Saudi petchem near-term outlook subdued

Given the weak economic fundamentals across the globe and spreading eurozone debt crisis, petrochemical prices are expected to remain under pressure over the next few months, barring a few like methanol and ammonia, Al Rajhi Capital said in its report on Saudi Petrochemicals.

The situation is likely to affect pure-play producers more than those having a diversified product portfolio.

However, the study said "Saudi producers will be relatively less impacted as they enjoy a feedstock cost advantage and hence, they can continue with healthy operating rates, while global peers scale down operations due to weak product prices. Consequently, we remain positive on the Saudi petrochemical sector as a whole."

Weak global environment is putting pressure on crude prices. The global economic environment deteriorated during the last few weeks with Spain seeking a bailout for its banking sector and GDP growth rates declining in China and India.

Subsequently, both crude and naphtha prices tumbled to 97/bbl and $761/ton, respectively (-19 percent and -26 percent vs. Q1 2012 average prices). With limited demand recovery and no major catalyst in sight, we expect prices to remain under pressure for the remainder of 2012.

Petrochemical prices have followed suit. As a knock-on effect, basic petrochemical prices also fell sharply in late Q2 2012, reversing the gains made in Q1.

Ethylene and propylene prices are currently 26 percent lower compared to Q1 2012 and this decline has been passed on to their derivatives, polyethylene and polypropylene. With low feedstock prices and weak demand, we expect petrochemical prices to remain weak in the near-term. Petrochemical producers are cutting down operating rates.

Major petrochemical producers in Europe and Asia have cut down operating rates or are planning to do so in the near-term due to the steep decline in product prices.

"However, Saudi producers can continue operating at full capacity on account of their feedstock cost advantage and hence, will be less impacted versus their global peers. Product portfolio to determine near-term results. While basic petrochemical products and their derivatives have witnessed a sharp price decline, specific commodities like methanol and ammonia have been resilient and witnessed a healthy demand. As a result, the performance of Saudi producers in Q2 2012 will depend on the kind of products they produce."

Al Rajhi Capital believes single product companies like APC and SPC (pure-play polypropylene producers) are more susceptible in the near-term as compared to companies like Sabic with a diversified product portfolio. Product composition will be the key for near term performance, as selective product prices have shown resilience to the general declining trend.

NIC, despite having a diversified portfolio, can suffer from weak demand for both its TiO2 and polypropylene products in the near-term. We believe Sipchem and SAFCO will continue to perform well owing to their exposure to methanol and fertilizers respectively, while we expect Yansab to post weak Q2 results on account of its exposure to basic olefins. "Though we have revised the target price of the stocks downwards, we continue to remain Overweight on all of them, except for SPC (Neutral rating)."