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NCB Capital report expects petchem earning to grow

Report anticipates earnings to grow 16% despite weak 1Q13

Continuance of natural gas price subsidy is a major concern in the industry today.
Continuance of natural gas price subsidy is a major concern in the industry today.

In its latest update on the Petrochemicals sector, NCB Capital upgrades 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% YoY growth in sector net income in 2013E,” 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 2013E.”

Petrochemical demand outlook remains weak.

IMF projects global GDP to expand by 3.5% in 2013 slightly higher than 3.2% in 2012 as 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. “We, therefore, expect petrochemical prices to move up in a narrow range of 2-8% as seen in 1Q13 as the tight supply is expected to ease with global supply returning to normal levels in the coming months.”

Oversupply to increase pressure on fertilizer prices

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%. Capacities are expected to grow further by 5% 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% YoY to USD428/mt and ammonia prices by 11.6% to USD506/mt in 2013,” commented Iyad Ghulam. “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.”

Natural gas prices expected to increase in 2Q13

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 USD1.5/mmbtu in 2Q13 from USD0.75/mmbtu.

“We earlier expected that the price change will occur at the beginning of 2013,” said Iyad 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.”  

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