High petrochemical prices, new production streams and uncertain demand set the tone for Saudi Arabian petrochemical companies ahead of second quarter results.
High petrochemical prices, new production streams and uncertain demand
set the tone for Saudi Arabian petrochemical companies ahead of second quarter
results.
The combination is likely to ensure another quarter of solid profits for most
of the kingdom's producers, but analysts warn that conditions might worsen in
coming months, as high second-quarter chemical prices undermined demand in key
emerging markets.
Over the last three months, however, there was an average 5% growth in the
prices of a basket of petrochemical products made by Saudi companies, said
Tariq al-Alaiwat, petrochemical equities analyst at NCB Capital in Jeddah.
"The main driver for the second quarter was higher prices, even though
demand was flat," he said. "Methyl tertiary-butyl ether [MTBE] was up
around 21%, polyvinyl chloride [PVC] is up 14% and polypropylene [PP] was up
9%."
However, the biggest market for Gulf petrochemicals is
China
,
where demand fell 16% in April and May compared to the first quarter, prompting
fears of stagnation through the third quarter.
In a late-June research note, HSBC Global Research said Chinese plastic resin
demand had slowed significantly in the second quarter, putting downwards
pressure on prices. "We believe that the risks to near-term sector
performance are skewed to the downside," it said.
A researcher for the bank said in an email that its base-case scenario was that
second quarter numbers would be "decent" - either flat on the first
quarter or slightly higher.
Even if prices should fall next quarter, however, the likelihood of continued
high oil prices means Saudi producers will still enjoy a profound competitive
advantage over their rivals in other regions. Whereas most international
producers use naphtha feedstock based on oil prices, Saudi petrochemical
companies make their products from natural gas, supplied at a subsidized rate
by the state oil firm.
The Bahrain-based Securities and Investment Co., or SICO, said in a research
note that "strongest revenue and profit growth [for Gulf companies] is
expected from petrochemical sector stocks".
Profit forecasts for market leader Saudi Basic Industries Corp. (2010.SA), or
Sabic, which dwarfs other listed petrochemical producers in the kingdom, were
strongly up on an annual basis, but down a bit on its surging first quarter
performance.
Al Rajhi Capital has penciled in 6.1 billion Saudi riyals, Credit Suisse
anticipates SAR7.2 billion, Cairo-based EFG Hermes and Kuwait-based Global
Investment House each expect profits of SAR7.4 billion, and NCB Capital
forecasts SAR7.7 billion for the majority state-owned conglomerate.
Sabic, which produces metals, fertilizers, basic petrochemical products and
downstream plastics, recorded profits of SAR7.7 billion in the first quarter of
this year and SAR5 billion in the second quarter of 2010.
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