Rabigh Refining & Petrochemical Co. (2380.SE)

The ongoing global economic recession and credit crunch has dampened demand leading to pricecorrection across basic petrochemical products. The prices of ethylene, butadiene, polypropylene andbenzene have declined to at least three-year lows. However, on a positive note, the improving demandscenario has led to an improved trend in 2Q09. The prices for polypropylene, polyethylene andbenzene witnessed a sequential improvement during 2Q09. While polypropylene prices reported a24.4% sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter.The price of benzene however, gained the maximum rising 80.6% in 2Q09 on a sequential basis.Price Change in Crude Oil and Natural GasPrice Change of Key Petrochemicals72%56%54%36%28%18%0%0%-18%-28%-36%2004 2005 2006 2007 2008-56%2006 2007 2008 2009Crude OPEC basketNatural GasPolyethylene Ethylene Benzene PolypropyleneSource: Bloomberg*2009 includes prices till AugustSource: BloombergAsian economies, mainlyChina, remain the biggestexport market for theMiddle EastEconomic downturn leadsto negative demand forpetrochemicals in ChinaOn the demand side, Asian economies have emerged as the key markets for petrochemical productsbecause of their favourable demand growth. China remains the biggest export market withpetrochemical demand expected to rise around 9% each year till 2012 compared to a mere 1.8%projected for the US and Europe. At the same time, as a result of the feedstock cost advantage, theMiddle East region has emerged as a significant petrochemical producer, targeting its low costproducts towards the Asian markets. However, given the economic slump, the demand forpetrochemical products is likely to remain low with over-capacity further deteriorating the situation.Ethylene derivatives exports from North America are expected to decline as a result of weakeningglobal demand, appreciating dollar and overcapacity building up in the Middle East. The reduction inoperating rates in Asia particularly the Middle East is expected to exert pressure on US exports andcash margins. According to ICIS, exports from the Middle East are expected to increase from 4.3million tonnes in 2008 to 11.7 million tonnes in 2013 benefiting from capacity expansions.Consequently, net trade balance for US polyethylene is expected to fall from 3.4 million tonnes in 2008to 0.80 million tonnes by 2013.With access to low cost feedstock (coal), China has been developing the local industry to fulfil thesoaring domestic demand. However, the scenario is changing fast as a result of the sluggish demandfor petrochemicals. According to CPCIA, Chinese petrochemical industry is moving downwards for thefirst time after ten years of high growth. Further, according to the Centre for Business Intelligence, anindependent commodities information provider in China, demand for key petrochemical productsincluding ethylene, polyethylene, benzene and purified terephthalic acid (PTA) witnessed negativegrowth in demand for the first time in 2008. Amongst this, PTA’s demand was the most affecteddeclining 8% in 2008 compared to a rise of 26% in 2007. The slowdown in global demand for Chinesetextiles, toys, electronics, home appliances, machinery and other finished manufactured goods hascaused the dip in demand for petrochemical products. Further, industry experts believe that the sectorwould be challenged by overproduction, lack of innovation and competitiveness and price undercuttingfrom other parts of the world.Demand and Production in China in 2008 ('000 tonnes)16,00012,8009,6006,4003,2000EthylenePropylenePolyethylene(PE)PolypropylenePetrobenzenePurifiedterephthalicacid (PTA)Monoethyleneglycol (MEG)MethanolDemandProductionSources: CBI Research & Consulting, China National Bureau of Statistics