Saudi Petrochemicals - NCBC

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INDUSTRY OUTLOOKterm perspective, oversupply concerns weigh heavily on the magnitude of furtherrecovery. We expect ethylene prices to grow at a CAGR of 5.9% during 2009-2015E. Our ethylene price forecast is based on anticipated movement in oil prices,given the strong correlation between ethylene prices and oil prices historically.Exhibit 7: Ethylene prices (historic and forecasts)USD/mt1,6001,4001,2001,00080060040020002005 2006 2008 2009 2011E 2012E 2014E 2015E 2017E 2018ESource: Bloomberg, <strong>NCBC</strong> Research estimatesPolyethylenePolyethylene is the most commonly used ethylene derivative and finds multipleapplications as it is durable, flexible and chemically resistant. It has two forms –high density polyethylene (HDPE) and low density polyethylene (LDPE).Polyethylene mainly finds application in films and sheets followed by injectionmolding and blow molding.High Density Polyethylene (HDPE)This is a high density version of polyethylene and therefore harder, stronger butless flexible than the low density polyethylene (LDPE). HDPE, given itsspecifications, finds uses in products and packaging such as milk containers,detergent bottles and water pipes to list a few.Exhibit 8: Applications of HDPE(%)Blow MouldingLarge20%Film Grade27%Blow MouldingMedium14%Pressure PipeGrade13%Source: Jacob Consultancy, NICBlow MouldingSmall26%27 April 2010 SAUDI PETROCHEMICAL SECTOR10
INDUSTRY OUTLOOKHDPE SUPPLY DYNAMICSHDPE capacity in MiddleEast expected to grow 2.6xby 2012eBy geography, North America is the largest producer of HDPE with a market shareof about 25% of total global capacity of about 30mn mtpa in 2008, followed byNorth East Asia (22%) and Western Europe (16%). The Middle Eastern regionaccounted for 13% of global market share. Following the aggressive capexundertaken by Middle Eastern players, the region’s total HDPE capacity is expectedto grow 2.6 times to 10mn mtpa by 2012e from 3.9mn mtpa in 2008.During 2003-2008, global operating rates were higher than 85%, similar to thestrong levels witnessed during 1995-1997. Following the spread of economicrecessionary pressures across the globe, operating rates bottomed out in 2009.Global operating rates are expected to improve gradually in the coming yearscapitalizing on improving demand scenarios; though the pace of recovery isexpected to be slow. Given that operating costs are much lower in KSA and theregion, due to the lower cost of raw materials, we expect KSA producers to operateat higher average rates than their global peers. Exhibit 9 details the globalproduction and operating rates historically and our estimates going forward.Exhibit 9: Global HDPE production and operating ratesMetric tons per annum (millions), unless otherwise stated60100%50403090%80%2010070%60%1995199619971998199920002001200220032004200520062007200820092010E2011E2012E2013E2014E2015ECapacity Production Operating Rate (%)Source: NIC Presentation - Jacob Consultancy, <strong>NCBC</strong> Research estimatesHDPE DEMAND DYNAMICSNorth-East Asia, North America and Western Europe are the largest consumers, bygeography of HDPE, together accounting for 64% of global consumption of 30mnmtpa in 2008. During 2003-2008, global HDPE demand had increased at a CAGR of3.5%, outpacing the growth in capacity of 3.1% during the same period. Thefastest growing geography was the Middle East, which reported a CAGR of 13.8% inHDPE consumption, followed by North-East Asia at 3.5%. Going forward, we expectconsumption growth in Middle Eastern and Asian countries (mainly China and India)to remain strong. However, overall HDPE demand is expected to grow at a slowerpace than witnessed historically, given the anticipated weakness in demand fromdeveloped economies.HDPE PRICING OUTLOOKThe prices of HDPE and LDPE have grown close to 47-77% since the beginning of2009, driven by the increase in oil and ethylene prices. Going forward, we expectHDPE and LDPE prices to continue tracking ethylene prices. We project HDPE prices27 April 2010 SAUDI PETROCHEMICAL SECTOR11
Page 1 and 2: NCB Capital Research DepartmentApri
Page 3 and 4: KSA Petrochemical Sector
Page 5 and 6: Overview of coverageExhibit 1: KSA
Page 7 and 8: INDUSTRY OUTLOOKgovernment offers n
Page 9: INDUSTRY OUTLOOKACCESS TO LOW COST
Page 13 and 14: INDUSTRY OUTLOOKDuring 2003-2008, g
Page 15 and 16: INDUSTRY OUTLOOKpolypropylene capac
Page 17 and 18: Oil: Correlation & pricingPetrochem
Page 19 and 20: OIL: CORRELATION AND PRICINGsector.
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Page 23 and 24: INDUSTRY FINANCIALS1Q 2010 financia
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Page 27 and 28: VALUATIONExhibit 27: Valuation over
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Page 33 and 34: Company descriptionOverviewSahara P
Page 35 and 36: COMPANY DESCRIPTIONPlanned projects
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Page 45 and 46: COMPANY DESCRIPTIONExhibit 31: Prod
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INVESTMENT VIEWRisks to our viewEAR
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Company descriptionOverviewEstablis
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FinancialsExhibit 48: Income statem
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PETROCHEMICAL | 27 April 2010COMPAN
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FINANCIAL PERFORMANCEHIGHER MINORIT
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FINANCIALSExhibit 63: Cash flow sta
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Forecast changesPHASE II TO START C
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FinancialsExhibit 67: Income statem
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