JEDDAH – Petrochemical prices are expected to remain under pressure over the next few months due to demand weakness, especially after a sharp jump in the first two months of Q3, Al Rajhi Capital said Saturday in its latest study on “Saudi Petrochemicals Sector”. Rising production costs continue to drive product prices upwards, without any visibility in demand growth. Hence, petrochemical prices were forecast to be lower in Q4 than the current levels as the stock replenishment activities end and demand remains muted for the next couple of months. Further, the supply side will not be constrained as there are not many planned shutdowns. The study noted that the third installment of the Quantitative Easing (QE) program announced by the US Federal Reserve could support product prices for the next couple of weeks. Overall, Al Rajhi Capital remains bearish on product prices over the near-term, barring ammonia, where relatively stable demand is expected. The study said that all companies under its coverage, i.e, SABIC, Sipchem, NIC, Yansab, APC, SPC, Saudi Kayan and Petro Rabigh, excluding SAFCO, would “suffer from sluggish product prices and weakening demand from the emerging markets in Asia,” adding that “pure-play producers” would to be the most affected than those having a diversified product portfolio. However, despite these near-term concerns, Saudi producers will perform better compared to global peers as they continue to enjoy feedstock cost advantage and healthy financials. Overall, the study remains “positive on the Saudi petrochemical sector as a whole, but downgrade APC and Yansab sighting near term headwinds.” Near term concerns such as weakened demand persist for Saudi petrochemical companies. Al Rajhi Capital revised target prices downwards for SABIC, Yansab, APC and SPC as a consequence, while increase target price for SAFCO considering its exposure to fertilizers. APC and Yansab were downgraded to Neutral (previous: Overweight) considering weaker product prices and exposure to basic olefins. Overweight rating for SABIC, SAFCO, NIC and Sipchem were maintained, while Neutral rating for SPC stays. The petrochemical industry has undergone a roller-coaster ride of sharp peaks and troughs throughout the year. After healthy product prices in Q1 2012, both demand and prices declined in Q2 on the back of economic weakness, lower naphtha prices and higher inventory build-up across the globe. Most of the product prices were down 20-25 percent q-o-q at the end of Q2 with utilization rates declining for major markets such as Europe from 92 percent in Q1 to 85 percent in Q2. Despite a continued weakness in the global economy and limited increase in demand from major markets, petrochemical product prices witnessed a sharp rally in Q3 mainly driven by the upstream factors such as rise in Brent and naphtha prices (key feedstock worldwide), the need for inventory replenishment and turnarounds (both planned and unplanned) across the globe. The global petrochemical sector as a whole is enduring tough times due to an uncertain demand environment and sluggish price outlook, “Saudi companies will not be an exception to this trend.” The global economy continues to struggle as the Eurozone crisis, and a growth slowdown in China and India put pressure on its recovery. – SG/QJM
