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Saudi petrochem income to rise five-fold

New projects will ally with higher prices to boost Saudi Arabia's petrochemical earnings by nearly five times in 2015 as the Gulf kingdom is pushing ahead with a major drive to diversify its oil-reliant economy, according to a local study.

The country's petrochemical companies, most of which are controlled by the government, earned about SR11.6 billion (Dh11.36bn) in 2009, one of the lowest income levels in nearly 20 years because of post-crisis decline in prices, said NCB Capital, an offshoot of National Commercial Bank, the largest Saudi bank.

Their income could more than double to nearly SR29bn this year as a surge in oil prices boost those of petrochemicals and new projects come onstream in the kingdom, said the study, sent to Emirates Business yesterday.

"We expect the kingdom's petrochemicals revenue in 2010 to increase to SR29bn from about SR11.6bn in 2009 for the six stocks we look at in this note. The drivers for this revenue growth include the start of production at two of the companies, an increase in volumes produced, as well as improving prices of petrochemicals," said NCB Capital, a key Gulf investment firm.

"Out of the six companies detailed in this report, Sipchem and Tasnee reported operating revenues in 2009. For 2010, Yansab and Sahara are expected to see revenues. However, Saudi Kayan is not expected to report revenues until 2011 and Petrochem until 2012."

Its projections showed the income of the six companies would leap to about SR46.2bn in 2011 and continue its climb to reach SR62.1bn in 2013 before it slips to about SR61bn in 2014 and SR47.6bn in 2015.

According to the report, Saudi petrochemical producers were not immune to the global slowdown and took a hit on earnings in the fourth quarter of 2008 and through 2009. But it noted that their feedstock advantage and proximity to Asian markets provided a floor to their earnings, with Saudi firms together reporting net income of SReight billion in the second half of 2009 compared to net income of only around SR0.7bn in the first half of 2009.

"The sector is one of the prime focus areas of the Saudi Arabian Government in its attempt to reduce the economy's dependence on petrodollars and to diversify the economy towards value added industries," NDB Capital said.

It noted that the Saudi Government offers natural gas to domestic petrochemical producers at a subsidized rate of only $0.75/mmbtu through state-owned oil giant, Saudi Aramco . However, global producers procure this commodity at spot prices that currently stand at £5/mmbtu.

"Based on our discussions with industry players, we believe that the natural gas price of $0.75/mmbtu will double to $1.5/mmbtu in the Kingdom by 2012. However, even at these revised levels, the price is well below that what is paid by the global peers. In our view, access to low cost feedstock, higher economies of scale and logistical advantages arising from proximity to Asian markets give Saudi Arabian companies a significant advantage over global peers," it said.

"To further strengthen their position in the global petrochemical market, Saudi Arabian petrochemical players are undertaking an aggressive drive to expand their capacities and diversify their product portfolios."

The report said oil plays a large part in the outlook of both petrochemical prices and petrochemical stocks, adding that the correlation between oil prices and the petrochemicals sector has been very strong over the past 18 months and at times ranging between 80 and 90 per cent.

"Oil demand and supply scenarios are the key factor instrumental in shaping oil price trends. Unusually cold weather in Western regions supported oil demand in January and in turn the crude oil price touched $87 per barrel. Though this level shows a strong rebound of 177 per cent from its lows of December 2008, it is around 60 per cent the level of its highs of July 2008," the report said.

By Nadim Kawach

© Emirates Business 24/7 2010