JEDDAH – Concerns on the global economy continue to hold back the performance of the Saudi petrochemical sector, NCB Capital said in its recent report. Rising propane and butane costs and operational inefficiencies at the new startups are contributing to the weak performance. In addition, pricing growth is restricted by weak demand. The report forecast that the total net income of the 10 stocks under its coverage would decline by 16 percent YoY to SR34.2 billion in 2012. “This is mainly due to higher losses by Saudi Kayan, increased propane and butane prices and weakness in petrochemical demand," said Iyad Ghulam, equity research analyst at NCB Capital. “However, the 2013 net income is expected to grow 22.7 percent YoY to SR41.9 billion benefiting from higher contribution from Saudi Kayan, Sahara and Petrochem. Moreover, we are confident on the sector's long term growth backed by its proximity to the attractive Asian markets, strong project pipeline and ethane cost advantage." NCB Capital maintained Overweight rating on Sipchem, SABIC, Sahara and SIIG, while remained Neutral on Tasnee, Yansab and APPC. “Our top picks are SABIC and Sipchem as we believe the stocks offer a good entry point, firm pricing outlook, low production cost and good dividend yield. We maintain our Underweight rating on Petrochem," Ghulam noted. NCB Capital downgraded SAFCO to Neutral as the stock offers limited upside at the current levels. Urea and ammonia oversupply concerns weigh heavily on the medium to long-term outlook. The stock price grew 8.6 percent since our last update in June 2012, outpacing TASI which increased 6.7 percent. “We have also downgraded Saudi Kayan to Neutral on the back off ongoing operational issues and high debt levels. Lowering our 2012E and 2013E estimates has led to a downward revision in our PT to SR16.1 from SR18.4 earlier," Ghulam further said. Economic indicators in the US, such as new homes, auto and retail sales, have improved in recent months, although slower restocking and little improvement in the unemployment data remain key concerns. The ongoing credit crisis is holding back demand in Europe, while Asian economies are struggling with lower export and domestic demand. The uncertain demand outlook is translating into need-based purchases, which exerts pressure on prices and operating rates. As demand for petrochemicals closely tracks economic growth, NCB Capital does not expect a strong recovery in near term demand. Despite weak demand, high prices of naphtha (which closely tracks oil) are fueling petrochemical prices globally. On a QTD basis, petrochemical prices have increased 15 percent. MEG gained 25.1 percent and MTBE gained 23.6 percent while Methanol declined by 2.7 percent. In 3Q12E, NCB Capital expects the average price of petrochemicals to move in the range of /-5 percent QoQ. Among fertilizers, the pricing trend is mixed. The price of urea dropped 16.3 percent QTD while prices of ammonia were up 9.3 percent QTD, benefiting from tight supply and rising demand in Asia. On a QoQ basis, NCB Capital expects the benchmark average price of urea to decline 16 percent, while ammonia is expected to increase by 25.7 percent in 3Q12. The International Monetary Fund (IMF), in its update reports in July 2012, marginally reduced its estimate for global GDP for 2012E and 2013E by 0.1 percent and 0.2 percent to 3.5 percent and 3.9 percent, respectively, primarily due to lower growth in major emerging economies. The IMF expects China to grow 8.0 percent in 2012E (earlier estimated 8.2 percent) due to lower exports to Europe and weak domestic demand. The Chinese government has set a target of 7.5 percent GDP growth in 2012. It is has undertaken measures such as interest rate cuts and financial support for small and medium size enterprises to stabilize the economy. The IMF also lowered its 2012E GDP estimate for India to 6.1 percent from 6.8 percent earlier. – SG/Agencies
