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.

Forecasts for Sabic subsidiary Yanbu National Petrochemical Co. (2290.SA), or Yansab, followed the same trajectory: Mostly lower than the SAR718 million profit recorded in the first quarter, but much higher than the SAR502 million from the second quarter of 2010.

Saudi Fertilizer Co. (2020.SA), or Safco, the other major Sabic unit listed on the bourse, is forecast to grow profits extensively because ammonia and urea prices were high. SICO expects SAR1.1 billion in profit and EFG Hermes anticipates SAR1 billion compared to a first quarter performance of SAR833 million.

Saudi International Petrochemical Co. (2310.SA), or Sipchem, one of a handful of producers that are independent of state ownership, is expected to enjoy strong profits well above those recorded last quarter or a year ago and was tipped by SICO as a good share buy.

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