Tentative recovery in H2-09 to be sustained in Saudi Arabia thru 2010 if Chinese demand is sustained

The beginning of a tentative recovery in H2-09 should be sustained throughout 2010, provided the revival in Chinese demand is sustained, according to the latest Saudi Arabia Petrochemicals Report by Business Monitor International. It is believed that demand for petrochemicals will have improved in 2010 following some difficult months which have seen a sharp slowdown in construction activity. This will be supported by the government's economic stimulus programme. Although H2-09 will be an improvement on the poor performance seen in H2-08, levels of demand growth are not forecast to return to 2007 levels until 2010 at the earliest. There are fears that the Chinese government's stimulus plan for petrochemicals, which is set to involve investment in new refineries to speed up their construction, could create a problem of short-term over-supply in Saudi Arabia's export markets in Asia. Much will depend on the strength of recovery in the automotive and home appliance sectors, which are expected to recover before the building sector. Taking a longer term view, China is set to remain a net ethylene importer over the next five years. The recovery in the industry's fortunes has translated into improved financial performance, although profitability and income in H2-09 was well down on 2008 levels due to the fall in petrochemicals prices. In Q3-09, Saudi Arabia's leading petrochemicals producer Sabic reported a sharp decline in profits compared with Q308, but rose sharply compared with Q2-09. Third quarter net income fell 50% to SAR3.6 bln, but doubled compared to Q2. Sabic's total production during the first nine months of 2009 was up 4% year-on-year (y-o-y) to 44 mln tons, while quantities sold were up 3% y-o-y to 34.5 mln tons. Sabic's increased production capacities through current expansions at YanSab, which recently started production at its complex at Yanbu, and the impending completions of expansions at Sharq, due on stream in the first quarter of 2010, and at Saudi Kayan, due for completion in 2011. Sipchem's net profit in the nine months of 2009 was SAR84.3 mln compared with SAR502 mln in the same period in 2008. Operating profit during the nine months of 2009 was down 95% y-o-y to SAR45.5 mln. Sipchem cites continuous decrease in petrochemical prices due to the international economic crisis and to the scheduled shutdowns of its plants for 25 days during Q3 to perform maintenance. The shutdowns have resulted in a decrease in sales but have improved the performance of Sipchem's plants. BMI's forecasts for the Saudi Arabian petrochemical sector take into account long delays in project completion. We do not believe the proposed Ras Tanura complex, with a 1.5 mln tpa ethylene cracker, will come onstream before 2015. The commissioning of the Petro Rabigh complex began in Q209, having been delayed from Q4-08. Nevertheless, ethylene capacity in 2014 is forecast to be more than double that of 2008 levels at 18.43 mln tpa, with Jubail and Yanbu the focus of petrochemicals developments. Our projections for petrochemical capacity are based on planned projects, but it is possible that some may not come to fruition due to the restriction on ethane feedstock and a possible lacklustre recovery in the Chinese market at a time of rising Chinese capacities. Due to the integrated nature of the megaprojects under development, any delay further up the supply chain causes delays in downstream developments. Consequently, the delay in Petro Rabigh has led to a delay in the commissioning of polymer plants with capacities of 300,000 tpa PE plants and 700,000 tpa PP.