RIYADH – Petrochemical demand outlook remains weak even as IMF projects global GDP to expand by 3.5 percent in 2013, slightly higher than 3.2 percent in 2012, since higher growth in emerging economies is partially offset by slower economic growth in the US and the continued economic instability in Europe. “Though 1Q13 saw higher petrochemical demand from Asia (mainly China), we maintain our cautious demand outlook for the remaining quarters of 2013 on slower recovery in the US economy and continued recession in the Eurozone,” said Iyad Ghulam, Equity Research Analyst at NCB Capital in the bank's latest update on the petrochemicals sector. “We therefore expect petrochemical prices to move up in a narrow range of 2-8 percent as seen in 1Q13 as the tight supply is expected to ease with global supply returning to normal levels in the coming months.” In its latest update on the petrochemicals sector, NCB Capital upgraded APPC and Yansab to Overweight, while maintaining all other ratings. “We remain overweight on Sipchem, SABIC, Sahara and SIIG. Increased earnings from startups and better operational efficiencies at existing facilities should lead to a 16 percent YoY growth in sector net income in 2013,” said Iyad Ghulam, Equity Research Analyst at NCB Capital. “Slow economic growth continues to delay demand recovery for petrochemicals and will keep prices broadly flat in 2013.” NCB Capital upgraded APPC to Overweight from Neutral due to “improved operational efficiencies which we believe are sustainable in the coming quarters, strong outlook for polypropylene prices due to tight supply and a FCF yield of 10.9 percent with no capex plans which raises the possibility of higher dividends being paid in the near term.” NCB Capital raised Yansab to Overweight from Neutral due to an anticipated multiple expansion from commencement of dividends and improved earnings outlook. Start of dividend payments in 2013 is a key catalyst in the near term. “We expect Yansab to distribute DPS of SR2.5 in 2013 with a payout of 48 percent and dividend yield of 4.9 percent. We expect the payout ratio to increase by around 10 percent per annum, reaching 81 percent in 2017,” Ghulam said. “We believe Yansab and APPC will outperform market in near term. Yansab and APPC offers strong upside potential in the short run based on an attractive dividend outlook and rising earnings. SABIC and Sipchem remain value picks for long term investors.” Following the extension of the natural gas price subsidy for one year in 2012, KSA's Ministry of Oil is now expected to lower the subsidy in 2013. We are expecting gas prices to increase to $1.5/mmbtu in 2Q13 from $0.75/mmbtu. “We earlier expected that the price change will occur at the beginning of 2013,” said Ghulam. “However, we have changed the start date of the change to 2Q13 from 1Q13 as no official decision was made. If there is no decision made in 2Q13, we will delay the planned increase in prices to 1Q14.” NCB Capital estimates the total net income of the stocks under coverage to increase by 16.1 percent YoY to SR38.6 billion in 2013, after falling 18.5 percent YoY in 2012. Higher earnings from startups (Petrochem and Sahara's projects), better operational efficiencies at existing plants and lower losses by Kayan will drive earnings in 2013. “This is despite shutdowns which will negatively impact 1Q13 earnings and the possible increase in natural gas prices to $1.5/mmbtu in 2Q13. Extension of the current price or lower than expected increase in gas prices will positively impact our estimates,” Ghulam noted. Drought and changing weather conditions resulted in weak agriculture production in 2012, thereby increasing the demand for fertilizers. The international fertilizers agency (IFA) expects the demand for fertilizers to remain unchanged in 2013, followed by an improvement in 2014. However, oversupply remains the key concern as fertilizer facilities globally are operating at an average utilization rate of 82 percent. Capacities are expected to grow further by 5 percent this year with increasing supply from China, Asia and the Middle East. Around 140 new fertilizer facilities are expected to start production in 2013-2014, mainly in China. “We project the anticipated increase in supply to lower urea prices by 3.8 percent YoY to $428/mt and ammonia prices by 11.6 percent to $506/mt in 2013,” Ghulam said. “The decline in ammonia prices is higher than urea due to the lower ammonia supply in 2H12 which led to a significant rise in prices, despite moderate demand fundamentals.” — SG
