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.