GCC Petrochemical Sector Quarterly - 2Q11

·         QoQ growth witnessed in benchmark crude oil prices in 2Q11.

·         QoQ growth of 6.5% in 2Q11 profits; indicating satisfactory financial performance.

·         Western economies unrest continue to threaten prices & regional sector in 3Q11.

·         ‘Neutral’ stance on the sector.

Regional unrest & European economic worries lead upward movement in 2Q11 prices

During the quarter under review, international oil market and regional petrochemical sector mainly remained under the influence of two factors (i) ongoing turbulence in Libya, Yemen & Syria, which raised the average prices of benchmark oil to higher levels and (ii) economic fears in the European economies, which led minimal QoQ volumetric growth in regional petrochemical production. The average prices of OPEC, WTI and UK Brent indicated QoQ growth of 6.5%, 9.1% and 13.5%, respectively, in 2Q11. On the other hand, the average prices of ethylene, propylene, ammonia, urea and DAP registered QoQ increase of 3.5%, 6.8%, 11%, 8.3% and 6.8%, respectively, in 2Q11.  

Financial performance

In 2Q11, the regional sales revenue (based on our GCC petrochemical coverage) registered QoQ growth of 9.8%, whereas the bottom line witnessed QoQ gain of 6.4% and recorded at USD3.3bn. We believe, the growth in the regional sector in 2Q11 was mainly associated with QoQ increase in the average prices of related products (as per our estimations for 2Q11). However, during 1H11, the regional petrochemical sector’s sales and net profitability registered YoY growth of 31.8% and 52.1%, respectively. In addition, the remarkable YoY growth during 1H11 was mainly associated with notable increase in the average prices of related products and production growth. Growth in production was mainly based on the improvement in capacity utilization and  start of production from new expansions.

European debt crisis & aftermath of US debt-ceiling lead decline in 3Q11 prices

Global research believes the signing of US debt-ceiling negotiation to avert US from default is portraying additional challenges to oil market  in 3Q11, including the potential cut in (i) government spending and (ii) the US ratings downgraded to AA+ from AAA by S&P. On the other hand, the ongoing European crisis will further deteriorate EUR from current levels in 3Q11. Hence, we believe the combined impact of these expected events will lead the prices of all benchmark oil to retreat from current levels; where the average prices of OPEC crude oil is expected to remain in a range of USD98/bbl - USD102/bbl in 3Q11. In addition, we are not expecting any notable impact of ongoing regional political unrest on crude oil prices in international market, during 3Q11. 

Outlook for 3Q11

We expect the sector’s sales and net profitability will show limited QoQ growth of 0.2% & 1.1% in 3Q11, respectively. The limited QoQ growth in sector, despite of expected decline in prices of crude, is mainly associated with the expected commencement of QAFCO-V plant of IQ. Furthermore, we are expecting the sector will be able to show gross, operating and net profitability margins at 37.9%, 30.8% and 22.2%, respectively, in 3Q11. 

Recommendation - Neutral

We reiterate our Neutral stance on the sector with SIPCHEM & IQ as our top pick for the sector in 3Q11.