Saudi Petrochemicals Sector Petrochemical –Industrial Saudi Arabia 29 September 2012 January 18, 2010 US$ 100.1bn 31.1% US$154.5mn Market cap Free float Avg. daily volume Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform Target mkt cap 442.8 18.0%over current Consensus mkt cap 483.3 28.7% over current Current mkt cap 375.4 as at 26/09/2012 Underweight Neutral Overweight Overweight Key themes We expect Saudi petrochemical producers to outperform global rivals driven by cheap feedstock costs and strong demand from Asia. Since most of the product prices are expected to remain sluggish in the next few months, we believe the near-term performance of Saudi producers will remain muted. Implications We like SABIC and NIC for its diversified product portfolio and global presence. SAFCO will benefit from exposure to fertilizers and Sipchem is likely to perform well with healthy operating rates. Single- product companies such as APC and SPC will be vulnerable. While Yansab is likely to post weak Q3 and Q4 results due to its basic olefin products, What do we think? Stock Rating Price Target SABIC Overweight SAR110.0 Sipchem Overweight SAR23.3 SAFCO Overweight SAR216.7 NIC Overweight SAR40.5 Yansab Neutral SAR50.3 APC Neutral SAR28.7 SPC Neutral SAR15.4 Saudi Kayan N/A N/A Petro Rabigh N/A N/A Why do we think it? Stock 3 year EBITDA CAGR* 2012 EV/EBITDA SABIC 6% 7.0x Sipchem 8% 7.3x SAFCO 19% 10.6x NIC 14% 7.4x Yansab 15% 8.2x APC 17% 11.9x SPC 52% 20.0x Saudi Kayan 46% 20.6x Petro Rabigh 24% 13.6x *2012-2015 Research Department ARC Research Team Tel 966 1 2119248, [email protected]Saudi Petrochemical Sector: Slowdown could hit Q3 results Petrochemical prices are expected to remain under pressure over the next few months due to demand weakness, especially after a sharp jump in the first two months of Q3. We expect all companies under our coverage excluding SAFCO to suffer from sluggish product prices and weakening demand from the emerging markets in Asia. We expect pure-play producers to be the most affected than those having a diversified product portfolio. Despite these near-term concerns, Saudi producers will perform better compared to global peers as they continue to enjoy feedstock cost advantage and healthy financials. Overall, we remain positive on the Saudi petrochemical sector as a whole, but downgrade APC and Yansab sighting near term headwinds. Global economic woes remain unabated. The global economy continues to struggle as the Eurozone crisis, and a growth slowdown in China and India put pressure on its recovery. However, petrochemical prices jumped in the first two months of Q3 on the back of higher crude and naphtha prices, demand for inventory restocking and a few supply concerns. With stock replenishment activities almost over, we expect product prices to decline moderately over the rest of the year. Ammonia, with healthy demand from Asia, might be the only exception to this trend. Petrochemical producers face strong headwinds. The global petrochemical sector as a whole is enduring tough times due to an uncertain demand environment and sluggish price outlook. We believe Saudi companies will not be an exception to this trend. Further, many companies could conduct maintenance shutdowns earlier than planned in response to lower product prices. Q3 results to be weaker on lower product prices and higher costs. Despite a sharp 10-15% rise in most of the product prices in the months of July and August 2012, average product prices in Q3 2012 remained lower compared to Q3 2011, barring methanol. Hence, we expect most of the Saudi producers to report weaker Q3 revenues year-over-year. Further, we expect net profit for almost all the companies under coverage to decline y-o-y in Q3 on lower revenues and relatively higher costs. SABIC, Sipchem, SAFCO and NIC are the bright spots: In this bleak market environment, there are a few bright spots such as SABIC and NIC, which stand out for their diversified portfolio, while SAFCO benefits from its exposure to fertilizers. Further, we like Sipchem for its superior track record and healthy operating rates. Stock conclusions: We believe near term concerns such as weakened demand persist for Saudi petrochemical companies. Hence, we revise target prices downwards for SABIC, Yansab, APC and SPC, while increase target price for SAFCO considering its exposure to fertilizers. We downgrade APC and Yansab to Neutral (previous: Overweight) considering weaker product prices and exposure to basic olefins. We wait for price correction in the near-term to find an attractive entry point. We continue with our Overweight rating for SABIC, SAFCO, NIC and Sipchem, while maintain our Neutral rating for SPC.
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Saudi Petrochemicals Sector Petrochemical –Industrial Saudi Arabia
Disclosures Please refer to the important disclosures at the back of this report.
Powered by Enhanced Datasystems’ EFA Platform
Target mkt cap 442.8 18.0%over current Consensus mkt cap 483.3 28.7% over current Current mkt cap 375.4 as at 26/09/2012
Underweight Neutral Overweight Overweight
Key themes
We expect Saudi petrochemical producers to outperform global rivals driven by cheap feedstock costs and strong demand from Asia. Since most of the product prices are expected to remain sluggish in the next few months, we believe the near-term performance of Saudi producers will remain muted.
Implications
We like SABIC and NIC for its diversified product portfolio and global presence. SAFCO will benefit from exposure to fertilizers and Sipchem is likely to perform well with healthy operating rates. Single-product companies such as APC and SPC will be vulnerable. While Yansab is likely to post weak Q3 and Q4 results due to its basic olefin products,
Slowdown could hit Q3 results Petrochemical prices are expected to remain under pressure over the next few
months due to demand weakness, especially after a sharp jump in the first two
months of Q3. We expect all companies under our coverage excluding SAFCO to
suffer from sluggish product prices and weakening demand from the emerging
markets in Asia. We expect pure-play producers to be the most affected than
those having a diversified product portfolio. Despite these near-term concerns,
Saudi producers will perform better compared to global peers as they continue
to enjoy feedstock cost advantage and healthy financials. Overall, we remain
positive on the Saudi petrochemical sector as a whole, but downgrade APC and
Yansab sighting near term headwinds.
Global economic woes remain unabated. The global economy continues to
struggle as the Eurozone crisis, and a growth slowdown in China and India put
pressure on its recovery. However, petrochemical prices jumped in the first two
months of Q3 on the back of higher crude and naphtha prices, demand for
inventory restocking and a few supply concerns. With stock replenishment
activities almost over, we expect product prices to decline moderately over the
rest of the year. Ammonia, with healthy demand from Asia, might be the only
exception to this trend.
Petrochemical producers face strong headwinds. The global petrochemical
sector as a whole is enduring tough times due to an uncertain demand
environment and sluggish price outlook. We believe Saudi companies will not be
an exception to this trend. Further, many companies could conduct maintenance
shutdowns earlier than planned in response to lower product prices.
Q3 results to be weaker on lower product prices and higher costs. Despite
a sharp 10-15% rise in most of the product prices in the months of July and
August 2012, average product prices in Q3 2012 remained lower compared to Q3
2011, barring methanol. Hence, we expect most of the Saudi producers to report
weaker Q3 revenues year-over-year. Further, we expect net profit for almost all
the companies under coverage to decline y-o-y in Q3 on lower revenues and
relatively higher costs.
SABIC, Sipchem, SAFCO and NIC are the bright spots: In this bleak market
environment, there are a few bright spots such as SABIC and NIC, which stand
out for their diversified portfolio, while SAFCO benefits from its exposure to
fertilizers. Further, we like Sipchem for its superior track record and healthy
operating rates.
Stock conclusions: We believe near term concerns such as weakened demand
persist for Saudi petrochemical companies. Hence, we revise target prices
downwards for SABIC, Yansab, APC and SPC, while increase target price for
SAFCO considering its exposure to fertilizers. We downgrade APC and Yansab to
Neutral (previous: Overweight) considering weaker product prices and exposure
to basic olefins. We wait for price correction in the near-term to find an
attractive entry point. We continue with our Overweight rating for SABIC,
SAFCO, NIC and Sipchem, while maintain our Neutral rating for SPC.
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 2
Global economy: Still on the edge
Economies continue to struggle Economies across the globe continued to struggle with a slow and unending economic recovery, since the fall out of the US subprime and Eurozone sovereign debt crisis. The US GDP growth was lower than 2% in the last three quarters raising concerns of stagnation. European economies continued to suffer with the sovereign debt crisis, though the intensity has come down moderately over the past few months. With job growth at its lowest in the US, a recessionary environment in the Eurozone and dwindling GDP growth in the world’s major emerging markets, the global economy is on the edge of a steep cliff and struggling to find a direction for safety.
The US job growth has continued to slow down as only 96,000 jobs were added in August 2012 as against expectations of 125,000 and July job addition of 141,000. Job addition numbers were well below 125,000, required to keep the unemployment rate stable. The unemployment rate rose from 8.1% in July to 8.3% in August, marking the 43rd consecutive month when the rate was above 8%. Further, the US GDP is now projected to have grown at 1.7% in Q2 2012, slightly better than Q1, but still below the 2% mark.
In September 2012, the Federal Reserve has announced third installment of quantitative easing (QE3) program to boost employment growth. QE3 is an open ended bond purchasing program (US$40bn a month), which will continue till mid-2015 to help induce liquidity in the market. We believe that this is a step in the right direction, but it may take some time to yield results, especially considering the success of QE1 and QE2
In the Eurozone, the GDP is expected to shrink by 0.4% in 2012 (source: ECB), against the previous estimate of 0.1%. Exports and imports declined by 2% and 1.2% m-o-m respectively in July, worsening the crisis. Germany is the only major economy in the Euro zone to register a 0.3% GDP growth in Q2 2012, while France (no growth), Italy (negative growth for the fourth consecutive quarter), and Spain (-0.4% GDP growth) are struggling.
In the Asian continent, China registered a GDP growth of 7.6% in Q2 2012, its lowest in the last three years. The purchasing managers’ index (PMI) for the country continued to be below 50 (47.6 in August 2012). Another Asian giant — India — is also struggling with a slowdown. The country reported GDP growth of 5.5% in Q1 2012 (Apr – Jun 2012), which was a multi-year low. The Indian economy has been facing a host of issues like government inertia, political obstacles for reforms, high inflation rate and a widening fiscal deficit.
Figure 1 Falling GDP growth rates across the globe
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Source: Bloomberg, Al Rajhi Capital
Worsening macroeconomic outlook is resulting in a bearish short-term outlook
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 3
Crude and naphtha prices rose mainly on Iran sanctions Despite weaker economic growth over the last two quarters and dismal sentiments, Brent crude continued its upward rally mainly on the back of supply concerns and geo-political factors in the MENA region. Brent crude prices reached US$114.1/bbl on Sept 10, 2012, up 17% since end of June. The ban on oil imports from Iran, which officially started from the end of June 2012, was the major factor in supporting this surge in oil prices as oil production from Iran declined by about 24% in August 2012 compared to average 2011 production (source: OPEC). Iran produced 2.8mn barrels of oil per day in August 2012, which accounted for 9% of the OPEC output. This decline in Iranian crude negated the increase in supply from Libya and Iraq.
Figure 2 OPEC oil production summary
000' barrels
per day 2010 2011 4Q11 1Q12 2Q12 Jun-12 Jul-12 Aug-12
Total OPEC 29,231 29,786 30,400 31,189 31,442 31,305 31,156 31,410 Source: OPEC, Al Rajhi Capital
Further, the increasing rhetoric between Israel and Iran on a potential war and a possible closure of the Strait of Hormuz also added to the supply risks. We believe that the possibility of a full blown war between Iran and Israel (or the US) is relatively small. However, in case of a war, nearly 70% of the oil exports to Asia will be severely impacted due to the temporary closure of the Strait of Hormuz.
Naphtha prices, which are highly correlated with crude prices, jumped 31.9% since the end of June 2012 to reach US$989/ton, indicating a steeper increase than the oil prices. Apart from higher crude prices, increased demand from the emerging markets and supply constraints pushed naphtha prices upwards in the last two months. Asian naphtha markets remained tight as Indian naphtha exports declined by about 30% to 500,000-600,000 tons, while demand remained strong for inventory replenishment. We expect naphtha and crude prices to decline moderately going forward, as concerns about global economy will take center stage than the supply concerns, which are already reflected in the current levels.
Figure 3 Trend in Brent and naphtha prices
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Source: Bloomberg, Al Rajhi Capital; Note: Rebased to 100
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Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 4
Product prices: Downward pressure mounts
The petrochemical industry has undergone a roller-coaster ride of sharp peaks and troughs throughout the year. After healthy product prices in Q1 2012, both demand and prices declined in Q2 on the back of economic weakness, lower naphtha prices and higher inventory build-up across the globe. Most of the product prices were down 20-25% q-o-q at the end of Q2 with utilization rates declining for major markets such as Europe from 92% in Q1 to 85% in Q2 (source: Platts). Despite a continued weakness in the global economy and limited increase in demand from major markets, petrochemical product prices witnessed a sharp rally in Q3 mainly driven by the upstream factors such as rise in Brent and naphtha prices (key feedstock worldwide), the need for inventory replenishment and turnarounds (both planned and unplanned) across the globe.
Rising production costs continue to drive product prices upwards, without any visibility in demand growth. Hence, we believe petrochemical prices will be lower in Q4 than the current levels as the stock replenishment activities end and demand remains muted for the next couple of months. Further, the supply side will not be constrained as there are not many planned shutdowns. Having said that, the third installment of the Quantitative Easing (QE) program announced by the US Federal Reserve could support product prices for the next couple of weeks. Overall, we are bearish on product prices over the near-term, barring ammonia, where we see relatively stable demand.
Ethylene and Polyethylene Prices can decline on weaker demand in Q4 Ethylene prices jumped by about 40% during the last two months (from lows of the US$1,000 levels in early July to US$1,405/ton in third week of September) mainly due to rising naphtha prices as well as production issues at various crackers worldwide, despite a weak demand environment. Brent and naphtha prices increased by 13.7% and 25.4% respectively over the last three months on the back of sanctions on Iran leading to supply concerns, improving global economic environment and rising expectations about large-scale economic stimulus programs in the developed countries.
Further, planned and unplanned cracker shutdowns also constrained supply in various parts of the world in Q3. Sinopec Sabic Tianjin Petrochemical Co. shut its 1 mtpa cracker plant in China for a 45-day maintenance in mid-August, while Formosa Petrochemical has reportedly shut down its 1.03 mtpa facility in Taiwan for a government inspection till mid-September. Unplanned shutdowns at Borealis and Shell in Europe and an impact of Hurricane Isaac on ethylene production in the US also lowered global ethylene supply. Hurricane Isaac forced shut around 18% of ethylene production in Louisiana since late August 2012. Williams shut its 612,000 tpa cracker in the US for a week, while Dow Chemical shut its 598,000 tpa
Higher naphtha prices driving the petrochemical price rally
Ethylene prices have rose in the last 2 months on higher crude prices
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 5
cracker for a planned maintenance. Shell Chemicals also lowered operating rates of its two crackers with a combined capacity of 1.36 mtpa.
Figure 5 Trend in Brent, naphtha and ethylene prices
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Source: Bloomberg, Al Rajhi Capital
Over the last three years, prices of ethylene, naphtha and Brent have moved in tandem and we believe their correlation will remain strong over the medium-term. With economic growth forecasts remaining feeble for the developed countries, we believe the crude prices can decline moderately from the current levels of US$111/bbl (as of Sept 26, 2012). Hence, we forecast ethylene prices to also follow the declining trend of crude in the next few months.
Figure 6 Correlation between Brent, naphtha and ethylene prices (3 years)
Correlation Brent Naphtha Ethylene
Brent 1.00 0.97 0.83
Naphtha 0.97 1.00 0.89
Ethylene 0.83 0.89 1.00
3 years time frame
Source: Bloomberg, Al Rajhi Capital
As we have seen before, prices of polyethylene (PE) are closely linked with ethylene, and hence PE prices also rose by 17.3% in the last two months to US$1,411/ton during the third week of Sept 2012. PE demand also witnessed an improvement with Chinese imports clocking a growth of 1.7% y-o-y during Jan-July 2012 period compared to a 6% y-o-y decline during Jan-March 2012 period (source: ICIS). We expect PE demand in China to remain lackluster over the next few months with no major demand catalyst in sight and hence, PE prices will follow the declining trend of ethylene prices for the remainder of 2012.
We expect ethylene prices to average around in the range of US$1,275-1,330/ton and PE prices to average around at US$1,370-1,400/ton for the remainder of 2012.
Strong correlation between Brent, naphtha and ethylene is likely to continue in the near-term
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 6
Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Propylene and Polypropylene Prices rose in Q3 on higher production costs Propylene prices like other basic petrochemical products such as ethylene and PE rose in July and August 2012, due to higher naphtha prices and supply constraints, despite lack of any demand drivers. Propylene prices surged 33.6% during the last two months from US$1,046/ton to reach US$1,398/ton during the third week of September. Despite this sharp rise in prices, the Q3 till date average price of US$1,207/ton was 7.6% lower as compared to Q3 2011 average price of US$1,306/ton.
Unlike propylene, Polypropylene (PP) prices were largely stable during the last two months (up by only 2.5% to reach US$1,243/ton in the third week of September 2012), mainly due to softer demand from most of the markets, excluding the US and Canada. Traders have indicated the spot market transactions in the PP market have begun to wane as majority of the customers have replenished inventories and are now waiting for a price correction over the next few months (source: Platts).
We estimate average propylene prices to decline to US$1,275-1,330/ton, on weaker demand and fading supply concerns. Further, PP prices are expected to decline to the levels of US$1,175-1,230/ton during the next three months.
Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Like ethylene, propylene prices have risen globally in Q3 2012
We expect propylene prices to remain stable in the next few months
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 7
Methanol Prices likely to remain stable, though with a negative bias Unlike basic petrochemical products as well as their derivatives – whose prices have jumped sharply– methanol prices have remained largely stable and hence continued to be an exception in the petrochemical product group. Methanol demand remained stable in the US and Europe as the customers continued buying before the holiday season. Supply remained constrained with a couple of outages in Trinidad and the US as well as sanctions on Iran.
Methanol Holdings (Trinidad) Limited (MHTL) is expected to have a 25 days scheduled maintenance for two of its methanol plants in September. MHTL’s 580,000 tpa plant will undergo a 15 day maintenance beginning from September 1, followed by the 1.9 mtpa unit going for a 10 day maintenance. Further, supplies are expected to be affected by production glitches at an already restarted methanol plant in Beaumont, Texas.
In China, methanol imports declined by almost 50% from April 2012 to 259,237 tons in July (source: Chinese customs data), indicating slowing demand and weakening export markets. Interestingly, Chinese methanol imports from Iran declined sharply from 273,800 tons in April 2012 to just 46,700 tons in July (a decline of 83%).
However, industry sources believe that official data may not be capturing the actual volume of shipments as importers might be resorting to techniques such as hiding the origin of the cargoes, using alternative currencies, and carrying out transactions through a barter system to get around the sanctions. We believe that this sharp decline in Chinese methanol imports is not rational even considering the slowing economy and hence, are of the same opinion as held by these industry sources.
Figure 11 Chinese Methanol imports in 2012 Figure 12 Methanol price trend (US$/ton)
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Source: Chinese customs data, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Despite sluggish demand outlook for the next few months, we estimate the average price of methanol to remain largely stable at current levels (US$350-360/ton) during the rest of the year, as supply concerns are still not faded away.
Mono Ethylene Glycol (MEG) Pre-season demand and supply shocks in Q3 resulted in a price rise MEG prices have been experiencing a sharp upward trend in the last two months mainly due to a rising demand from downstream sectors such as PET bottles and a few plant shutdown issues. MEG prices increased 26.5% during the last three months to reach US$1,324/ton in the last week of September. Despite this rapid rise in prices, the Q3 till date average price of US$1,209/ton is still very much below the $1,500/ton levels witnessed in Q3 2011.
In late August, MEG demand increased sharply in Asia as traders secured supplies before the impact of maintenance shutdowns was felt on the prices. The off-take rate surged to 7,000 tons per day on 23rd August compared with 3,000 tons per day in the first half of August (source: ICIS). Industry sources expect shutdowns at multiple facilities in Kuwait, Taiwan and Saudi Arabia to weigh down on supplies over the near-term, though traders claim there is enough inventory to cater to the demand.
Steady demand and a few supply issues are helping the methanol prices to remain stable
MEG prices improved mainly on pre-season buying ahead of the shutdown fears
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 8
Kuwait’s EQUATE Petrochemical’s 550,000 tpa No 1 MEG plant was shut down on July 31, 2012, following a fire near the facility. The shutdown was initially planned for six weeks but as the restart date has not been confirmed till now, traders expect the shutdown has been extended. In Saudi Arabia, Petro Rabigh delayed its MEG shipments due to an unspecified technical problem at its 600,000 tpa plant. Further, Eastern Petrochemical Company (SHARQ) plans a 10-week maintenance shutdown at its 700,000 tpa No 4 MEG plant starting early September. These supply constraints are likely to support the prices further in September and October, even if the demand stabilizes (source: ICIS).
Considering the uncertain economic outlook coupled with supply constraints in the next couple of months, we expect MEG prices to remain largely stable at current levels of US$1,250-1,300/ton for the remainder of 2012.
Benzene Stable demand and production cutbacks boosted prices In line with the basic petrochemical prices, Benzene prices climbed 16.2% during the last three months on the back of improved demand for short covering as well as better than expected demand for styrene, for which benzene is a feedstock. There are a few supply concerns such as production problems in Botlek in the Netherlands, and possible outages at Total, Shell and Petrogal in the next couple of months (source: ICIS).
Styrene spot prices in Europe touched their highest levels of US$1,700/ton since July 2008 mainly because of a supply crunch, resulting from cutbacks in operating rates in Europe and lack of imports from the US. Traders believe the supply situation will ease soon and prices will begin to normalize by end of the year (source: ICIS).
We expect benzene prices to decline in the remainder of 2012 as prices for styrene are expected to normalize over the next few months and an expected year-end inventory tax is implemented in the US, which will lower any fresh demand. Hence, we estimate the average benzene prices to remain in the range of US$1,130-1,160/ton for the rest of the year.
Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Ammonia and Urea Ammonia prices to remain firm, urea to remain weak As we had expected in our previous report in June 2012, ammonia prices remained firm at current levels (+4% change) during the last three months, while urea prices saw a downward trend (-9.8%). In contrast to a sharp rise in petrochemical prices, fertilizer prices witnessed different trend mainly due to negative factors such as droughts in the US, China and India, and the high prices limited further upside.
Ammonia prices have risen by 5% in the last few weeks mainly due to major plant shutdowns in the Black Sea region, natural gas curtailments in Trinidad, and production issues at QAFCO in Qatar. Demand remained healthy particularly from Asian buyers. Asian buyers have been active in the market since the start of August as the sowing season approaches. In the first week of September, Japan-based Mitsui secured a 23,000 ton spot cargo from SABIC
Asia-Pacific region dominates demand for benzene
We expect benzene prices in Q4 2012 to hover around US$1,130-1,160/ton
Ammonia prices, which have rallied, have limited upside going forward
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 9
at US$705/ton FOB for end of September shipment most probably to India, while the same company booked a similar volume cargo from NF Trading at US$630/ton FOB in mid-August. Further, Mitsubishi recently agreed for a US$705/ton FOB cargo of 23,500 ton for September from NIC for Far East countries (most likely South Korea).
We believe demand for ammonia is likely to arise mainly from Asia as the Indian monsoon improved in September and hence, the possibility of a drought faded in most of the states. Further, a potential regulatory move by the Indian government to halt subsidized gas supply to ammonia production facilities over the near term, can act as a positive catalyst for ammonia spot prices. We estimate average ammonia prices to remain around US$630-650/ton for the rest of 2012.
Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Urea prices, on the other hand, have corrected as the supply situation improved compared to ammonia, while the weakness in demand persisted. Urea supply was boosted by QAFCO’s new QAFCO VI urea plant with 1.3mn tons/year capacity, which commenced operations in late July, two months ahead of expectations. We expect urea demand to improve in line with ammonia with the advent of the Indian agricultural season. Further, reduction of subsidies on other fertilizers in India will also have a positive impact on Indian demand for urea. We estimate average urea prices to remain stable at US$380-400/ton for the next 3-4 months.
Overall, we expect petrochemical product prices to remain under pressure for the rest of the year as inventory restocking for the holiday season is almost over and hence, demand will decline in Q4. Further, global economic crisis and slowdown in China and India will put pressure on demand for basic olefins. We do not expect prices to recover in Q4 2012 and hence expect muted performance from the petrochemical sector for the rest of the year.
Figure 17 Summary: product prices (US$/ton)
Products Price (US$/MT) Price estimates (US$/MT)
Q1 2012 Q2 2012 Current Q3 2012 Q4 2012
Ethylene 1,498 1,281 1,405 1,251 1,275
Polyethylene 1,449 1,328 1,411 1,346 1,370
Propylene 1,419 1,274 1,398 1,219 1,275
Polypropylene 1,525 1,371 1,243 1,226 1,175
MEG 1,294 1,126 1,324 1,214 1,250
Methanol 378 389 365 363 350
Benzene 1,183 1,110 1,220 1,180 1,130
Ammonia 427 508 645 624 650
Urea 429 506 415 418 380 Source: Bloomberg, Al Rajhi Capital
Urea prices to remain firm as demand is expected to pick up mainly from Asia
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 10
Saudi Petrochemicals: Weak demand to affect performance Subdued demand is likely to hamper performance of Saudi petrochemical companies for the remainder of 2012. Consequently, we prefer diversified companies like SABIC and NIC over pure play companies like APC, Yansab and SPC. On the other hand, we believe that SAFCO are likely to benefit from its exposure to fertilizers, while Sipchem can benefit from relatively stable methanol prices and superior track record.
We downgrade APC and Yansab to Neutral (previous: Overweight) and look for price correction over the near-term to find an attractive entry point. We continue with our Overweight rating for SABIC, SAFCO, NIC and Sipchem, while maintaining our Neutral rating for SPC.
SABIC with its diversified product base will remain relatively shielded from the impact of declining product prices in basic petrochemical commodities in the next few months.
The company has a solid cash balance of nearly SAR60bn at the end of Q2 2012, which can be used for investing in new opportunities. An instance of this is the recent announcement by the company to go ahead with the construction of the 400,000 tons per annum specialty elastomer project in a 50:50 JV with ExxonMobil to be known as Al-Jubail Petrochemical Company (KEMYA). The completion of the project, estimated to be worth US$3.4bn, is expected by 2015 and will produce a host of rubber products (halobutyl, styrene butadiene, polybutadiene, and ethylene propylene diene monomer rubbers, thermoplastic specialty polymers, and carbon black) for the Middle East and Asian markets. KEMYA has awarded the EPC contracts for the elastomers facility to Daelim Industries, Technip, and Tecnicas Reunidas. SABIC also continues to innovate as evidenced by the recent announcement of development of two new high -clarity polypropylene products under its ―PP Qrystal‖ brand, which allows customers to make final products at 15% faster cycle times, significantly reducing their production costs.
We expect the company’s revenue to be SAR45.9bn in Q3 2012 (-6% y-o-y), while the net profit is expected to decline by 30% y-o-y to SAR5.7bn. However, on a q-o-q basis net margin is expected to improve by nearly 100bps to 12.4%. We remain Overweight on the stock with a revised target price of SAR110 per share (previous: SAR113.4).
Sipchem, on account of its methanol exposure, is likely to benefit from relatively stable product prices. As a result, we expect Q3 2012 revenue to be around SAR945mn (+4% q-o-q) and net profit of SAR159mn (+17% q-o-q). On a y-o-y basis, we expect revenue growth of 9% partly attributable to the addition of the Swiss trading company Aectra SA in Q1 2012. However, we estimate net margin levels to be lower than last year as the Swiss business is less profitable compared to Sipchem’s core business. This has already been evidenced in the Q1 and Q2 results. We reiterate target price to SAR23.3 per share, which implies a 16.5% upside at current market price.
SAFCO is most likely to report better results in Q3 compared to Q2 2012 due to higher operating rates. We expect the company to post better quarterly results for the next two quarters on the back of higher ammonia demand from Asia in the near-term. We expect SAFCO to clock revenue of SAR1.2bn (+12% q-o-q) and net profit of SAR960mn in Q3 2012 (+23% q-o-q), mainly driven by a substantial growth in ammonia prices partly offset by lower urea prices. We revise SAFCO’s target price upwards to SAR216.7 per share (previous: SAR202.3).
We expect NIC’s revenue to remain flat on a q-o-q basis at SAR4.6bn in Q3 (-14% y-o-y), due to lower product prices for both TiO2 and basic petrochemicals, despite achieving high operating rates. According to industry sources, the current TiO2 prices are perceived to be high by consumers and they are letting their inventories to fully deplete before placing any fresh purchase orders. Hence, we expect TiO2 prices to remain under pressure in the near term. We expect net profit to decline by 29% y-o-y to SAR514mn. We reiterate our target price of SAR40.5 per share for NIC.
Yansab is likely to post weak results on a y-o-y basis due to its high exposure to basic olefins like ethylene and polypropylene, whose prices are likely to come under pressure in the next couple of quarters. We expect Yansab to report revenue of SAR2.1bn for Q3 2012 (-14% y-o-
We prefer diversified companies like SABIC and NIC over pure play companies
SABIC continues to be one of our top picks based on its diversified portfolio, healthy financials and global operations
NIC remains one of our top picks on diversification and healthy operating rates
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 11
y), assuming operating rates of around 80% due to a shutdown at its polyolefin plants. We revise downwards the target price of Yansab to SAR50.3 per share (previous: SAR52.1).
We expect APC’s revenue to be SAR465mn (-35% y-o-y) in Q3 due to a decline in polypropylene prices during the quarter, partly offset by an improvement in operating rates. APC had carried out a scheduled maintenance activity of three weeks in May 2012, which had impacted Q2 performance. We downgrade APC to Neutral rating and also lower our target price to SAR28.7 per share (previous: SAR29.8).
We expect SPC’s revenue to be SAR362mn (-3% y-o-y) in Q3 2012. On q-o-q basis, this will be a significant improvement (+29%), which we believe will be driven by an improvement in operating rates (~70% levels as per management guidance). As per our discussion with the management, the operational issues at Al Waha have been mostly sorted out. We reiterate our Neutral rating on the stock and revise the target price of SPC to SAR15.4 per share (previous: SAR15.8).
Figure 18 Saudi market: our estimates of the companies under coverage
(SAR mn)
Company 2011Q3A 2012Q3E YOY% chg. 2011Q3A 2012Q3E YOY% chg.
SABIC 48,930 45,898 -6.2% 8,185 5,695 -30.4%
Sipchem 865 945 9.2% 208 159 -23.5%
SAFCO 1,379 1,246 -9.6% 1,211 960 -20.7%
NIC 5,333 4,611 -13.6% 725 514 -29.2%
Yansab 2,498 2,149 -14.0% 828 607 -26.7%
APC 717 465 -35.1% 135 55 -59.1%
SPC 374 362 -3.2% 98 122 24.7%
Saudi Kayan 0 2,451 n/m (35) 69 n/m
Petro Rabigh 14,100 15,688 11.3% (281) (158) n/m
Revenue Net profit
Source: Company data, Al Rajhi Capital
We expect Q3 2012 performance for almost all the companies to weaker y-o-y
Saudi Petrochemicals Sector Petrochemical –Industrial
29 September 2012
Disclosures Please refer to the important disclosures at the back of this report. 12
Disclaimer and additional disclosures for Equity Research
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Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law:
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"Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon.
"Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2. Definitions
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Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
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