Kingdom’s petchem sector under pressure

Updated 13 December 2012

Kingdom’s petchem sector under pressure

The global economic uncertainty continues to put pressure on the Kingdom’s petrochemical sector. Weak demand and increasing supply is restricting price growth. Operational inefficiencies at the new startups are also contributing to the weak performance. This is according to a new report issued by NCB Capital yesterday. The report explains that the global demand outlook for petrochemicals remains weak.
Petrochemical demand in China is expected to remain weak in the near term due to lower industrial activities and slowing domestic demand. China’s GDP is expected to grow by 7.8 percent in 2012 and 8.2 percent in 2013 lower than the 9.2 percent in 2011. Slow recovery in the US economy and the ongoing credit crisis in Europe are expected to result in a weak demand for petrochemical products. Excess supply from low-cost producers will pressure prices.
Three petrochemical projects — Petrochem’s Saudi Polymers Company, Industries Qatar’s LDPE facility, and Saudi Kayan’s LDPE plant — started the commercial/trial operations in H2, 2012. This coupled with other projects such as Borouge 3 expansion, Sadara Chemical Co., PetroRabigh II expansion, and Sipchem Phase III expansion will increase the GCC’s petrochemical capacity by 19.4 percent to 145-146 million tons per annum by 2016 from 121 million tons per annum in 2011.
The increasing supply from low-cost producers will result in excess supply and will pressure prices in the long term. Petrochemical and fertilizer prices are expected to decline in 2013. Continuing weakness in demand in key markets and increasing supply from low-cost producers are expected to exert downward pressure on petrochemical prices in 2013.
The report expects petrochemical prices to drop 5-10 percent YoY in 2013. However, polyethylene, ethylene glycol and polypropylene prices are expected to remain flat as demand for these products remain strong. Among fertilizers, both urea and ammonia prices are to drop by 8 percent and 19 percent YoY respectively in 2013, as supply is expected to outpace demand. Shutdowns at SABIC (Saudi Basic Industries Corp.), Yansab and Petrochem SABIC’s MEG unit (700,000 mtpa capacity) and methanol facility (750,000 mtpa capacity) were closed for 56 and 6 days respectively during Q4, 2012 for maintenance.
In addition, there were some planned and unplanned closures at some of the facilities of Sinopec-SABIC Tianjin Petrochemical Co. (SSTPC), an equally owned SABIC–Sinopec JV, during October 2012. A total production loss of about 0.3 million ton equivalent to a revenue loss of around SR 1 billion in Q4, 2012, is estimated. Petrochem started the commercial operations at its 3.4 million tons per annum petrochemical complex in October 2012. However, operations at most of Petrochem’s units were stopped on Nov. 10 initially for four weeks due to technical problems.
However, on Dec. 9, the company announced that it has extended the duration of shutdown until January 2013.
The company’s initial results for the October and November operations indicate losses of around SR 264 million. The report estimates net loss of SR 229 million for Q4, 2012.
Yansab has closed its ethylene glycol unit (770,000 tons per annum) to undergo maintenance and technical repair work for ten weeks commencing Nov. 25. The report expects the total production loss to be around 87,000 tons each in Q4, 2012 and Q1, 2013. The revenue loss is expected to be marginal in Q4, 2012 due to the sufficient inventory levels, but is expected to increase to SR 654 million in Q1, 2013.
Currently it is expected that feedstock prices will double in 2013.
Saudi Arabia’s Ministry of Oil extended the subsidy on gas for one year at the beginning of 2012. Prices were kept unchanged at $ 0.75/mmbtu. Currently, there is no clarity on whether the ministry will extend this subsidy for another period or not.
The report believes that doubling feedstock prices will impact Sipchem and SAFCO the most as these companies are solely dependent on natural gas for their feedstock. SABIC will also be impacted by the increase in the natural gas price. It is believed that its ethane feedstock allocation for older facilities was also scheduled for renewal in early 2012 (in line with Sipchem and SAFCO). Saudi Kayan, Tasnee, Yansab, and Petrochem will also be affected in 2014-2015.
Currently, Saudi petrochemical firms have one of the lowest production costs globally. Although increasing feedstock prices will decrease their cost advantage, the cost structure of Saudi petrochemical producers will remain lower than their global peers. Net income is to grow in 2013 on higher earnings from startups. The report expects net income to grow 18.2 percent YoY to SR 39.8 billion in 2013 mainly driven by higher earnings from startups with improved operational efficiencies from existing plants. This will offset the negative effect of weak demand and prices. In 2013, earnings will increase as a result of the contribution from petrochem’s facilities and Saudi Kayan’s LDPE plant, which started the operations in Q4, 2012. Higher productivity at Saudi Kayan’s petrochemical complex and the contribution from Sahara’s three projects (SAMC, SAP and ACVC), which are expected to start operations during 2013, will further support earnings growth during the year.

Is the Dubai economy turning the corner?

Updated 7 min 26 sec ago

Is the Dubai economy turning the corner?

  • Expo 2020 expected to boost GDP
  • Relaxation of residency rules helps real estate

LONDON: Is the Dubai economy finally turning the corner? At least one major international bank thinks so.

It follows a move by the emirate's leadership to reboot an economy that has been hit hard by corporate job losses, the introduction of VAT and a slowing real estate sector.

The UAE’s non-oil economy is likely to “turn a corner” next year with Dubai’s Expo 2020 infrastructure projects, changes to visa rules and increased government spending set to boost growth, according to a Bank of America Merrill Lynch (BofAML) research note.

Abu Dhabi National Oil Company’s (ADNOC) downstream expansion plans are also expected to drive the country’s non-oil GDP growth, said the note compiled by Middle East and North Africa (MENA) economist Jean Michel Saliba.

The Gulf country’s real GDP growth is estimated to rise to 3.5 percent in 2019 from a forecast 2.8 percent increase this year and a 1.9 percent increase in 2017, said the note published on Thursday.

Buoyed by a recovery in oil prices, Abu Dhabi approved a 50 billion dirham ($13.6 billion) three-year stimulus package in early June, which BofAML estimated could add 0.4 percentage points to non-oil GDP growth.

ADNOC’s $45 billion five-year downstream investment plan — revealed in May — is estimated to add a further 1.1 percentage point to the emirate’s non-oil growth, the report said.

The Expo 2020 event in Dubai could drive up GDP growth by 2 percentage points between 2020 and 2021, the report said, by boosting job creation, consumption and tourist numbers.

Given the improvement in oil prices, the cost of Abu Dhabi’s stimulus spending is considered “financeable” by BofAML, while Dubai’s spending plans are said to be “modest.”

Recent structural reforms, including plans to introduce long-term expatriate visas for up to 10 years, could help to boost the UAE’s population and consumer demand, the note said.

“The new UAE long-term and temporary visa system should facilitate retention of white-collar expatriates,” it said.

“As we expect longer-term visas not to be linked to continued employment, this may increase expatriate incentives to acquire property and support real estate demand.”

The UAE announced in May that it would allow 100 percent foreign ownership of UAE companies in specific industries by the end of the year, a move that could give a welcome boost to foreign direct investment in the country.

A new UAE-wide insurance scheme may provide a one-time boost to corporate profits, the note said.

The UAE cabinet approved plans in June for the insurance scheme to replace the previous system whereby employers had to provide a monetary guarantee to cover each of their workforce.

The move is likely to free up capital that companies could choose to sit on or to reinvest, BofAML said.

“Should corporates invest, we estimate this could lead to a one-off 0.1percentage point boost to UAE non-hydrocarbon real GDP growth,” the report said.