produces more propylene and butadiene. However, ethane yields comparatively lesser quantities of low‐value products and produces mainly basic olefins. In contrast, naphtha is more versatile, producing a range of aromatics and intermediates. For example, the yield of propylene increases when feedstock is changed from ethane to more of propane and naphtha. Any readily available demand for by‐products from naphtha‐based production will increase the demand for naphtha as feedstock.

Oil vs. Gas reserves of MENA countries (2008)

0

5

10

15

20

Bahrain Egypt Oman

Bn barrels Oil Equivalent

Oil Gas

0

100

200

300

400

Kuwait Qatar Saudi UAE

Bn barrels Oil Equivalent

Oil Gas

Source: BP Statistical Review 2009, Blominvest

Ethane 59%Naptha

24%

Propane12% Butane

3%

Gas oil & Other2%

Feedstock allocation in Olefin plants in MENA (2007)

Naphtha53%

Ethane 27%

Propane8%

Butane4% Gas oil &

Other8%

Feedstock allocation in Olefin plants in the Rest of the World (2007)

Source: NBK, Blominvest Source: NBK, Blominvest


Flexibility of a Plant The flexibility of a plant is an important factor as well in choosing the type of feedstock. Naphtha has higher molecular weight than ethane or propane, which implies a relatively high boiling point for cracking. Therefore, naphtha‐based plants provide greater flexibility of cracking ethane and lighter hydrocarbons produced from natural gas. However, naphtha‐based plants require higher capital investments, as cracking yields a wide range of by‐products and therefore requires larger facilities than those in the case of gas. Also, facilities that can operate with alternative feedstock provide the ability for opportunistic purchase and are better able to optimize production costs. Finally, location is another factor that determines the flexibility of using different feedstock. For European producers, naphtha is becoming the feedstock of choice because of lower accessibility to natural gas. On the contrary, producers in the MENA region and the US have greater flexibility in switching between oil and gas, at least if prices are similar, due to the availability of both oil and gas.

5.4 Trends in Feedstock Allocation In recent years, the MENA region has undertaken a number of expansion projects in order to diversify its economy. For new capacity expansions, feedstock allocations are changing from ethane to more of propane. CMAI estimates Saudi feedstock allocation for ethane to likely decline from 73% in 2007 to 62% by 2013.

Product Yield (tons per 1 ton of feedstock) Feedstock

Ethane Propane Butane Naphtha Gas Oil

Ethylene 0.80 0.40 0.36 0.23 0.18

Propylene 0.03 0.18 0.20 0.13 0.14

Butylene 0.02 0.02 0.05 0.15 0.06

Butadiene 0.01 0.01 0.03 0.04 0.04

Fuel gas 0.13 0.38 0.31 0.26 0.18

Gasoline 0.01 0.01 0.05 0.18 0.18

Gas Oil 0.00 0.00 0.00 0.01 0.12

Pitch 0.00 0.00 0.00 0.00 0.10

Total 1.00 1.00 1.00 1.00 1.00


Natural Gas Price Differential

0

2

4

6

8

10

12

14

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

USD

per m

mBtu

Japan LNG CIF EU CIFUS Henry Canada Alberta

Source: BP Statistical Review 2009, Blominvest

Ethane 73%

Propane16%

Butane1%

Naptha10%

Ethylene Feedstocks in Saudi (2007)

Ethane 62%

Propane23%

Butane6%

Naptha8%

Others 1%

Ethylene Feedstocks in Saudi (2013E)

Source: CMAI, Blominvest Source: CMAI, Blominvest

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July 2010

This change in feedstock allocation is not easy and the region is turning to this expensive option purely out of compulsion due to geological and political factors. Recently, oil fields have been producing heavier oil with less associated ethane, while gas fields have been producing dry low ethane or high methane gas. Ethane‐based plants produce ethylene, which requires limited downstream processing and as a result does not create many jobs. It is a major concern for MENA governments, especially for Saudi Arabia, where unemployment rate was as high as 11.6% during 2009, according to Central Intelligence Agency (CIA). Governments intend to create more jobs by changing feedstock allocation to a wider mix of chemical intermediates. Additionally, an increase in refining capacity required for naphtha‐based production will further boost employment in the region.

5.5 Geographical Shift in Production Regulatory initiatives undertaken by OECD countries shifted the main production base of the chemical industry toward the east. In addition to tight regulations, expensive feedstock resulted in investments moving out of Europe and the US. On the contrary, the availability of abundant feedstock at cheaper prices in the MENA region brought it into the limelight starting 2001 after natural gas prices in the US increased sharply. Prior to 2001, the US had cheaper gas reserves since demand matched with the abundant gas supply from the US gulf coast. In addition, US producers had the advantages of better technology, economies of scale, and being located within the world’s major consumer market. These factors made the US gulf coast one of the most competitive chemical manufacturing sites in the world, hurting the ability of the MENA region to increase exports to the US. Post 2001, several alternative uses of natural gas in the US led to a significant increase in demand. Exceptionally cold winters and the drive to use clean burning fuel for electricity production boosted the demand for natural gas at power plants. On the supply side, environmental policies limited a rapid increase in production of natural gas. Since the deregulation of natural gas in 1980s, monthly average prices of natural gas remained relatively stable over 1985‐99 ranging from USD 2 to 4 per mmbtu (with a standard deviation of USD 0.5 mmbtu). However, since then, natural gas prices have been higher and more volatile, ranging from USD 3 to 13 per mmbtu with a standard deviation of USD 2.27 mmbtu. Several producers of chemicals like ammonia and methanol were large consumers of natural gas and had to shut down part of their US operations due to higher input costs and volatility in gas prices. Price increases were similar in Canada and Europe since the demand for natural gas increased considerably. Hence the price variability of gas has jeopardized the competitiveness of chemical companies operating in North America and Europe. In contrast, prices of natural gas in the MENA region were relatively stable and cheap, providing a feasible alternative for setting up production capacity. However, so far the industry has witnessed only limited shutdowns in North America and Europe because of the ability of producers to pass on the high costs to consumers. Additionally, increased demand from emerging economies consumed the additional production from the new capacity that came online in the MENA region. Between 1980 and 2000, the annual demand for petrochemicals in North America almost doubled to 30 mn tons, while capacity rose from 20 mn tons to 35 mn tons. However, since then, both demand and capacity in North America have remained flat. Between 1997 and 2007, North America’s petrochemical exports as a percentage of capacity reduced from 15% to 7% and the region is likely to turn into a net importer going forward. On the other hand, ethylene capacity in the Middle East and China is expected to grow by 300% and 230%, respectively, over 2005‐2015. This geographical shift in production was on account of efforts by many producers to strategically aligning their manufacturing bases with future industry dynamics. Going forward, profitability pressures due to expected overcapacity of petrochemicals will force companies to set up new production capacity in, or move existing capacity to, countries with greater availability of cheaper feedstock and low‐cost labor. As a result, closures of units in North America and Europe are likely to increase through 2013. Morgan Stanley estimates capacity closures of 4.2 mn tons per annum in North America, compared to 2.91 and 2 mn tons per annum in Asia and Europe, respectively, between 2011 and 2013. North America will lead the world in plant closures as domestic demand is likely to remain flat, whereas exports are expected to decline as MENA region’s exports continue to grow. In Asia, the output from producers in Japan, Korea, and Taiwan is either consumed domestically or exported to China. Capacity additions in China and increasing exports from the MENA region will impact producers in these Northeast Asian countries as well.

Expected Ethylene Capacity Rationalization (in Kta) 2010E 2011E 2012E 2013EEurope 1500 2000 2000 2000

North America 2200 4200 4200 4200

Asia 2630 2910 2910 2910

Kta: Kilo tons per annum Source: Morgan Stanley, Blominvest


The situation of Western European producers is different from the standalone producers in Asia. European producers may need to retain a certain amount of uneconomic ethylene production due to valuable by‐products that support other downstream operations. However, CMAI estimates 30% of Europe’s polyethylene capacity is at risk of closure due to the aforementioned reasons.

5.6 Presence of International Players The availability of cheaper feedstock in the MENA region has attracted several global energy companies to set up new petrochemical complexes. However, the region lags behind the western world in terms of research and development (R&D) in the chemicals sector. R&D expenses as percentage of sales for SABIC were only 0.38% during 2008 and 0.42% during 2007. This compares unfavorably to BASF’s 2.17% and 2.38% and Dow Chemical’s 2.28% and 2.44% during 2008 and 2007, respectively. The influence of foreign knowhow on the regional petrochemical industry started with the involvement of international majors in the oil and gas sector. In 1950, the Saudi government required Aramco to share half of the company’s profits with the government. Later in 1980, Aramco was fully acquired by the Saudi government after which the name was changed to Saudi Aramco. By the end of 2006, 23 international players were active in the region through 33 joint venture companies. In 2006, foreign players owned 14% of the region’s total capacity or 31% of the region’s privately held capacity, while almost 55% of the region’s capacity was state‐owned. In 2006, the top 10 international players owned 11% of the total regional capacity. According to the Gulf Petrochemical & Chemical Association (GPCA), as of end‐2008, ExxonMobil and Mitsubishi clearly led the regional capacity followed by Shell, Chevron, and Dow Chemical.

Most of the capacity additions that are likely to come online by 2012 are being developed in partnership with major global players. The collaboration with world’s leading players helps bring advanced technological knowhow to the region, which translates into world‐class infrastructure and the ability to diversify into higher value‐added businesses. Petro‐Rabigh, the largest integrated oil refinery and petrochemical production facility to be built at once is a joint venture between Saudi Aramco and Sumitomo Chemical. While Sumitomo will benefit from a stable supply of feedstock, Saudi Aramco can leverage the former’s marketing base and technical knowhow.

5.7 Alliance with China Another emerging trend is that of collaboration between the MENA region and China, combining the best of both worlds – the former’s abundant cheaper feedstock and the latter’s huge demand base and cheaper labor. China continues to be a significant consumer of chemicals exported from the MENA region, either for domestic purposes or as a hub for processing end products exported to the US and Europe. In early 2008, SABIC and Sinopec, China’s major fuel and petrochemical producer, established a 50‐50 joint venture to produce ethylene derivatives, along with a possible polycarbonate plant, in Tianjin. This landmark deal involving engineering services, project execution, and product marketing has laid a strong foundation for similar ventures in the future. China maintains strong political and economic ties with the MENA region on which it relies heavily for its energy needs. Saudi Arabia was the largest crude oil supplier to China in 2007 with exports of around 527,000 barrels per day. Crude oil exports jumped to nearly 720,000 bpd in 2008 following Saudi Aramco’s agreement with China’s Sinopec to increase supply to 1.5 mbpd by 2015. Interestingly, China has the option of falling back on its large coal reserves during times of high oil prices.

MENA Top 10 International Players (2006) Company Country Countries Operating in Capacity (Ton/ Year)ExxonMobil Chemical U.S. Saudi Arabia 3,404

Royal Dutch Shell Group Netherlands Kuwait, Oman, Qatar, UAE 2,308

Yara International Norway Egypt 1,200

Chevron Phillips Chemical Company U.S. Qatar, Saudi Arabia 1,091

Total France Qatar, Saudi Arabia 699

Dow Chemical Company U.S. Egypt, Kuwait, UAE 616

Duke Energy Corporation U.S. Saudi Arabia 525

Hoechst Celanese Chemicals U.S. ‐ 525

Borealis Denmark Lebanon, Saudi Arabia, Abu Dhabi 472

Norsk Hydro Norway Bahrain, Qatar 336

Others 2,445

Source: Various news agencies, Blominvest

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5.8 Impact of the Financial Crisis The performance of the chemical industry is closely related to economic growth and industrial production levels. The prevailing financial and economic crisis severely impacted the profitability of the industry players across the world. Companies that depend on petrochemicals for raw materials were hit hard by the increase in chemical prices. In early 2009, Dow Chemical Co. increased the prices of its products on a monthly basis to offset the continuing rise in energy costs. Procter & Gamble introduced gradual price increases to meet the higher cost of raw materials. During the crisis, BASF reduced capacity utilization at six of its sites worldwide, bringing its average utilization down to less than 75%. Meanwhile, Dow Chemical closed 20 plants permanently and 180 units temporarily to reduce costs. The chemical industry in the MENA region did not remain immune to the crisis following the decline in oil prices during the second half of 2008. SABIC permanently shut down its aromatics plant in the UK and temporarily closed its plastics plant in Spain. Nonetheless, MENA companies fared better than their US and European counterparts during the eventful 2008. SABIC led the pack of MENA producers with capacity expansions in Saudi Arabia and acquisitions in Europe and the US. These acquisitions were in line with SABIC’s objectives to expand its product portfolio and enhance its technological capabilities. The company has presence in over 40 countries with technology centers in Houston, US; Vadodara, India; and Al‐Jubail, Saudi Arabia; which employ research professionals from around the world. Some resilient segments of the chemical industry such as agrochemical and industrial gas producers were able to maintain profit margins even during the financial crisis, given the supply‐demand balance. Industrial gas producers generally benefit from the industry structure that allows them to pass on costs to customers. On the other hand, profit margins of MENA‐based petrochemical producers declined from their pre‐crisis levels to those seen earlier in 2003.


6 Opportunities and Challenges

6.1 Opportunities

6.1.1 Government Policies As majority owners of several chemical companies in the MENA region, the local governments are directing these companies to add capacities in line with their objective to diversify their economies. Governments enable access to cheaper feedstock for producers in the region, which is probably their most important competitive advantage. Several industry‐friendly regulations such as encouragement of foreign investments have been put in place and a number of bureaucratic barriers have been dissolved to facilitate the industry’s development. Government support to the development of massive industrial complexes, such as those in Jubail and Yanbu in Saudi Arabia, have helped chemical companies achieve economies of scale in electricity generation and cooling water. On the contrary, the European chemical industry is faced with regulations such as REACH, European Union Greenhouse Gas Emission Trading Scheme, and Integrated Product Policy (IPP). These regulations, although being supportive of the environmental cause, are discouraging capacity additions in EU and, in turn, are indirectly helping producers in the MENA region to capture a bigger share of the overall trade pie.

6.1.2 Demand Growth from Emerging Economies The rapidly growing population, changes in dietary patterns, and farming practices in developing countries have led to an increase in the cultivation of cereals to cater to the rise in demand for food. As a result, this calls for increased application of fertilizers in order to enhance crop yields. Strong support from the governments of Brazil, China, and India to their respective agricultural sectors will further boost the demand for fertilizers in these high‐growth countries. Due to these reasons, most of the increase in fertilizer demand over the upcoming years is likely to come from Asia (mainly China and India) and Latin America. This will help further boost exports from the MENA region to India and other emerging markets, which have been key export markets for producers in the region. Furthermore, we expect natural gas discoveries in India to have minimal impact on the country’s fertilizer production, unless the government relaxes production and price controls on producers. Government intervention in the country has left fertilizer producers with wafer‐thin margins and the industry has seen almost no new investments during the last 10 years.

6.1.3 Development of End Products In 2006, urea, ammonia, ethylene, and methanol accounted for 54% of the total chemical production in the MENA region. It is time for the region to focus on capacity expansions for end products as well. End products are likely to help sustain margins, since prices of such value‐added products are less sensitive to changes in feedstock prices and depend more on end‐demand. China remains a key consumer and exporter of end products, for which it relies on basic petrochemical imports. Nonetheless, the MENA region has the clear advantage of cheaper feedstock over China. The region is almost at the centre of the globe with practically every terrestrial location in the world at a maximum distance of 8,000 nautical miles (nm). This favorable geographical location allows regional producers to export the end products at lesser cost. Moreover, such end products will readily absorb some of the capacity additions for basic petrochemicals. Most importantly, this will help create more jobs and will be in line with the emphasis of local governments on diversifying their economies.

6.2 Challenges

6.2.1 How Long will the Feedstock Advantage Last? The availability of cheaper feedstock, facilitated by the government‐owned oil companies, remains a key advantage for producers in the MENA region. However, proven gas reserves grew at CAGRs of ‐3.9% in Bahrain, 1.3% in Kuwait, 2.1% in Saudi Arabia, and 0.6% in the UAE, respectively, over the last two decades. These four countries, which accounted for 81.8% of MENA’s petrochemical capacity in 2008, experienced a slowdown in the growth of gas reserves. The growth rates in these countries were lesser than the 2.6% CAGR of world’s proven gas reserves over the same period, according to BP Statistical Review of World Energy 2009.

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July 2010

The rapid increase in gas consumption, coupled with the huge capacity additions, will hurt the availability of cheaper feedstock for chemical companies in the region. Going forward, MENA producers may have to face higher feedstock prices as capacity expansions are likely to pressurize the limited feedstock supply. For example, rapid capacity expansion of ethylene will dramatically increase the demand for ethane in Saudi Arabia. However, Saudi Aramco has not allocated ethane to Saudi International Petrochemical Company (Sipchem) since mid‐2007. Even the industry giant SABIC has not received a new ethane allocation since 2005. As a corollary, renegotiations of terms and conditions could materially impact the sector's competitive advantage. After joining the World Trade Organization (WTO) in 2005, Saudi Arabia convinced the WTO that the kingdom’s feedstock arrangement was not really a subsidy and only represented the opportunity cost for ethane and the abundant flared gas from oil wells. The agreement also allowed for a dual pricing system, wherein domestic users paid less than the export price for feedstock. The discount will remain in force until 2011, after which it may be phased out or reduced in order to comply with WTO regulations. Strong support from the US helped Saudi Arabia finalize the contract in 2005, despite skepticism from several key WTO members. Nonetheless, the future remains rather uncertain, given the strong opposition from EU in 2005 and periodic “dumping” complaints from China and India. Any changes from the current pricing mechanism will significantly impact the competitive advantage of producers in the MENA region.

6.2.2 Pollution and Government Actions According to BP estimates, Saudi Arabia contributes 1.5% to global carbon emissions, ranking 12th in the world in 2008. Carbon emissions in the UAE, Kuwait, and Saudi Arabia increased by 14.9%, 9.3%, and 6.9%, respectively, much higher than the global carbon emission growth rate of 1.6% in 2008. As major carbon‐emitting countries from the developed world come together to address this serious issue, chemical companies operating in Saudi Arabia and other MENA countries will definitely get their share of the spotlight in due course. In December 2006, the Saudi government asked Saudi Arabian Fertilizer Co. (SAFCO) to close down its Dammam plant, which accounted for 12.5% of the company’s capacity, following concerns of environmental and health risks. In Egypt, contaminated industrial sites and lack of municipal waste incineration plants pose a significant problem for public health and environment. According to Datamonitor, around 50% of all industrial activity is concentrated in Greater Cairo, 40% in Alexandria, while the rest is shared between the Delta, Upper Egypt, and the newer cities. The chemical industry, an important sector in Egypt after textiles, is a primary source of hazardous waste in the industrial hubs and possible government actions could impact the industry in the short‐ to medium‐term.

6.2.3 Impact of Electricity Costs in MENA Qatar, Kuwait, the UAE, and Bahrain are among the highest consumers of power in the world on a per capita basis. Data shows that smaller populations consume more electricity on a per capita basis, compared to larger populations living in similar geographic and economic conditions. However, we expect the region to maintain its per capita consumption, despite the expected rapid increase in population. In addition to harsh summers and improving standards of living, industries requiring large amounts of energy such as chemicals will continue to drive high levels of consumption. However, the capacity additions in the chemical industry will only have a marginal impact on the demand for energy, since residential and commercial consumption accounts for most of the region’s demand in general. Furthermore, we do not expect any disruption in electricity supply, given the GCC region’s ambitious projects to increase power generation by 50%, according to Cheuvreux. So far electricity costs for MENA chemical companies have remained flat, since local governments provide subsidized natural gas for power generation and regulate the power companies. However, any major delays or cancellations of power generation projects and any increase in electricity costs could significantly impact chemical companies in the MENA region.

Electricity Consumption in 2007 (Kwh/capita)

0

5000

10000

15000

20000

Bahrain

Egypt

Jordan

Kuwait

Lebanon

Oman

Qatar

Saudi

UAE

Source: EIA, UN, Blominvest


6.2.4 Lack of Skilled Personnel The chemical industry is one of the major employers in the MENA region. For every job created directly in the industry, an average 6.5 jobs are created indirectly, according to American Chemistry Council. SABIC, the dominant player in the region, has a mandate from the government to employ Saudi nationals wherever possible. About two‐third of the company’s 33,000 workforce are estimated to be Saudi nationals, representing 1.4% of the total Saudi workforce. Overall, the chemical industry in Saudi Arabia employs 90,000 nationals including the nationals employed in small and/or private companies. The MENA region’s dependence on foreign chemical knowhow puts the regional industry at a certain disadvantage. A shortage of personnel with requisite skills results in delays, owing to higher production lead times. The capacity expansions in the region will further pressurize the available pool of qualified labor. Ras Tanura, Jubail industrial city, and Petro Rabigh ‐ three of the most ambitious petrochemical projects in the world will collectively require 150,000 engineers and technicians. The shortage of adequate and suitable manpower has already caused delays in the rollout of projects such as Yansab and Sharq. At this juncture, GCC countries need to ensure that labor productivity is not sacrificed in order to push for an increase in the employment rate. The region has traditionally relied on expatriate workers for skilled manpower requirements ‐ a model that has worked well for years. However, this model does not satisfy the governments’ objective of creating sustainable job opportunities for its citizens. Therefore, a key challenge for GCC countries will be to ensure the right balance between the need to create more jobs for its citizens while maintaining the competitiveness of its critical industries.

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7 Future Outlook

The chemical industry can be regarded as a relatively better performer in the MENA region compared to other regions. The planned capacity expansion initiatives will transform the region into a primary production hub for basic petrochemicals in the coming years. The regional players will continue to depend on foreign majors for technology and are likely to focus less on penetrating the already saturated markets and more on evaluating and entering new territory. High consumption growth in emerging markets, especially BRIC countries, will ensure robust demand in the years ahead. In the short‐term however, production trends in the MENA region will be closely linked to developments in key export markets, particularly China. The increase in Chinese production capacity and the simultaneous decline in demand will be a significant threat to the region’s exports. The level of demand seen in China during 2007 is likely to return by the end of 2010, which will impact exports from the MENA region over the next few quarters. Meanwhile, the MENA region’s differential cost advantage could prevail if natural gas prices remain volatile going forward. Any significant increases in feedstock prices will likely lead to shutdown of certain plants globally, but may have no immediate impact on the region’s plants. The proximity to developing markets in Asia and cheaper feedstock will position producers in the MENA region ahead of their international counterparts in the short‐term.

In the medium‐term, we expect to see better utilization rates and an increase in the number of integrated petrochemical facilities. The sustained increase in natural gas demand from various sectors will likely put a strain on the availability of gas at the current low prices, despite abundant reserves for now. As a result, producers in the MENA region will likely move towards naphtha as feedstock, despite additional processing, given the governments’ thrust on job creation. In addition, developing integrated facilities with refining and petrochemical production units will enable producers to use naphtha as feedstock going forward. The integrated model will likely favor large producers, such as SABIC and Saudi Aramco at the expense of smaller, stand‐alone private players in the region.

Increased foreign direct investments in these facilities from large multinational energy and chemical companies will allow technology transfer to players in the MENA region. Internationally, we expect capacity build up in India reflecting that country’s market size and economy growth. This along with increased production in China will compel MENA producers to find new export markets.

In the longer run, governments will continue to play a vital role in developing and sustaining the MENA region’s petrochemical industry. Since the MENA region is rich in both natural gas and crude oil, any change in feedstock allocation will likely not have a significant direct impact on its competitive advantage. In addition to abundant feedstock, low taxation will help the region’s petrochemical companies to score over their international counterparts. The governments in China, India, Brazil, and other emerging economies will continue to focus on ensuring food security for their large populations as a key objective. The need for higher crop yields and limited arable land will call for an increase in fertilizer use, eventually boosting the demand for agrochemical exports from the MENA region. Therefore, we expect agrochemical production in MENA region to grow rapidly over the coming years. The fundamentals drivers for the fertilizer industry are likely to remain strong in the short‐ to medium‐term, as there are no immediate alternative solutions to the growing food demand and the scarcity of arable land. Even though innovative solutions and technological breakthroughs to improve crop yields may be developed over the next few years, these can only be implemented commercially over a longer time horizon. The implementation will require transformation of economic policies across countries and may face resistance in countries where a majority of the population is employed in agriculture. Rising incomes and development of biofuels will translate into strong long‐term fundamentals for agrochemicals. The MENA region will play a prominent role in global fertilizer production, given the availability of natural gas and the abundant reserves of phosphate and potash.


8 Appendix

8.1 Country Briefs

8.1.1 Bahrain Fast depleting gas reserves have compelled Bahrain to broaden its industrial base and encourage investments in other sectors like manufacturing. The country’s economy has seen stable growth due to strong expansions in the construction and manufacturing sectors. The fast growing financial services industry and export of refined petroleum products also supported the economic growth in recent years. Unemployment in the country remains low on account of this rapid expansion into services and manufacturing sectors. Petrochemicals Bahrain’s petrochemical capacity stood at 0.5 mn tons annually, accounting for a mere 0.8% of the total capacity in the MENA region as of 2008. The chemical industry enjoys support from the government and ranks high on the priority list of overall industrial development. Total investments in the industry grew at a CAGR of 3.6% from USD 2.5 bn in 2000 to USD 3.1 bn in 2006 vis‐à‐vis the GCC’s CAGR of 4.98% over the same period. Companies like Gulf Petrochemical Industries Company (GPIC) were set up with the objective of not only boosting chemical production, but also developing related downstream industries. However, the development of the petrochemical industry in Bahrain is limited to the production of synthesis gas‐based industries. GPIC is the country’s leading producer and is owned jointly by the government of Bahrain, SABIC, and Petrochemical Industries Company (PIC). Gulf Capital Group (GCG) estimates Bahrain’s annual chemical production to increase from 1.5 mn tons in 2006 to 4.2 mn tons by 2012 as a result of the significant capacity additions. Agrochemicals Agriculture accounts for 0.5% of the country’s GDP and employs 1% of the total labor force. Since most of Bahrain’s food requirements are met through imports, consumption of fertilizers is limited. Fertilizer production in Bahrain accounted for only 2.8% of the total in the MENA region during 2007. The country produces only nitrogen and does not have any significant reserves of potash and phosphate. Most of the nitrogen fertilizers produced in the country between 2002 and 2007 was exported. Even though Bahrain produced 269,100 tons of nitrogen fertilizers during 2007, production may decline in the medium‐ to long‐term due to depletion of natural gas reserves or an increase in gas prices on rising demand.

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Major Projects in Bahrain Project Nature Status Value (USD mn)

GPIC ‐ Petrochemical Complex ‐ Ammonia & Urea Plant Olefins & Aromatics On Hold 200 GPIC ‐ Petrochemical Complex ‐ Methanol Plant Olefins & Aromatics On Hold 1,000 KFH Bahrain ‐ Integrated Petrochemical, Power and Water Complex Olefins & Aromatics Cancelled 1,500


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8.1.2 Egypt Agrochemicals Agriculture accounts for about 13.2% of the country’s GDP and employs 32% of the labor force, which is the highest among the countries under study. Fertilizer consumption by the country’s agriculture sector started in the early 20th century and for more than 30 years, Egypt imported mineral fertilizers until local production of phosphate started in 1936. Egypt began production of nitrogen fertilizers in 1951. In 2007, the country accounted for 28.5% of the total fertilizer production in the MENA region and is self‐sufficient in nitrogen and phosphate. However, it relies on imports for all of its potash requirements owing to the absence of reserves. Nitrogen fertilizer production grew at a CAGR of 9.5% between 2002 and 2007 to 2.45 mn tons. Phosphate production grew at a CAGR of 12.6% during the same period to 338,250 tons. With 1.2% of the world’s proven natural gas reserves as of 2008, Egypt will likely continue to rely on domestic production for its nitrogen fertilizer needs. The currently planned capacity additions are estimated to increase the designed capacity of the country by 3.96 mn tons by 2011. We expect the consumption of fertilizers in the country to rise further on the back of population growth, improved per capita income, rising demand for food, and increasing international demand for biofuels. On the supply side, feedstock availability and the government’s encouragement for fresh investments in fertilizer plants will support the industry’s growth story. Egypt has 10 fertilizer producing companies of which 8 are nitrogen‐based, while 2 are based on phosphate. Phosphate mines are government‐owned and the related fertilizer market is led by Egyptian Financial & Industrial Co. (EFIC) group with a 64% share of total sales in FY08. The free zone is home to three of the large nitrogen producers targeting the international markets. Nitrogen fertilizer production is highly concentrated within the top‐five companies ‐ Abu Qir, Delta, Egyptian Fertilizers Company (EFC), Alexandria, and Helwan, which together accounted for as much as 97% of total production in FY08. Strong fertilizer demand in Egypt will prevail as the government plans to expand agricultural land and reclaim another 150,000 feddans (or 155,700 acres) per year until 2017. In accordance with the economic reform policy, energy subsidies to energy‐intensive industries will be reduced over the years to offset the negative budget impact. The fertilizer industry in Egypt stands second, next only to the power sector, in terms of natural gas consumption. The energy reform policy will increase fertilizer production costs, even as strong demand due to the land reclamation policy will continue to support fertilizer prices. While the government exercises its control on nitrogen fertilizer producers in the form of export restrictions and price caps in order to limit exports, low cost nitrogen production in Egypt increases the willingness of domestic producers to export most of their production. However, the government does not intervene in the phosphate fertilizer market, since demand for Egyptian phosphate exports is lesser as domestic producers compete with Jordan Phosphate Mines Company, a neighboring phosphate giant. Currently, the government is working towards the deregulation of the nitrogen fertilizer market. The government’s initiative to align domestic and international prices clearly impacted the fertilizer industry, as reflected in the 100% increase in prices since March 2008. The Principal Bank for Development & Agriculture Credit (PBDAC) increased its capital from EGP 1.8 bn to EGP 3 bn and changed its name to Egyptian Agriculture Bank. Now the bank can establish agricultural projects including fertilizers, thereby supporting the growth in fertilizer production in the country. Petrochemicals Egypt’s petrochemical capacity stood at 3.1 mn tons, accounting for 4.7% of the MENA region’s total capacity in 2008. Accounting for 15% of GDP in FY07‐08, the petroleum sector is key to the country’s economy. In addition to the implementation of the National plan for Petrochemicals (2002‐2022), the ministry of petroleum has granted several concessions for exploration

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and drilling activity in order to increase the production of crude oil and natural gas. The demand for plastics is very high in Egypt, translating into a demand of about 1.2 mn tons of petrochemicals annually. Local production of plastics stands at around 470,000 tons per annum, while the remaining is imported. Reducing the outflow on plastic imports is one of the main targets of the petrochemical master plan, which is focused on making petrochemicals a key element of the country’s future growth potential. The completion of financial arrangements for TCI Sanmar Chemicals’ USD 868 mn chloralkali project in March 2009 indicated the financial sector’s confidence in a growing industry. The financing came on the heels of the negative impact of the cancellation of the EAgrium project in mid 2008 and the effective abandonment of free trade zones. However, the Egyptian government rendered investments relatively unattractive by imposing a 20% profit tax on chemical producers and traders, including those located in the ‘free zones’. Industry players are now calling for a reinstatement of industry tax breaks and reduction in feedstock prices.

8.1.3 Jordan Agrochemicals Agriculture accounts for 3.7% of Jordan’s GDP and employs only about 2.7% of the total labor force. The country accounted for 16.8% of the MENA region’s total fertilizer production in 2007. With limited consumption, the country is a net exporter of all the three fertilizer types. During 2007, net exports of nitrogen, potash, and phosphate stood at 119,824, 1054,125 and 326,249 tons, respectively. Jordan will continue to play a prominent role in the potash fertilizer market, being one of the few countries in the world with significant potash reserves. In 2008, India accounted for 43% of Arab Potash Company’s (APC) sales and 96.7% of Jordan’s phosphate fertilizer exports. We expect Jordan’s fertilizer exports to increase further in tandem with the likely growth in India’s fertilizer consumption. However, the country will need to diversify its export markets in order to better manage its risk.

Major Projects in Egypt Project Nature Status Value (USD mn)AFC ‐ Abu Qir Fertilizer Plant Revamp Fertilizers Ongoing 600 EAgrium ‐ Damietta Fertilizer Complex Fertilizers Cancelled 1,200 EBIC‐Ain Sokhna Ammonia Plant Fertilizers Completed 550 EFC ‐ Ain El‐Sokhna Fertilizer Plant Expansion Fertilizers Ongoing 75 EIPET‐ Damietta Polyester Plant Olefins & Aromatics Ongoing 235 EMethanex ‐ Methanol Plant Olefins & Aromatics Ongoing 950 EPPC ‐ Propane Dehydrogenation (PDH) and Polypropylene (PP) Complex

Olefins & Aromatics Ongoing 680

EHC ‐ Petrochemical Complex Olefins & Aromatics Ongoing 2,500 EHC ‐ Petrochemical Complex ‐ Ammonium Nitrate Plant Olefins & Aromatics Ongoing ‐ Egyphos ‐ Edfu Fertilizer complex Fertilizers Ongoing 680 Mopco ‐ Damietta Fertilizer Plant Fertilizers Completed 392 Estryenics ‐ Styrene / Polystyrene Plant Olefins & Aromatics Ongoing 200


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Note: Potash consumption data in 2003 is not available Source: FAO, Blominvest

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Phosphate rock production declined from 6.65 mn tons in 2003 to 5.54 mn tons in 2007 in terms of gross weight and from 2.13 mn tons in 2003 to 1.77 mn tons in 2007 by phosphorus oxide content. Jordan’s contribution to the world’s total phosphate rock production (by phosphorus oxide) declined from 4.9% in 2003 to 3.5% in 2007, whereas China’s contribution increased from 23.9% to 30.3%. However, the production of phosphate fertilizers increased from 231,380 tons to 342,730 during the same period. Such trends indicate that the contribution of phosphate rocks used for the production of phosphate fertilizers increased between 2003 and 2007. Jordan accounts for 6% of the world’s total extractable phosphate reserves, which are expected to last only until 2051 as per our estimates.

8.1.4 Kuwait Petrochemicals Kuwait kicked‐off initiatives to develop the chemical industry in 1963 with the establishment of Petrochemical Industries Company (PIC) as a government‐private partnership. In 1976, the government bought out the stakes of private investors, making PIC a wholly government‐owned enterprise. In 1980, the Kuwait Petroleum Corporation (KPC) was established to bring together state‐owned companies like PIC, Kuwait Oil Company (KOC), and Kuwait National Petroleum Company (KNPC). In 2004, PIC set up Qurain Petrochemical Industries Company (QPIC), offering 90% of its equity to public in order to encourage private investments in petrochemicals. The Kuwaiti constitution forbids foreign ownership of the country’s mineral resources. However, in 2001, the country’s parliament passed the Foreign Direct Investment Act to promote investments in the oil and gas sector and in petrochemicals as well. Total investments in the chemical industry grew at a CAGR of 0.17% from USD 6.12 bn in 2000 to USD 6.19 bn in 2006 compared to the GCC’s CAGR of 4.98% during the same period. Kuwait’s petrochemical capacity stood at 3.6 mn tons, accounting for 5.4% of the total capacity in the MENA region as of 2008. Kuwait’s petrochemical industry is dominated by a few large companies such as PIC, Boubyan, and Qurain that operate through a number of subsidiaries and account for a major share of the country’s petrochemicals. The private sector significantly differs from public companies as 90% of the former’s labor force comprises of foreign nationals. Kuwait has a relatively healthy chemical sector on account of abundant oil reserves. The country accounts for 8.1% of the world’s proven oil reserves and ranks next to Saudi Arabia, Iran, and Iraq. Kuwait was expected to add 2.6 mn tons of chemical production capacity of different grades during 2009, taking its total capacity to 6.3 mn tons. GCG estimates Kuwait’s annual chemical production to increase from 2.8 mn tons in 2006 to 6.1 mn tons by 2012 following significant capacity additions by major projects. The country’s petrochemical industry faced a major setback with the cancellation of two major foreign investment projects: the USD 17.4 bn joint venture between KNPC and Dow Chemical and the USD 15 bn Al‐Zour refinery. In particular, the cancellation of Al‐Zour impacted the country’s potential to supply naphtha as feedstock to the petrochemical industry, affecting both upstream and downstream activities. The major reason stated for the cancellation was the government’s audit bureau deeming the project to be economically and technically infeasible. Furthermore, the opposition demanded the cancellation as a result of declining oil prices and a global slump in petrochemical sales. Going forward, such cancellations would likely make foreign investors wary about investments and hurt the prospects of the industry in the longer run. Agrochemicals Kuwait accounted for 4.3% of the MENA region’s total fertilizer production during 2007. Agriculture accounts for only 0.3% of the country’s GDP, as a result of which most of the country’s food requirements are met through imports. On the production side, the country produces enough nitrogen‐based fertilizers to meet its domestic requirements.

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8.1.5 Lebanon Agrochemicals Lebanon accounted for 1.5% of the MENA region’s total fertilizer production during 2007. However, unlike GCC countries, Lebanon consumes a higher percentage of its domestic production, with agriculture accounting for almost 5.1% of the country’s GDP during 2009, according to US Central Intelligence Agency (CIA) estimates ‐ higher than its GCC counterparts. The production of phosphate fertilizers grew at a CAGR of 10.9% between 2002 and 2007 to 150,000 tons. However, the country does not figure among the top countries with extractable phosphate reserves, which is a rather scarce resource. The country imports nitrogen and potash because of the absence of gas reserves and potash mines.

8.1.6 Oman Petrochemicals Oman entered the oil and gas sector much later compared to other GCC countries. Instead of exporting gas, the sultanate decided to use it as an energy source for gas‐based industries. The country built on the capacity for urea and methanol, following the success of the initial few units. The government established the Oman Oil Company (OOC) in 1996 to pursue investment opportunities in the energy sector both within and outside Oman. OOC is the holding company for Oman India Fertilizer Company (OMIFCO), the Sohar Refinery Company (SRC), the Oman Polypropylene (OPP), the Aromatics Oman Limited (AOL), the Oman Petrochemical Industries Company (OPIC), and the Salalah Methanol Company. During 2006, the manufacturing sector, excluding oil refining and natural gas, grew by 7.6%, while the manufacturing of basic chemicals grew 74%, according to Datamonitor. Total investments in the chemical industry increased at a CAGR of 11.69% from USD 515 mn in 2000 to USD 1 bn in 2006, compared to the GCC growth of 4.98% during the same period. Oman’s petrochemical capacity stood at 2.1 mn tons and accounted for 3.2% of the region’s total petrochemical capacity in 2008. Oman is expected to increase its total capacity from 2.6 mn ton in 2009 to 3.7 mn ton by 2011, following capacity additions for oxygenates. The sultanate is likely to add 810,000 tons and 270,000 tons of oxygenate capacity during 2010 and 2011, respectively.

Major Projects in Kuwait Project Nature Status Value (USD mn)Equate ‐ Olefins II Olefins & Aromatics Completed 3000 IBK‐ PTA/PET Complex Olefins & Aromatics Ongoing 300 KPPC ‐ Paraxylene and Benzene Plant Olefins & Aromatics Completed 1,240 Olefins II ‐ Offsites and Utilities Olefins & Aromatics Completed ‐ Olefins II ‐ Polyethylene Expansion Olefins & Aromatics Completed 150 PIC ‐ Olefins III Olefins & Aromatics Ongoing 5,000 TKOC Olefins II ‐ EO/EG Unit Olefins & Aromatics Completed 400 TKOC Olefins II ‐ Ethane Cracker Olefins & Aromatics Completed 575 TKSC Olefins II ‐ Styrene Monomer Plant Olefins & Aromatics Completed 250 UIC ‐ PTA/PET Complex Olefins & Aromatics Ongoing 800


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GCG estimates Oman’s total annual chemical production to increase from 3.3 mn tons in 2006 to 8.5 mn tons by 2012 with significant capacity additions in major projects. By the end of 2006, OMIFCO accounted for 87% of the market share in the sultanate and is estimated to decrease to 34% by 2012 because of new entrants. Also, the market share of Oman Propylene is expected to decline from 10% to 4% and that of Oman Chlorine is expected to decrease from 2% in 2006 to 1% in 2012. The market shares of new entrants Sohar International Urea and Chemical Industries (SIUCI), Salalah Methanol plant, Oman Methanol Company (OMC), and Sohar Aromatics Complex are expected to be 24%, 13%, 13%, and 12% by the end of 2012, respectively. Going forward, the major challenges for Oman’s chemical industry will be the limited availability of proven gas reserves, lack of skilled workforce, and latest technical knowhow. As a result, the government is looking to diversify its economy by promoting other sectors like manufacturing, food processing, and tourism. Agrochemicals The agriculture sector contributes only about 2.6% to the country’s GDP, but Oman accounted for 9.0% of the MENA region’s fertilizer production in 2007. The sultanate relies on imports for its potash and phosphate requirements in the absence of relevant reserves. However, the sultanate will remain a net exporter of nitrogen fertilizers, given that it accounts for 0.5% of the world’s proven gas reserves. Major capacity additions expected to come online soon will increase the designed capacity by 3.68 mn tons by 2011.

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Major Projects in Oman Project Nature Status Value (USD mn)Aromatics Oman ‐ Sohar Aromatics Complex Olefins & Aromatics Completed 1,600 Moderna Non Wovens ‐ Non Wovens Plant Olefins & Aromatics Ongoing 72.2 OMC ‐ Sohar Methanol Plant Olefins & Aromatics Completed 500 OMIFCO ‐ Fertilizer Plant Olefins & Aromatics On Hold 1,000 OPIC ‐ Sohar Olefins Complex Olefins & Aromatics On Hold 2,500 OPIC ‐ Sohar Olefins Complex ‐ Ethane Cracker Package Olefins & Aromatics On Hold ‐ OPIC ‐ Sohar Olefins Complex ‐ PE Package Olefins & Aromatics On Hold ‐ ORPC ‐ Sohar Ethylbenzene / Styrene Monomer Plant Olefins & Aromatics Ongoing 200 Octal ‐ Integrated PET Resin and APET Plant Expansion ‐ Phase 2 Olefins & Aromatics Ongoing 250 Octal ‐ Liquid Chemicals Tank Farm Terminal Olefins & Aromatics Ongoing 50 Oman ‐ PET Plant Olefins & Aromatics On Hold 210 OOC/JBF ‐ PTA Plant Olefins & Aromatics Ongoing 680 SIUCI ‐ Urea and Ammonia Project Fertilizers Completed 638 Salalah Methanol Company ‐ Methanol Plant Olefins & Aromatics Ongoing 900 Octal ‐ Integrated PET Resin and APET Plant Expansion ‐ Phase 1 Olefins & Aromatics Completed 350



8.1.7 Qatar Petrochemicals Qatar ranks last in terms of oil output among OPEC members, but accounts for 13.8% of the world’s natural gas reserves, ranking third after Russia and Iran. Qatar is among the lowest cost natural gas and LNG producers in the world. The huge gas reserves led the government to set up and continuously expand gas‐based manufacturing industries such as petrochemicals and fertilizers. The government encouraged the development of gas infrastructure to help domestic companies secure uninterrupted feedstock supply. In addition, the reserves helped the country to provide feedstock at subsidized prices ranging USD 1.0 to USD 1.5 per mmbtu, resulting in better margins and a huge advantage for Qatari companies over their international counterparts. Most of the petrochemical production capacity is held by two state‐owned companies, Qatar Petroleum (QP) and Industries Qatar (IQ), through their subsidiaries. With QP further holding a majority stake in IQ, it is the leading oil and natural gas producer in the country and plays a prominent role in most downstream projects. QP owns majority stakes in major LNG players, Qatargas and RasGas. Through QP, the government established Qatar Fertilizer Company (QAFCO) in 1969 to produce urea and ammonia, and Qatar Petrochemical Company (QAPCO) in 1974 to produce ethylene and LDPE. These units enjoy strong market access and technical knowhow as they were established in partnership with world petrochemical leaders, Total and Norsk Hydro. The total investments in the chemical industry grew at a CAGR of 31.7% from USD 1.85 bn in 2000 to USD 9.65 bn in 2006, compared to the GCC’s growth at a CAGR of 4.98% during the same period. Qatar’s petrochemical capacity stood at 6.9 mn tons, accounting for 10.4% of the MENA region’s total petrochemical capacity as of 2008. The spike in oil prices until the middle of 2008 helped sharpen Qatar’s competitiveness and encouraged its capacity expansion plans. Large gas reserves encouraged the government to plan for massive expansions in basic petrochemicals. The country is expected to add 1.5 mn tons of olefins’ capacity by 2011. The country’s USD 14.9 bn investment plans will likely increase its production capacity at a CAGR of 6.6% from 9.6 mn tons in 2007 to 12.4 mn tons by 2011. The advantage of cheaper feedstock, size of the units, and its integrated nature make the country’s chemical industry relatively strong. A major part of Qatar’s petrochemical production is exported, particularly to China. Going forward, capacity additions in China could result in reduced exports from Qatar. GCGestimates Qatar’s annual chemical production to increase from 9.6 mn tons in 2006 to 17.5 mn tons by 2012 with significant capacity additions in major projects. By the end of 2006, QAFCO accounted for 50% of the country’s chemical capacity. Despite the new planned projects, its market share is estimated to decline to 40% by 2012, whereas its sister company Qatar Additives Company Limited (QAFAC) is expected to increase its market share from 15% to 23% over the same period. QP/Exxon Mobil complex, Mesaieed complex, QP/Shell complex, and Ras Laffan Olefins Cracker (RLOC), which were non‐existent in 2006, are expected to account for 17%, 14%, 7%, and 7%, respectively by 2012. These investments from international and private players will increase competition and hence reduce the market shares of existing players. Agrochemicals As of 2008, agriculture accounted for a meager 0.1% of the country’s GDP, as a result of which most of the food requirements are met through imports and consumption of fertilizers is limited. Qatar accounted for 13.9% of the MENA region’s fertilizer production during 2007. The country produces only nitrogen fertilizers and does not have reserves of potash and phosphate. Production of nitrogen fertilizers grew at a CAGR of 11.3% between 2002 and 2007 to 1.36 mn tons. With abundant natural gas, we expect Qatar to play an important role in the export of nitrogen fertilizers in the long run. QAFCO is the country’s key exporter of nitrogen fertilizers. In 2007, India accounted for 71% of ammonia exports and 16% of urea exports from QAFCO. With a significant increase in fertilizer consumption in India, we expect Qatar’s nitrogen exports to go up further in the coming years.

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8.1.8 Saudi Arabia Petrochemicals Saudi Arabia is the biggest economy in the MENA region and the leading oil producer in the world. The country undertook initiatives for the chemical industry in 1975, when Aramco started developing a network of gas gathering, processing, and distribution systems to use flared gas from oil wells. This Master Gas System supported the development of energy‐intensive industries, including chemicals. Saudi Arabia, a net importer in the 1970s, has now emerged as the world’s key petrochemical exporter. According to Saudi Arabian Monetary Agency (SAMA), total merchandise exports grew from SAR472, 491 mn in 2003 to SAR877, 457 mn in 2007 at a CAGR of 22.9%. During the same period, oil exports increased from SAR415, 297 mn to SAR772, 989 mn at a CAGR of 23%, while non‐oil related exports increased from SAR57, 194 mn to SAR104, 468 mn at a CAGR of 22.2%. Petrochemical exports outperformed oil and non‐oil related exports with a CAGR of 42.5% from SAR18, 673 mn in 2003 to SAR54, 036 mn in 2007. The widespread availability of cheaper feedstock and infrastructure investments in Jubail and Yanbu were the key factors behind the impressive performance of the petrochemical sector in recent years. The total investments in the chemical industry grew at a CAGR of 2.7% from USD 37.5 bn in 2000 to USD 44 bn in 2006, compared to the GCC growth of 4.98% over the same period. Saudi Arabia’s petrochemical capacity stood at 48.9 mn tons, accounting for a mammoth 73.5% of the MENA region’s total capacity in 2008. The kingdom expects to add 4.6 mn tons and 1.9 mn tons of chemical capacity during 2010 and 2011, respectively. The kingdom exports to over 100 countries and accounts for 7% of the world’s supply of basic petrochemicals. Currently, Jubail industrial city accounts for around 75% of production volumes and the government plans to expand production in similar industrial cities at Yanbu and Rabigh. The icons of Saudi Arabia’s chemical industry are the industry pioneer SABIC and state‐owned Saudi Aramco, which are the key providers of feedstock and controllers of most oil reserves. SABIC is structured as a holding company with a number of wholly‐owned subsidiaries. Furthermore, the company has major stakes in listed companies

Major Projects in Qatar Project Sector Status Value (USD mn)Qatofin ‐ Polyethylene Plant Olefins & Aromatics Ongoing 1,200 QH/Honam ‐ Qatar Petrochemicals Complex (QPCC) Olefins & Aromatics On Hold 2,600 QH/Honam ‐ Qatar Petrochemicals Complex (QPCC) ‐ Aromatics Facility Olefins & Aromatics On Hold ‐ QH/Honam ‐ Qatar Petrochemicals Complex (QPCC) ‐ Ethane Cracker Olefins & Aromatics On Hold 1,100 QH/Honam ‐ Qatar Petrochemicals Complex (QPCC) ‐ Propylene/Polypropylene Plant

Olefins & Aromatics On Hold ‐

QH/Honam ‐ Qatar Petrochemicals Complex (QPCC) ‐ Styrene/Polystyrene Plant Olefins & Aromatics On Hold ‐ QP/ExxonMobil ‐ Ras Laffan Petrochemical Complex Olefins & Aromatics Ongoing 6,000 RLOC ‐ Ras Laffan Olefins Cracker Olefins & Aromatics Ongoing 800 SEEF ‐ Linear Alkyl Benzene (LAB) Plant Olefins & Aromatics Completed 240 Q‐Chem II ‐ HDPE & Alpha Olefins Plant Olefins & Aromatics Ongoing 850 Qafac II ‐ Ammonia & Methanol Expansion Olefins & Aromatics On Hold 800 Qafco V Fertilizers Ongoing 3,200 Qafco VI Fertilizers Ongoing 610 Qapco ‐ Ethylene Expansion (EP2) Olefins & Aromatics Completed 190 Qapco ‐ Low Density Polyethylene Plant (LDPE 3) Olefins & Aromatics Ongoing 410 QMC ‐ Melamine Plant Olefins & Aromatics Ongoing 300 QP ‐ Fahahil Stripping Plant (Regeneration Trains) Olefins & Aromatics Ongoing 275 QP/Shell ‐ Ras Laffan Olefins Complex Olefins & Aromatics Delayed 2,500 Tasnee ‐ Polyacetal Resins Plants Olefins & Aromatics Ongoing 130


SABIC Benefits from Scale and Feedstock Advantages SABIC Japan Asia (excluding

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such as SAFCO, Yansab, and Saudi Kayan. The concentration of petrochemical production in industrial cities, Jubail and Yanbu, and cheaper feedstock translated into an unbeatable scale advantage for SABIC over its international counterparts. CA Cheuvreux estimates SABIC to own an equity interest in 90% of the petrochemicals produced in Saudi Arabia as indicated in the table below.

The government’s decision to diversify its economy and develop the petrochemical industry to take advantage of the kingdom’s large gas reserves led Saudi Aramco to provide feedstock at prices as low as USD 0.75 per mmbtu to SABIC. This subsidy remains a huge competitive advantage for Saudi companies, helping them maintain higher margins. In addition to the development of the gas‐based chemical industry, Saudi Arabia undertook initiatives to develop non‐gas‐based petrochemicals by establishing the Rabigh Refining and Petrochemical Company (Petro Rabigh) that will use the refinery’s naphtha output as feedstock. In 2007, Dow and Saudi Aramco agreed to construct and operate Ras Tanura, an integrated refinery and chemicals/plastics production complex. The complex is set to become the world’s largest foreign direct investment ever in Saudi’s chemical sector. Saudi Arabia supported the plastics industry with large investments and is the biggest producer of several vital components for consumer plastic producers. The kingdom has the highest per capita consumption of plastics in the region at 40 kilograms per capita, twice that of any other GCC country and higher than the world average of 26 kilograms per capita. By the end of 2006, SABIC accounted for 57% of the total chemical capacity in the country. Its market share is estimated to decline to 36% by 2012, due to increased investments in the country by international and private players. Furthermore, the market shares of Yanpet, Sadaf, and Saudi Methanol are likely to decline from 12%, 11%, and 8% in 2006 to 8%, 9%, and 5% by 2012, respectively.

Major Petrochemical Producers in Saudi Arabia Name Ownership Main Products Feedstock LocationSaudi Kayan Petrochemical Co. (SABIC) Public Ethylene, Polyethylene, Ethylene Glycol,

PE, and PP Ethane, Butane Jubail

National Chevron Phillips Private Ethylene, Polyethylene and Propylene Naphtha Jubail Al Jubail Petrochemical Co. (SABIC) Private Ethylene, Polyethylene and Propylene Ethane, Propane, Butane Jubail United Petrochemical Co. (SABIC) Private Ethylene, Ethylene Glycol, High Density

Polyethylene Ethane Jubail

Petrokemya (SABIC) Private Ethylene, Styrene, Benzene, Propylene, PVC

Ethane, Propane, Butane, Naphtha

Jubail

Saudi Arabia Petrochemical Co. (SABIC) Private Ethylene, E. Dichloride, Caustic Soda, Styrene, MTBE

Ethane Jubail

Saudi Methanol Co. (SABIC) Private Methanol Methane Jubail Saudi Ethylene & Polyethylene Co. Private Ethylene, Polyethylene and Propylene Ethane, Propane, Butane Jubail Sahara Petrochemical Co. Public Ethylene, Polyethylene and Propylene Ethane, Propane, Butane Jubail Advanced Polypropylene Co. Public Polypropylene Propane Jubail Saudi European Petrochemical Co. (SABIC)

Private MTBE and Polypropylene Ethane, Propane Jubail

Saudi Polyolefins Co. Private Propylene and Polypropylene Propane Jubail Chemanol Public Methanol, Carbon Monoxide, Dimethyl

Carbonate Methane Jubail

Saudi Arabian Fertilizer Co. (SABIC) Public Urea Methane Jubail Nama Chemicals Public Epoxy, Caustic Soda, Hydrochloric Acid. N/A Jubail Saudi Yanbu Petrochemical Co. Private Ethylene, Polyethylene, Ethylene Glycol,

PE, and PP Ethane, Propane, Butane, Naphtha

Yanbu

Yanbu National Petrochemicals Co. (SABIC)

Public Ethylene, Butene, Propylene, Polyethylene, Ethylene Glycol

Ethane, Propane Yanbu

National Petrochemical Industries Co. Private Propylene and Polypropylene Propane Yanbu Petro Rabigh Public Ethylene, Polyethylene and Propylene Ethane, Propane Rabigh

Source: CA Cheuvreux, Blominvest

55

July 2010

Agrochemicals In 2008, agriculture accounted for 3.2% of the kingdom’s GDP and employed 6.7% of the total labor force. The consumption of fertilizers is limited as the kingdom relies on imports for most of its food requirements. Saudi Arabia accounted for 20.1% of total fertilizer production in the MENA region as of 2007. The designed capacity of the kingdom accounts for 24.6% of the total regional capacity and 3% of the world’s total. The kingdom produces nitrogen and phosphate, but does not have potash reserves. The production of nitrogen fertilizers grew at a CAGR of 7.2% between 2002 and 2007 to 1.83 mn tons. The production of phosphate grew at a CAGR of 2.3% to 139,100 tons during the same period. Since the kingdom has abundant natural gas reserves, we expect Saudi Arabia to play an important role in the production and export of nitrogen fertilizers, going forward. Most importantly, the kingdom’s nitrogen fertilizer producers have significant cost advantages over their international counterparts. Saudi Arabia is expected to play a key role in fertilizer exports with major capacity additions increasing the designed capacity from 6.8 mn tons in 2007 to 20.3 mn tons by 2011. Major capacity expansions of 3.6 mn tons and 6.1 mn tons were estimated for 2009 and 2010, respectively. This was mainly on account of the completion of the Maaden fertilizer complex, a joint venture between SABIC and Saudi Mining Company.

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Major Projects in Saudi Arabia Project Sector Status Value (USD mn)Al Bayroni ‐ Ammonia Plant Revamp Fertilizers Ongoing ‐ Al Rajhi ‐ Jubail Petrochemical Complex Olefins & Aromatics On Hold 4,000 Al Waha ‐ Polypropylene and PDH Plant Olefins & Aromatics Ongoing 613 Alfasel‐ Propylene Plant Olefins & Aromatics Completed 285 Arabian Chlor Vinyl Co. ‐ Jubail Alkali Complex Olefins & Aromatics Ongoing 400 Aramco/Sumitomo ‐ Rabigh Refining & Petrochemical Complex Expansion Olefins & Aromatics Ongoing 2,000 Chemanol ‐ Dimethylformamide (DMF) Facility Olefins & Aromatics Ongoing 60 JCP ‐ Integrated Styrene Scheme Olefins & Aromatics Completed 1000 NAMA ‐ Hassad Petrochemical Complex Olefins & Aromatics Completed 175 OSOS Petrochemicals Co. ‐ Yanbu Petrochemicals Complex Olefins & Aromatics Delayed 1,000 Petchem ‐ Jubail Petrochemical Complex Olefins & Aromatics Ongoing 5,200 PETRORabigh ‐ Rabigh Refining & Petrochemical Complex (Phase 1) Olefins & Aromatics Completed 10,100 PETRORabigh ‐ Rabigh Refining & Petrochemical Complex (Phase 1) ‐ Ethane Cracker and High Olefin Fluid Catalytic Cracker

Olefins & Aromatics Completed 850

PETRORabigh ‐ Rabigh Refining & Petrochemical Complex (Phase 1) ‐ MEG and PO Plants

Olefins & Aromatics Completed 852

PETRORabigh ‐ Rabigh Refining & Petrochemical Complex (Phase 1) ‐ Polymers Plants Package

Olefins & Aromatics Completed 1,000

SABIC /Asahi Kasei ‐ Jubail Acrylic Plant Olefins & Aromatics Ongoing ‐ SATORP ‐ Jubail Refinery & Petrochemical Complex ‐ Aromatics Package Olefins & Aromatics Ongoing 700 Saudi Kayan ‐ Jubail Petrochemicals Complex Olefins & Aromatics Ongoing 10,000 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ Amines Plant Olefins & Aromatics Ongoing 400 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ EO/EG Plant Olefins & Aromatics Ongoing 500 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ HDPE Plant Olefins & Aromatics Ongoing ‐ Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ LDPE Plant Olefins & Aromatics Ongoing 300 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ Phenolics Complex Olefins & Aromatics Ongoing 1,200 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ Polycarbonate Plant Olefins & Aromatics Ongoing 1,300 Saudi Kayan ‐ Jubail Petrochemicals Complex ‐ Polypropylene Plant Olefins & Aromatics Ongoing 341 SEPC ‐ Jubail Olefins Complex ‐ HDPE & LDPE Package Olefins & Aromatics Completed 630 Sharq ‐ Petrochemical Expansion Olefins & Aromatics Completed 3,640 Sharq ‐ Petrochemical Expansion ‐ Ethane/Propane Cracker Package Olefins & Aromatics Completed 900 Sharq ‐ Petrochemical Expansion ‐ Ethylene Glycol (EG) Package Olefins & Aromatics Completed 400 Sharq ‐ Petrochemical Expansion ‐ Polyethylene (PE) Package Olefins & Aromatics Completed ‐ Sino Saudi Petrochemical ‐ Jubail Olefins Complex Olefins & Aromatics On Hold 5,000 Sipchem Phase 3 ‐ Jubail Polyolefins Complex Olefins & Aromatics Ongoing 7,000 Sipchem Phase 3 ‐ Jubail Polyolefins Complex ‐ Olefins Cracker Package Olefins & Aromatics Ongoing 1,100 Teldene‐ Polypropylene Plant Olefins & Aromatics Completed 215 Al Zamil / Chemtura ‐ Jubail Metal Alkyls Plant Olefins & Aromatics Ongoing 150 Alujain Corporation ‐ Jubail Iso‐Octane Plant Olefins & Aromatics On Hold 550 APPC ‐ Propane Dehydrogenation and Polypropylene Plant Olefins & Aromatics Completed 774 Ar Razi ‐ 5th Methanol Plant Olefins & Aromatics Completed 600 Arabian Amines Co. ‐ Ethylene Amines Complex Olefins & Aromatics Completed 289 Chemanol ‐ Methanol Plant Olefins & Aromatics Completed 150 Chemanol ‐ Pentaerythritol Production Facility Olefins & Aromatics Ongoing ‐ Dammam 7 ‐ Acrylic Acid and Acrylates Complex Olefins & Aromatics Ongoing 400 Delta Oil ‐ Ethane/Propane Cracker Olefins & Aromatics Cancelled 2,000 Gulf Farabi ‐ Benzene Recovery Unit Olefins & Aromatics Cancelled 50 Ibn Rushd ‐ Propane Dehydrogenation PDH Olefins & Aromatics Ongoing ‐ Ibn Rushd ‐ Yanbu PET Conversion and Debottlenecking ‐ Phase 1 Olefins & Aromatics Completed 150 Ibn Rushd ‐ Yanbu PET Conversion and Debottlenecking ‐ Phase 2 Olefins & Aromatics Ongoing ‐ Ibn Zahr ‐ Jubail Polypropylene 3 Plant Olefins & Aromatics Completed 800

57

July 2010

8.1.9 The United Arab Emirates (UAE) Petrochemicals In the UAE, the rapid expansion of other sectors significantly boosted the demand for natural gas and resulted in a supply constraint. As a result, the country undertook several initiatives to increase natural gas processing and Natural Gas Liquid (NGL) recovery. NGLs are liquid hydrocarbons recovered from natural gas in gas processing facilities and include ethane, propane, and butane, among others. NGLs are generally more suitable as petrochemical feedstock than produced gas and can be recovered from a natural gas stream as a liquid to be sold separately from piped gas. Abu Dhabi National Oil Company (ADNOC), a state‐owned enterprise, is the major player in the oil, gas, and petrochemical industries in the country. ADNOC established Abu Dhabi Gas Industries (GASCO) in a joint venture with other international players for processing gas from onshore oil production. GASCO transports processed NGLs to the Ruwais plant where they are divided into ethane, propane, butane, and pentane. While ethane is transported to the neighboring Borouge petrochemicals plant, propane, butane, and pentane are stored in special tanks for subsequent export by gas carriers or tankers from the Ruwais plant. The total investments in the chemical industry grew at a CAGR of 8.2% from USD 3.66 bn in 2000 to USD 5.87 bn in 2006, much higher than the GCC average of 4.98% over the same period. The UAE’s petrochemical capacity stood at 1.4 mn tons, accounting

Project Sector Status Value (USD mn)Ibn Zahr ‐ Jubail Polypropylene 3 Plant ‐ OCU package Olefins & Aromatics Completed 100 Ibn Zahr ‐ Jubail Polypropylene 3 Plant ‐ PP package Olefins & Aromatics Completed 302 Jana ‐ Epoxy Plant Expansion Olefins & Aromatics Ongoing ‐ Kemya/Yanpet ‐ Synthetic Rubber Plants Olefins & Aromatics Ongoing 5,000 Midroc/House of Invention/Sara Holding ‐ Isocyanates Complex Olefins & Aromatics Ongoing 800 Petrokemya ‐ Debottlenecking/Expansion of Cracker Units 1 and 3 Olefins & Aromatics Cancelled ‐ Petrokemya ‐ Jubail ABS plant Olefins & Aromatics Ongoing 300 Petrokemya ‐ PVC and Offsites & Utilities Package Olefins & Aromatics Cancelled ‐ Petrokemya ‐ VCM Plant Expansion Project Olefins & Aromatics Cancelled ‐ Rowad ‐ Bi‐Axially Oriented Polypropylene Plant (BOPP) Olefins & Aromatics Ongoing 53 SABIC/MRC ‐ Acrylates Plant Olefins & Aromatics Ongoing 1,000 Sadaf ‐ Styrene Plant 3 Olefins & Aromatics Ongoing 600 Safco 4 ‐ Urea and Ammonia Plant Fertilizers Completed 630 Safco 5 ‐ Urea and Ammonia Plant Fertilizers Ongoing 500 Safra ‐ Yanbu Phase 2 Aromatics Expansion Olefins & Aromatics Delayed 400 Saudi Acrylic Monomer Co. ‐ Acrylic Acid Plant Olefins & Aromatics Ongoing 700 Saudi Acrylic Monomer Co. ‐ Acrylic Acid Plant Olefins & Aromatics Ongoing 700 Saudi Maaden ‐ Phosphate and Fertilizer Complex ‐ Ammonia Plant Fertilizers Ongoing 950 SEPC ‐ Jubail Olefins Complex Olefins & Aromatics Completed 2,400 SEPC ‐ Jubail Olefins Complex ‐ Ethane/Propane Cracker Package Olefins & Aromatics Completed 1,200 Sipchem ‐ Jubail Ammonia Plant Fertilizers Delayed ‐ Sipchem Phase 2 ‐ Jubail Acetyls Complex ‐ Acetic Acid and VAM Package Olefins & Aromatics Completed 1,000 Sipchem Phase 2 ‐ Jubail Acetyls Complex ‐ Carbon Monoxide Unit Olefins & Aromatics Completed 200 Sipchem Phase 2 ‐ Jubail Acetyls Complex Olefins & Aromatics Completed 1,830 Sipco ‐ Yanbu Linear Alkyl Benzene (LAB) Plant Olefins & Aromatics On Hold 170 SPC ‐ Polypropylene (PP) Expansion Olefins & Aromatics Ongoing 560 Yansab ‐ Yanbu Olefins Complex Olefins & Aromatics Completed 5,000 Yansab ‐ Yanbu Olefins Complex ‐ Benzene Toluene Xylene (BTX) Plant Olefins & Aromatics Completed 150 Yansab ‐ Yanbu Olefins Complex ‐ Ethane/Propane Cracker Olefins & Aromatics Completed 1,000 Yansab ‐ Yanbu Olefins Complex ‐ Ethylene Glycol (EG) Plant Olefins & Aromatics Completed 400 Yansab ‐ Yanbu Olefins Complex ‐ High Density Polyethylene (HDPE) Plant Olefins & Aromatics Completed 400 Yansab ‐ Yanbu Olefins Complex ‐ LLDPE and PP Plant Olefins & Aromatics Completed 400



for 2.1% of the MENA region’s petrochemical capacity in 2008. But the UAE’s petrochemical industry remains robust and attractive due to the availability of cheaper feedstock at subsidized prices between USD 1.25 and USD 1.5 per mmbtu. This subsidy provides a strong competitive advantage to UAE‐based companies over their counterparts in other regions. The plastics industry is expected to witness tremendous growth as well. According to Dubai Multi Commodities Center (DMCC), the plastics industry in the UAE has developed rapidly with the number of factories increasing from 507 in 2003 to 679 in 2007. In tandem, investments increased from AED 144.75 mn to AED 154.38 mn during the same period. Feedstock supplies are expected to increase from 4.3 mn tons in 2008 to 11.7 mn tons by 2013, which will translate into further opportunities for plastics and petrochemicals companies. Most importantly, the plastics industry has helped boost employment in the country by creating about 7,000 jobs in just two years between 2003 and 2005. GCG estimates the UAE’s annual chemical production to increase from 4.7 mn tons in 2006 to 10.4 mn tons in 2012 with significant capacity additions in major projects. In 2006, Borouge, Takreer, and Fertil accounted for 13%, 60%, and 23%, respectively of the chemicals market. However, by 2010, Borouge is estimated to become the leader with 35% of the market, followed by Takreer, Fertil, and Hamriyah with 32%, 22%, and 8%, of market share respectively. Agrochemicals Agriculture accounts for 1.1% of the country’s GDP, employing about 7% of the total labor force. Irrigation remains a problem in the country, as a result of which the government has taken steps to canalize recycled water for agricultural purposes to conserve ground water resources. The consumption of fertilizers in the country is limited, as most of the food requirements are met through imports. The country produces only nitrogen fertilizers and does not have potash or phosphate reserves. The production of nitrogen fertilizers grew at a low CAGR of 0.9% between 2002 and 2007 to 298,310 tons. During 2007, the UAE accounted for only 3.1% of MENA region’s total fertilizer production. Going forward, we expect this percentage to go up because of a likely increase in nitrogen production.

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Major Projects in UAE Project Sector Status Value (USD mn)Borouge ‐ Base Chemicals Olefins & Aromatics Ongoing N/A Borouge ‐ Ruwais Melamine Plant Olefins & Aromatics Cancelled 175 Borouge 2 Olefins & Aromatics Ongoing 5,500 Borouge 2 ‐ Ethane Cracker Package Olefins & Aromatics Ongoing 1,300 Borouge 2 ‐ Olefins Conversion Unit (OCU) Olefins & Aromatics Ongoing 300 Borouge 2 ‐ Polyolefins Package Olefins & Aromatics Ongoing 1,855 Borouge 3 Olefins & Aromatics Ongoing 3,000 Borouge 3 ‐ Ethane Cracker Package Olefins & Aromatics Ongoing 1075 Borouge 3 ‐ LDPE Package Olefins & Aromatics Ongoing N/A Borouge 3 ‐ Offsites and Utilities Package Olefins & Aromatics Ongoing N/A Borouge 3 ‐ Polyolefins Package Olefins & Aromatics Ongoing 3000 Chemaweyaat ‐ Tacaamol Petrochemical Complex Olefins & Aromatics Ongoing 10,000 ADIC ‐ Ruwais Gasoline & Aromatics Expansion (GAE) Olefins & Aromatics Ongoing 1,000 ADNOC ‐ PTA/PET Complex Olefins & Aromatics Ongoing 1,000 Fertil ‐ Expansion of Urea Plant (debottlenecking) Fertilizers Completed 117 Fertil ‐ Ruwais Fertilizer Plant Expansion Fertilizers Ongoing 1,200 KGL Petroleum ‐ Mono Ethylene Glycol Plant Olefins & Aromatics Delayed 2,000 OCPL ‐ Hamriyah Ammonia & Urea Plant Olefins & Aromatics Ongoing 200


59

July 2010

8.2 MENA Chemical Company Profiles

8.2.1 Saudi Arabian Basic Industries Corporation (SABIC)

Stock Performance

25

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125

175

225

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May‐08

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Aug

‐09

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5000

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9000

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13000

Index

SABICTADAWUL


Market cap (Mar 29,2010) Market Cap (Mar 29, 2009)

SAR 295,500 mn SAR 119,100 mn


Major Shareholders Holding (%)

Public 30 Government 70


Revenue break‐down

84%

5%8% 3%

Petrochemica ls Ferti l i zersMeta ls Corporate

Source: Company Report, Blominvest Key Financials (SAR’000)

2009 2008

Total revenues 103,092,300 150,809,596 EBITDA 29,717,200 46,643,290 Net earnings 9,061,969 22,029,840 Free cash flow 1,718,390 19,634,330 Total Assets 296,232,000 271,760,000 Total Liabilities 144,562,300 125,118,400 Shareholders' Equity 151,669,700 146,641,600 Enterprise Value 340,819,000 239,837,800


Saudi Basic Industries Corporation (SABIC) is one of the world’s leading manufacturers of chemicals, fertilizers, plastics, and metals. The company supplies materials to other companies, which in turn use them to produce an array of end‐products. SABIC Innovative Plastics, launched in 2007, is a leading, global supplier of engineering thermoplastics with a 75‐year history of breakthrough solutions. Recent Developments • A 50‐50 joint venture between SABIC and China Petroleum & Chemical Corporation (Sinopec) named Sinopec‐Sabic‐Tianjin Petrochemicals Co. received 12.3 bn Yuan in long‐term financing from Chinese lenders and an additional 6 bn Yuan for working capital needs. The new plant is expected to produce 3.2 mn tons of various chemical products annually.

• SABIC plans to set up a SAR 375 mn Plastic Applications Development Centre at Riyadh Techno Valley by 2012, spread over an area of 110,000 square meters. The centre is likely to be ready by 2012 and would support Saudi’s downstream industry by producing diversified plastic products for a wide range of applications.

• SABIC recently signed an agreement for the private placement of a bond worth SAR 10 bn with the Public Investment Fund. The proceeds from the bond would be directed for financing part of SABIC’s strategic projects and programs in a bid to improve its financial performance, boost competitiveness, and contribute to the company's expansion and growth.

Financial Analysis During 2009, SABIC posted a 31.6% decline in total revenues to SAR 103.09 bn from SAR 150.81 bn in 2008, due to the global financial crisis. Additionally, the company’s net earnings declined several times to SAR 9.06 bn from SAR 22.03 bn due to a sharp decline in prices of petrochemicals, plastics, and metals. The company’s total production volume stood at 59 mn tons reflecting an increase of 4% over the last year, while total quantity sold was up 5% to 46 mn tons. In addition, the company’s free cash flow plunged 91.2% to SAR 1.72 bn from the earlier SAR 19.63 bn. Management outlook SABIC expects to accelerate profit growth in 2010 with an improvement in product prices and output capacities. The demand for the company’s petrochemical products is anticipated to increase in Europe and the US, and even more rapidly in China. The company plans to start operations at new plants owned by affiliates in Saudi and China beginning the first half of 2010. With China being the world’s largest petrochemical market, SABIC is looking forward to more partnerships in the country, especially with Sinopec to set up polycarbonate plants and more units for the automotive industry. The company also plans to start its 35%‐owned company Saudi Kayan during the second half of 2010.

Company Overview


8.2.2 Saudi International Petrochemical Company (Sipchem)

Saudi International Petrochemical Co. (Sipchem) is a public company engaged in establishments, operations, and investments in the petrochemical industry, across both basic and intermediate products, for the purpose of producing chemicals that are used in the manufacturing of a number of end‐products. The company’s affiliated companies include International Methanol Company, which produces 1 mn tons of methanol annually; International Diol Company, which manufactures Butanediol, Tetrahydrofuran and Gamma‐butyrolactone; International Acetyl Company, whose product line comprises Acetic Acid and Acetic Anhydride; International Vinyl Acetate Company, which manufactures vinyl acetate monomer; and International Gases Company, which produces carbon monoxide.

Recent Developments • Sipchem signed a memorandum of understanding with King Fahd University of Petroleum and Minerals (KFUPM) and the Ministry of Petroleum & Minerals to establish a research center for the development of polymers technology and applications. The SAR 80 mn center would be spread over 15,000 square meters.

• Recently, Sipchem completed the sale of an 11% stake in both Acetyl Co. and International Vinyl Acetate Co. to Kuwait's Ikarus Petroleum Industries Co. The stakes were sold for a combined value of SAR 240 mn and the company made a profit of SAR 55 mn on the deal. Following the deal, Sipchem’s stake in each unit came down to 76%.

• SABIC and Sipchem signed a memorandum of understanding for setting up new projects in Jubail. The MoU is for seven projects with different costs and varied end products. They are expected to come online by mid‐2013.

Financial Analysis During 2009, Sipchem’s revenues plummeted 51.4% to SAR 830.40 mn from SAR 1.71 bn in 2008, due to the economic crisis affecting the demand for petrochemical products. Furthermore, the company’s net earnings dropped to SAR 140.88 mn from SAR 536.78 mn a year ago. The unscheduled maintenance shutdowns for 9 days at the methanol plant and 26 days for the butanediol plant during the second quarter of 2009, coupled with the increase in the price of butane for the butanediol plant, hurt the company’s profits. Free cash outflow widened to SAR 1.72 bn compared to SAR 1.47 bn in 2008. Meanwhile, the company received SAR 55 mn as profit from the sale of its shares in two affiliates during the first half of 2009.

Management Outlook Looking ahead at 2010, the Acetyls complex will double the company’s annual capacity to 2.2 mn tons with full‐year benefits of new product lines. Also, 2010 revenue is estimated to increase almost 3 times compared to that in 2009 due to increasing demand and price improvements. Additionally under Phase III expansion, which is likely to be complete by mid‐2014, Sipchem plans to add 125,000 tons of polyvinyl acetate (PVA) and 200,000 ton of ethylene vinyl acetate (EVA).

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SIPCHEMTADAWUL

Source: Bloomberg, Blominvest Market cap (Mar 29,2010) Market Cap (Mar 29,2009)

SAR 7,850 mn SAR 5,633.3 mn Source: Bloomberg, Blominvest


Public 60 Corporate 30.4 Government 9.6


Key Financials (SAR’000)

2009 2008

Total revenues 830,402 1,708,582 EBITDA 329,412 1072,429 Net earnings 140,879 536,782 Free cash flow (1,719,149) (1,474,681) Total Assets 11,831,330 10,833,390 Total Liabilities 5,999,371 4,975,121 Shareholders' Equity 5,831,954 5,858,267 Enterprise Value 12,208,050 7,365,628 Source: Bloomberg, Blominvest

Company Overview

61

July 2010

8.2.3 Industries Qatar (IQ)

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‐09

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IQDSM


Market cap (Mar 29,2010) Market cap (Mar 29,2009)

QAR 61,875 mn QAR 42,955 mn



Public 25.7 Corporate 4.3 Government 70



20%

10%

39%

31%

Petrochemica ls Fuel additivesSteel Ferti l i zers

Source: Company Report, Blominvest Key Financials (QAR’000)

2009 2008

Total revenues 9,656,667 14,743,060 EBITDA 3,847,263 7,198,669 Net earnings 4,875,740 7,275,554 Free cash flow 3,235,638 5,697,774 Total Assets 27,121,290 27,449,660 Total Liabilities 8,061,196 9,195,200 Shareholders' Equity 19,060,100 18,254,460 Enterprise Value 62,804,000 51,808,340 Source: Bloomberg, Blominvest

Industries Qatar, established in April 2003, operates across a range of activities from metals to petrochemicals and its products are sold in markets that are as diverse as India, Australia, and the US. The company has a number of world‐class production facilities in Qatar and the UAE. Being one of Qatar’s biggest companies, it employs over 3,000 people with offices across several parts of the world. The company is a conglomerate of four companies ‐ Qatar Petrochemical Company Limited Q.S.C. (QAPCO), Qatar Fertilizer Company S.A.Q. (QAFCO), Qatar Steel, and Qatar Fuel Additives Company Limited Q.S.C. (QAFAC). Qatar Steel Company manufactures steel billets and reinforcing bars; QAPCO manufactures and markets ethylene, polyethylene, hexane, and other related products; QAFCO manufactures and markets ammonia and urea; and QAFAC is engaged in the production and export of methyl tertiary‐butyl‐ether and methanol. Recent Developments Industries Qatar received government approval for a total of QAR 1.6 bn in settlement for steel price caps in early 2009. The government put a limit on steel prices in the local market during the second and third quarters of 2008 because of increased demand fueled by the construction boom in the Gulf state. Financial Analysis During 2009, Industries Qatar’s total revenues plummeted 34.5% to QAR 9.66 bn from QAR 14.74 bn in 2008. Despite grants from the government, the company’s net earnings reduced 33.0% to QAR 4.88 bn from QAR 7.28 bn, mainly due to the shrinkage in revenues. In early 2009, the government gave a grant of QAR 1.17 bn to the company mainly on account of selling steel at administered rates. Free cash flow stood at QAR 3.24 bn compared to QAR 5.70 bn in 2008. On a positive note, the company is likely to improve its performance over the upcoming quarters as the macroeconomic environment improves.

Management Outlook According to Industries Qatar, total investments in expansions and future projects to be undertaken by its subsidiaries through 2011 amount to QAR 21.3 bn, of which the firm’s share accounts for QAR 14.7 bn. The QAR 1.5 bn (of which IQ’s share is QAR 1.2 bn) LDPE project with a designed capacity of 250,000 tons per annum, being undertaken by QAPCO as part of its expansion plan, is expected to come online during the third quarter of 2011.

Company Overview


8.2.4 Boubyan Petrochemicals Company (BPC)

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BoubyanKSE



KWD 271.7 mn KWD 215.9 mn Source: Bloomberg, Blominvest


Public 86.6 Corporate 13.4



79%

21%

Investments Manufacturing and trading

Source: Company Report, Blominvest Key Financials (KWD’000)

9M09 9M08

Total revenues 13,638.98 18,849.36 Net earnings 9526.60 19,205.06 Free cash flow 6787.95 (10,113.87) Total Assets 407,316 425,038 Total Liabilities 193,108 199,920 Shareholders' Equity 214,207 225,118 Enterprise Value 382,489.80 359,315.00


Boubyan Petrochemical Company KSC, a Kuwait‐based public shareholding company, is engaged in direct investments in the industrial sector with special focus on chemical projects. The company has invested in Equate Petrochemical Company KSCC, which is incorporated in Kuwait to build and operate petrochemical plants in the Shuaiba industrial area. It has a wholly owned subsidiary, Boubyan Plastic Industries Company that manufactures and trades in packaging materials. The company’s portfolio of invested companies includes National Waste Management Company KSCC, a household waste recycling company; Muna Noor Manufacturing and Trading Co LLC, an Oman incorporated manufacturer and trader of plastic pipes; and Olayan Arabian Packaging Company LLC, a Saudi Arabia‐based manufacturer and trader of packaging material. New Projects and Strategies The focus of BPC on expanding its investments in the petrochemicals sector across the GCC region is expected to drive its long‐term growth. Additionally, the company is looking for suitable investment opportunities even as it divested unprofitable businesses in order to maximize the returns on its investment portfolio. Boubyan’s Equate investment generates healthy returns and is expected to further improve the company’s profitability given that expansion plans are already in place. PIC, a wholly owned subsidiary of Kuwait Petroleum Corporation and Dow Chemical, is dedicated toward the construction of a new ethylene and derivatives complex in Kuwait referred to as the Olefins II project. The project will be managed and operated by Equate and is being constructed adjacent to the current production facilities of the company. Financial Analysis During 9M09, Boubyan Petrochemicals Company registered a decline of 27.6% in total revenues to KWD 13.64 mn compared to KWD 18.85 mn in 9M08. The company’s free cash flow stood at a positive KWD 6.79 mn as against a negative cash flow of KWD 10.11 mn in 9M08. However, net earnings reduced 50.4% to KWD 9.53 mn from KWD 19.21 mn. Management Outlook Petrochemicals sector has witnessed weak demand and falling product prices as a result of the slump across global economies. However, the prices of petrochemicals have been increasing providing a cushion to the industry. Although these factors provide a improving outlook for the companies in the sector, Boubyan’s weak fundamentals and exposure to investments amid volatile capital markets result in a cautious outlook for the company. However, the company’s beneficial investments in Equate could help it to revive.

Company Overview

63

July 2010

8.2.5 Saudi Arabian Fertilizer Company (SAFCO)

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SAFCOTADAWUL



SAR 36,562.5 mn SAR 22,750 mn Source: Bloomberg, Blominvest


Public 43 Corporate 43 Government 14



2009 2008

Total revenues 2,740,708 5,235,760 EBITDA 1,960,149 4,575,748 Net earnings 1,804,287 4,279,788 Free cash flow 1,987,921 4,217,747 Total Assets 8,807,829 9,850,037 Total Liabilities 1,793,059 1,816,078 Shareholders' Equity 7,014,770 8,033,959 Enterprise Value 27,875,150 19,339,120


Saudi Arabian Fertilizer Co (SAFCO) is engaged in the production, processing, manufacturing, and marketing of all kinds of fertilizers like ammonia, urea, melamine and sulfuric acid for local and international markets. SABIC owns 43% of the company, while the remaining 43% and 14% is held by the public and government. With many industrial projects underway and partnerships with other companies, SAFCO is a financially strong company. SAFCO in partnership with SABIC owns 50% of National Chemical Fertilizer (Ibn Al‐Baytar), 3.7% of Ibn Rushd, 5% of SABAYEK, and 1.69% of Yansab. Meanwhile, SAFCO’s highly efficient urea plant has played a key role in the development of agriculture in Saudi Arabia and many other countries through effective marketing strategies. The company achieved a major milestone when it completed a significant expansion in the production capacity of chemical fertilizers between 1993 and 2006 by establishing seven factories in the Jubail industrial city. The expansion added 2.3 mn tons of urea and 2.1 mn tons of ammonia capacities, taking the actual production to 5.3 mn tons. Recent Developments • The board of directors of SAFCO approved the distribution of SAR 1.25 bn cash dividends to its shareholders for the first half of 2009.

• The General Organization for Social Insurance, a Riyadh‐based pension fund, increased its stake in SAFCO to 14.5% from 14.2% in a bid to expand investments and benefit from a market rally.

Financial Analysis During 2009, SAFCO recorded a decline of 47.7% in total revenues to SAR 2.74 bn from SAR 5.24 bn in 2008, due to falling international prices of urea and ammonia and cutbacks due to maintenance shutdown at four of its plants. The company’s net earnings fell 57.8% to SAR 1.80 bn from SAR 4.28 bn in 2008. The company’s free cash flow plunged 52.8% to SAR 1.99 bn compared to SAR 4.22 bn in 2008.

Management outlook: SAFCO revealed its plans to cut costs and enter new markets in order to boost profits in 2010 as prices for products are expected to remain at 4Q09 levels. The company’s chairman said that the company could post improved 1Q10 earnings if chemical prices remain stagnant and its plants maintain the current production levels. However, excess capacity in the global nitrogen fertilizer market is a matter of concern for the company.

Company Overview


8.2.6 Arab Potash Company (APC)

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APCJordan


Market cap (Mar 29,2010) Market Cap (Mar29,2009)

JOD 2,882.8 mn JOD 3,056.9 mn Source: Bloomberg, Blominvest


Public 3 Corporate 28 Government 69



Numeira Co.

0.06%

KEMAPCO11%

Arab Potash Co.89%

Source: Company Report, Blominvest Key Financials (JOD’000)

9M09 9M08

Total revenues 267,262 461,837 EBITDA 130,774 269,198 Net earnings 106,157 218,236 Free cash flow 119,285 97,374 Total Assets 830,404 737,627 Total Liabilities 140,765 188,731 Shareholders' Equity 689,639 548,896 Enterprise Value 2,804,149 4,366,138 Source: Bloomberg, Blominvest

Arab Potash Company PLC is a Jordan‐based mining company that manufactures and supplies minerals for use in the agricultural and chemical industries. The company, along with its subsidiaries, produces a range of minerals and has four manufacturing plants across Jordan ‐ the hot leach plant, the cold crystallization plant, the compaction plant, and the industrial potash plant. Its subsidiaries and affiliated companies include Numeira Mixed Salts and Mud Company, Jordan Dead Sea Industries Company, Jordan Magnesia Company, Arab Fertilizers and Chemicals Industries Ltd. (KEMAPCO), Jordan Bromine Company, Jordan for Investment, and South Development and Nippon Jordan Fertilizers Company. Recent Developments • APC recently signed an MOU with the Indonesian fertilizer producer Kaltim for the supply of up to 150,000 tons of potash as the plant comes online in 2010‐11.

• Aqaba Development Corporation (ADC) signed a 30‐year build, operate, and transfer agreement with Jordan Phosphate Mines Company and APC, the two main users of the industrial terminal. The agreement comes as part of ADC’s efforts to develop ports in Aqaba in line with promoting the Aqaba SEZ.

• On July 24, 2009, the company reached an agreement with India regarding contracts for the 2009‐10 period. As part of the contract, APC will supply 600,000 tons of potash between August 2009 and March 2010 at a price of USD 460 per ton.

Financial Analysis During 9M09, APC registered a decline of 42.1% in total revenues to JOD 267.26 mn from JOD 461.84 mn recorded in 9M08, due to declining sales volume. The decline was slightly offset by a 33% rise in average price per ton. Furthermore, the company posted a 51.4% drop in net profit to JOD 106.16 mn, due to higher wages, cost of employee lawsuits, and higher mining royalty fees. Meanwhile, sales of potash declined 53% to 663,000 tons during 9M09 compared to the same period of 2008. During 3Q09, India and China accounted for 66% of revenues compared to 38% in 3Q08. In terms of production, potash production during 9M09 was 885,000 tons compared to 975,000 tons in 9M08, a decline of 9%. Production levels remained the same as that during 1H09 following stoppages during 3Q09 in order to manage inventory levels. Management Outlook Potash prices are not expected to rebound in the near short‐to‐medium term which raises further concerns about the global potash industry. Furthermore, the industry would not be able to retain its pricing power due to factors like tougher price negotiations with China, abundance of supply and the potential entry of new producers. These global concerns are surely to affect APC’s performance in the upcoming quarters.

Company Overview

65

July 2010

8.2.7 Jordan Phosphate Mines Company (JPMC)

Jordan Phosphate Mines Company (JPMC) is a public shareholding company engaged in mining, producing, and marketing phosphate rock and fertilizers in Jordan. The company operates in three mining locations in the central and southern parts of Jordan, Al Hassa, Al Abiad, and Eshidiya mines. It produces 7 mn tons of phosphate rock annually. JPMC owns and operates a complex in Aqaba that produces phosphoric acid, di‐ammonium phosphate, and aluminum fluoride. The company holds capital shares in Indo‐Jordan Chemicals Company Limited and Nippon Jordan Fertilizer Company Limited. Recent Developments • JPMC launched the expansion of Jordan Al Abyad Fertilizers and Chemicals Company (JAFCCO) along with a venture capital bank. Through a syndicate facility led by Jordan Ahli Bank, the two companies finalized a USD 45 mn financing loan. The loan would be used to expand and diversify the production of fertilizers, chemicals and high‐value derivatives in order to focus more on high‐demand products to be sold locally and internationally.

• Jordan recently laid the foundation for a USD 625 mn Jordan‐Indian project to manufacture phosphoric acid. The project is part of a range of projects that JPMC intends to realize by 2013 with investments exceeding USD 1.3 bn in a bid to modernize present fertilizer plants and increase their output by 350,000 tons annually.

Exploration activities JPMC designs its exploration program on the basis of geological data from the Jordanian Natural Resources Authority following initial testing procedures and its own field observations and aerial surveys. JPMC currently has exploration and mining licenses for a total area of 52 square kilometers at the mines in Al‐Hassa and Al‐Abiad and 258 square kilometers at Eshidiya. The company’s estimated total reserves of phosphate bearing ore at its three operating mines were 1,459 mn tons as of December 31, 2008. Financial Analysis During 2009, JPMC reported a decline of 45.9% in total revenues to JOD 458.25 mn from JOD 846.89 mn a year ago. Additionally, the company’s net earnings also slumped 61.1% to JOD 92.88 mn from JOD 238.62 mn in 2008. Meanwhile, free cash flow declined to JOD 66.26 mn from JOD 171.20 mn. Total assets increased 4.2% to JOD 574.28 mn, while total liabilities declined 24.0% to JOD 101.86 mn. Management Outlook For 2010, the company not only aims to maintain but also to increase its production and sales levels as compared to the previous five years. Also, it seeks to carry on work to execute other strategic joint ventures, such as the Indonesian‐Jordanian JV that was signed at the beginning of 2010. It would continue to work on the establishment of the rock phosphate port in Aqaba. Besides all the other future projects, JPMC will also upgrade and expand the current industrial port with The Arab Potash Company.

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JPMCJordan

Source: Bloomberg, Blominvest Market cap (Mar 29,2010) Market Cap (Mar 29,2009)

JOD 1,222.5 mn JOD 1,334.3 mn Source: Bloomberg, Blominvest


Public 48

Government 52



52%46%

2%

Phosphate Fertil izersTrading in raw materials

Source: Company Report, Blominvest Key Financials (JOD’000)

2009

2008

Total revenues 458,245 846,891 EBITDA 114,094 279,063 Net earnings 92,878 238,621 Free cash flow 66,255 171,198 Total Assets 574,284 551,097 Total Liabilities 101,859 133,984 Shareholders' 472,424 417,113 Enterprise

l1,182,352 1,325,987


Company Overview


8.2.8 Saudi Industrial Investment Group (SIIG)

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SI IGTADAWUL


Market cap (Mar 29,2010) Market Cap (Mar 29,2009)

SAR 9,787.5 mn SAR 5,445.0 mn Source: Bloomberg, Blominvest


Public 80 Corporate 3.1 Government 10.6 Private 6.3



2009 2008

Total revenues 516,279 2,099,419 Net earnings 284,975 48,752 Free cash flow (8,178,920) (1,616,891) Total Assets 19,675,130 8,649,028 Total Liabilities 11,731,360 3,451,800 Shareholders' Equity 7,943,773 5,917,228 Enterprise Value 17,827,680 4,550,608


Saudi Industrial Investment Group (SIIG) is a public shareholding company engaged in industrial investment activities in Saudi Arabia. The company's core area of business is in the petrochemicals industry. It operates through subsidiaries, including Saudi Chevron Phillips Company, which produces benzene, cyclohexane, and gasoline; Jubail Chevron Philips Company, which produces styrene, propylene and motor gasoline; and National Petrochemicals Company, which constructs, develops, and operates petrochemicals, gas, and petroleum producing companies. SIIG has investments in Saudi Nylon Company and Saudi Benzene Company. New Projects and Strategies In order to expand the production and portfolio of hydrocarbon and aromatic products, SIIG is focused on increasing its investments in the petrochemical industry. For this purpose, the group has a strategic tie‐up with Chevron Phillips to facilitate the development of petrochemical industries and increase its market share. Furthermore, the company along with Saudi Chevron Phillips is engaged in the development of their third project ‘Saudi Polymers Company’. SIIG’s stake in this company will be indirect through its wholly owned subsidiary Petrochem, which is likely to hold 65% of the project. The development of the new plant commenced in September 2008 and is expected to be the world’s largest olefins unit with downstream units to produce ethylene, hexane, polyethylene, polypropylene, and polystyrene. Saudi Polymers is likely to be integrated with Saudi Chevron Phillips and Jubail Chevron Phillips to a certain extent to enable operational efficiencies once the plant becomes fully operational by 2011. Financial Analysis During 2009, SIIG reported a decline of 75.4% in total revenues to SAR 516.28 mn from SAR 2.10 bn a year ago. Additionally, the company’s net earnings soared several times to SAR 284.98 mn from SAR 48.75 mn in 2008. The company did not have any major investments during the period. Meanwhile, free cash outflow widened to SAR 8.18 bn from SAR 1.62 bn. Total liabilities and total assets increased several times to SAR 11.73 bn and SAR 19.67 bn from SAR 3.45 bn and SAR 8.65 bn, respectively. Management Outlook As the demand for petrochemical products is on the increase with prices consolidating, SIIG’s financial performance is likely to improve going forward in 2010. The fundamental outlook of the company is strengthened with the help of a feedstock cost advantage that the company achieved through a long‐term supply agreement with Aramco. Also, the company’s increasing investments in the petrochemical industries including world’s largest olefins complex is a key long‐term growth driver.

Company Overview

67

July 2010

8.2.9 Egyptian Financial and Industrial Corpoartion (EFIC) Stock Performance

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EFICEgypt



EGP 1,705.7 mn EGP 1,491.4 mn Source: Bloomberg, Blominvest


Public 87.7 Corporate 5.1 Government 7.2



SA10%

PSSP33%

GSSP56%

NPK1%

Note: NPK‐ Nitrogen Potash Phosphate, SA‐ Sulphuric Acid PSSP‐ Powered Single Super Phosphate GSSP ‐ Granulated Single Super Phosphate Source: Company Report, Blominvest

Key Financials (EGP’000)

2009 2008

Total revenues 575,598 931,325 EBITDA 122,799 296,329 Net earnings 25,630 225,956 Free cash flow (74,351) (367,759) Total Assets 2,011,088 2,011,775 Total Liabilities 1,150,409 1,160,575 Shareholders' 860,679 851,199 Enterprise Value 2,417,612 2,585,710 Source: Bloomberg, Blominvest

Egyptian Financial and Industrial Co. (EFIC) is engaged in the production and marketing of phosphate fertilizers, sulfuric acid, and other by‐products through its two main plants at Kafr El Zayat and Assuit. EFIC exports products to Europe, the Middle East, Africa, South America, and Asia. EFIC's wholly owned subsidiary is Suez Fertilizers Industries Co. Recent Developments • Egypt's Orascom Construction Industries (OCI) signed a deal to collaborate with EFIC for the production of 300,000 tons a year of ammonium sulfate. As per the agreement, Orascom will supply 78,000 tons of ammonia a year to EFIC. The end product is intended to be exported to different international markets. • As per the stock exchange website, EFIC is keen to buy back 1 mn treasury shares. • In May 2009, EFIC signed a deal with OCI to supply 78 tons per annum of ammonia to EFIC to produce about 300,000 tons per annum of ammonium sulfate. Of the total, 40% will be exported exclusively by OCI at prices that will cover at least the export prices of ammonia and sulfuric acid along with all the operating costs. Any profit realized above this coverage will be shared in the ratio of 75:25 between EFIC and OCI. • EFIC is acquiring a 15% stake in a new massive phosphate fertilizer project, Egyptian Company for Phosphate and Compound Fertilizers, at Subaya Upper Egypt with a total capex of USD 1 bn (the first Egyptian company with such capex) to be financed 1:1 equity to loan, with a paid‐in capital of USD 300 mn and an authorized capital of USD 1.5 bn. Financial Analysis During 2009, EFIC reported a 38.2% decline in total revenues to EGP 575.60 mn from EGP 931.33 mn recorded a year ago. Additionally, the company’s net earnings slumped several times to EGP 25.63 mn in 2009 from EGP 225.96 mn in 2008. Free cash flow stood at a negative EGP 74.35 mn as against a negative EGP 367.76 mn. Total liabilities declined a marginal 1% to EGP 1.15 bn as against EGP 1.16 bn recorded in 2008. Management Outlook EFIC plans to achieve a more competitive position on the local and regional levels along with continuous development of exports to the global market. It is also targeting strategic alliances with major land reclamation, cultivation and agro‐industrial projects in Arab Countries and Africa. EFIC expects 30% increase in revenues in 2010 to reach EGP 850 mn. In 2011 it foresees to witness the same rate of revenue increase as well to reach EGP 1.1 bn. It also aims at financial restructuring throughout 2010 to overcome its high costs.

Company Overview


8.2.10 Qurain Petrochemical Investment Corporation (QPIC)

Qurain Petrochemical Industries Company KSC (QPIC), a subsidiary of Petrochemical Industries Company, is a Kuwait‐based public shareholding company engaged in direct and indirect investment activities in companies involved in the manufacturing, purchase, sale, supply, distribution, export, and storage of chemicals, petrochemicals, and other derivatives. QPIC has investments in EQUATE, Olefins II project, aromatics project, and styrene project. New Projects and Strategies QPIC’s expansion plans through its subsidiaries are progressing well. The building and construction work for the USD 2 bn aromatics project is complete. The project team is conducting necessary tests before the project is commissioned and starts commercial operations. In another development, tests for the commissioning of the styrene plant have been completed. Furthermore, the final review of all provisions of the partnership agreement of the Algerian methanol project (QPIC holds 42.5% stake) with Sonatrach is complete, paving the way for commencement of work on the project. Going forward, the completion of projects is expected to provide better returns on the company’s invested capital, thereby supporting its financial performance.

Financial Analysis During 2009, QPIC reported positive net earnings of KWD 7.10 mn as opposed to negative net earnings of KWD 5.62 mn in 2008 due to sound financial management leading to a reduction of 26% in total expenses. The company’s total long‐term investments increased 21.2% to KWD 142.4 mn from KWD 117.5 mn as building and construction works for the USD 2 bn aromatics project were completed during 1H09. Investments in associates increased significantly due to the additional investment of KWD 15 mn in the share capital of Kuwait Aromatics Company and KWD 1.4 mn in Algerian Methanol Spa.

Management Outlook: Supported by the expected improvement in global demand for petrochemical products, the company foresees huge opportunities for the development of new projects. Also, it is likely to launch the commercial production of such projects in order to market the company’s products and subsequently recover the paid investments in the short term.

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QPICKSE



KWD 213.4mn KWD 169.4 mn Source: Bloomberg, Blominvest


Public 35.3 Corporate 37.4 Government 27.3


Key Financials (KWD’000) 2009 2008

EBITDA (1,236) (1,330) Net Earnings 7,099 (5,623) Free Cash Flow 10,816 11,797 Total assets 191,349 141,446 Total Liabilities 12,431 2372 Shareholders' Equity 178,917 139,074

Enterprise Value 206,204 176,289 Source: Bloomberg, Blominvest

Company Overview

69

July 2010

8.3 Acronyms ABS Acrylonitrile‐butadiene‐styrene KPPC Kuwait Paraxylene Production Company ACC American Chemistry Council Kta Kilo tons per annum ADC Aqaba Development Corporation LDPE Low Density Polyethylene ADNOC Abu Dhabi National Oil Company LLDPE Linear Density Polyethylene AED UAE Dirham MAP Mono‐ammonium phosphate AFA Arab Fertilizers Association MEED Middle East Economic Digest AFC Abu Qir Fertilizers Co. MEG Monoethylene glycol AOL Aromatics Oman Limited Mmbtu Million British Thermal Unit APC Arab Potash Company MTBE Methyl tert‐butyl ether APICORP Arab Petroleum Investment Corporation NAFTA North American Free Trade Agreement APPE Association of Petroleum Products in Europe NAICS North American Industry Classification System Aramco Arabian American Oil Company NBAD National Bank of Abu Dhabi BP British Petroleum NBK National Bank of Kuwait BPC Boubyan Petrochemical Company NGL Natural Gas Liquid CEFIC European Chemical Industry Council OCI Orascom Construction Industries

CMAI Chemical Markets Association Inc. OECD Organization for Economic Co‐operation and Development

DAP Di‐Ammonium Phosphate OMC Oman Methanol Company DMCC Dubai Multi Commodities Center OMIFCO Oman India Fertilizer Company EBIC Egypt Basic Industries Corporation OOC Oman Oil Company EDC Ethylene Dichloride OPEC Organization of the Petroleum Exporting Countries EFC Egyptian Fertilizers Company OPIC Oman Petrochemical Industries Company EFIC Egyptian Financial & Industrial Co OPP Oman Polypropylene

EG Ethylene Glycol PBDAC Principal Bank for Development & Agriculture Credit

Egyphos Egyptian Company for Phosphate and Compound Fertilizers

PDH Propane Dehydrogenation

EIA Energy Information Administration PET Polyethylene terephthalate EIPET The Egyptian Indian Polyester Company PIC Petrochemical Industries Company EO Ethylene Oxide PMC Project Management Consultancy EPC Engineering, Procurement and Construction PSSP Powered Single Super Phosphate EPCM Engineering, Procurement, Construction Management PTA Pure Terephthalic Acid EPPC Egyptian Propylene & Polypropylene Company PVC Polyvinyl chloride ETBE Ethyl tert‐butyl ether QAFAC Qatar Fuel Additives Company Limited FAO Food and Agriculture Organization QAFCO Qatar Fertilizer Company S.A.Q. FCC Fluidized Catalytic Cracking QAPCO Qatar Petrochemical Company Limited FEED Front‐end engineering and design QP Qatar Petroleum GASCO Abu Dhabi Gas Industries QPIC Qurain Petrochemical Industries Company GOIC Gulf Organization for Industrial Consulting RBS Royal Bank of Scotland

GPCA Gulf Petrochemical and Chemical Association REACH Registration, Evaluation, Authorization and Restriction of Chemical substances

GPIC Gulf Petrochemical Industries Company RLOC Ras Laffan Olefins Cracker GSSP Granulated Single Super Phosphate SA Sulphuric Acid HDPE High Density Polyethylene SABIC Saudi Basic Industries Corp HHI Herfindahl‐Hirschman Index SAFCO Saudi Arabian Fertilizer Co IBK Industrial Bank of Kuwait SAMA Saudi Arabian Monetary Agency IEA International Energy Agency SCFP Suez Company for Fertilizer Production IFA International Fertilizer Industry Association SEZ Special Economic Zone

IFDC International Center for Soil Fertility and Agricultural Development

SIC Standard Industrial Classification

IMF International Monetary Fund SIIG Saudi Industrial Investment Group


IPNI International Plant Nutrition Institute Sipchem Saudi International Petrochemical Company

Jordan Al Abyad Fertilizers and Chemicals Company SIUCI Sohar International Urea and Chemical Industries JAFCCO Jordanian Dinar SRC Sohar Refinery Company JPMC Jordan Phosphate Mines Company TKOC The Kuwait Olefins Company KEMAPCO Arab Fertilizers and Chemicals Industries Ltd. TKSC The Kuwait Styrene Company KFH Kuwait Finance House TSCA Toxic Substances Control Act KFUPM King Fahd University of Petroleum and Minerals UIC United Industries Company KNPC Kuwait National Petroleum Company USDA U.S. Department of Agriculture KOC Kuwait Oil Company USGS U.S. Geological Survey

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