The Saudi petrochemical sector faces “cautious outlook” due to a slowdown in demand and weaker prices, the NCB Capital said in its report on “KSA Petrochemical Sector” for the month of June 2012.
However, the recent correction in stock prices leads to attractive entry-points in the sector, it added.
“We initiate coverage on SIIG with an Overweight rating and APPC with a Neutral rating. We upgrade Sahara and Saudi Kayan to Overweight from Neutral”, the report noted.
While some indicators of demand for petrochemicals (mainly industrial production data from the US and global auto sales figures) have improved in recent quarters, declining petrochemical imports in China is a point of concern. Additionally, the ongoing uncertainty over the strength of key European economies raises further doubts in terms of the strength of economic growth in the upcoming quarters. “Thus, we believe demand for petrochemical products will remain under pressure in the short-run with a strong rebound unlikely.” However, petrochemical companies based in the Kingdom are better placed to withstand this pressure than their global peers due to the low cost of production in Saudi Arabia and its proximity to Asia, which continues to increase its share in global demand.
Amid the uncertain global economic environment, we expect the pressure on demand for petrochemical products to lead to lower petrochemical prices YoY. Petrochemical prices are likely to remain firm in 1H12 mainly due to high oil prices during the major portion of the period, but drop in 2H12 as oil prices decline. We expect prices of all petrochemicals (except methanol, MTBE and benzene which are likely to benefit from tight demand-supply conditions) to fall 5-10 percent YoY in 2012. However, urea prices are expected to remain firm amid rising demand from Asia and limited sup after increasing 47 percent YoY in 2011.
However, “we believe ammonia prices would drop 9 percent in 2012, considering that they remained weak in 1Q12, after rising 43 percent YoY in 2011.”
Petrochem was initially scheduled to start commercial operations in 2Q12. However, the company is yet to release any update on this. Petrochem is expected to continue to report losses in 2Q12 arising from pre-operating expenses. “We assume the commercial operations at the company’s petrochemical complex will start in July 2012.”
In the April 2012 edition of its World Economic Outlook, the International Monetary Fund (IMF) said it expects the global GDP to grow 3.5 percent in 2012 and 4.1 percent in 2013E. The IMF raised its estimate for 2012 by 0.2 percent and 2013 by 0.1 percent (from the figures in its January 2012 edition of the report) based on improving economic conditions in the US and sustained support from emerging economies. However, economic growth is expected to remain weak in Europe due to the ongoing debt crisis. Slowdown in the world’s fastest growing economy, China, remains another important concern. The Chinese economy grew 8.1 percent in 1Q12, lower than 8.9 percent in 4Q11, due to weak internal consumption and demand for exports. The financial turmoil in Europe (China’s largest trade partner) is negatively impacting the demand for exports from the country.
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