Global Research. Equities. Saudi Arabia. Saudi Basic Industries Corporation-SABIC

Transcription

1 Global Research Equities Saudi Arabia Saudi Basic Industries Corporation-SABIC Formula for Growth, Equation for Expansion July 2008

2 KSCC Global Tower, P.O. Box Safat Kuwait Tel: (965) Fax: (965) stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. El-Quqa, CFA Executive Vice President Phone No:(965) Faisal Hasan, CFA Head of Research Phone No:(965) Mahmoud M. Soheim Manager Egypt-Research Phone No:(202) Syed Taimure Akhtar Financial Analyst Phone No:(965)

3 Saudi Basic Industries Corporation-SABIC Tickers: SABIC AB (Bloomberg) 2010.SE (Reuters) Listing: Saudi Stock Exchange (Tadawul) July 2008 BUY Current Price: SR (As of July 27 th, 2008) Investment Summary Saudi Basic Industries Corporation is a public listed joint stock company incorporated under the law of Saudi Arabia. The Company was established pursuant to Royal Decree on 6th September 1976, and registered in Riyadh on 4th January The establishment of SABIC was in furtherance of a government policy to diversify the Saudi industrial base outside the oil sector and to make proper use of associated gases at well-heads, which had, until that point, been flared off. The Company has numbers of subsidiary and affiliates, which is referred as the SABIC Group. Along with its subsidiaries and affiliates, the Company is the largest non-oil industrial group in MENA region. The principle activity of the Company is to market and sell the petrochemical products of its affiliates / subsidiaries, under long-term marketing and sales agreements. SABIC group comprises of 21 manufacturing petrochemical affiliates / subsidiaries, which are involved in the manufacturing of wide range of petrochemical products, including basic chemicals, intermediates (including industrial gases), polymers, fertilizers and metals. These affiliates / subsidiaries has further categorized under six strategic business units (SBUs), which are (i) basic chemical, (ii) intermediates, (iii) polymers, (iv) specialized products, (v) fertilizer and (vi) metal. In 2007, the Company, through its affiliates / subsidiaries, owned 37.1mn tons capacity to produce different petrochemical products and metals. In addition, 64.9% of the total capacity is composed to produce petrochemical products (basic chemicals), 20.2% of capacity is of fertilizer products and 14.8% is claimed by metal production unit. Moreover, the Company, through its affiliates / subsidiaries, is the largest petrochemical company not only in Saudi Arabia but also in the MENA region. The Company, in 2007, has claimed 70.7% of the total country and 37.3% in the total MENA region production capacity. Basic chemical plants of the Company s affiliates / subsidiaries are designed to produce wide range of basic chemical products, which includes olefins, aromatics and oxygenates. In 2007, the consolidated basic production of the Company reached 19.9mn tons out of which 47.2% is composed of olefins, 43% of oxygenates and 9.8% of aromatics. The petrochemical plants of the Company s affiliates / subsidiaries are vertically integrated. This has led the maximum utilization of these basic chemical products to produce intermediates (including industrial gases), which are further used to produce polymers within the group or in the same company, providing an advantage of economies of scale to SABIC group. July 2008 Saudi Basic Industries Corporation SABIC

4 Fertilizer SBUs have the capacity to produce basic fertilizer chemicals like ammonia, phosphate and sulfuric acid. Moreover, the fertilizer plants of the affiliates / subsidiaries are well-integrated and enable fertilizer SBUs companies to make maximum utilization of fertilizer chemical to produce end fertilizer products i.e. urea. At present, none of the affiliate / subsidiary of SABIC is producing Di Ammonia Phosphate (DAP). The production from metal division of the SABIC group is mainly comprised on the steel production. The SABIC group has produced 5.5mn tons of different types of steel in The production capacity expansions and new production capacities in the Company s affiliates / subsidiaries: (i) Eastern Petrochemical Company SHARQ, (ii) Saudi Kayan Petrochemical Company Saudi Kayan (iii) Yanbu National Petrochemical Company - YANSAB, (iv) Saudi Methanol Company, (v) Maaden fertilizer project, (vi) Saudi Arabian Fertilizer Company s SAFCO-V expansion plan, and (vii) acquisition in European region, will lead the Company s production capacity to increase, during , at a CAGR of 5.7%. In line with the efforts to diversify its economic development from oil to non-oil based industries, the government of Saudi Arabia had encouraged local petrochemical industry to make an investment US$60.0bn (SR225.1bn) during the period of in petrochemical sector. Out of which US$52.5bn (SR196.8bn) are allocated for the expansion of basic, intermediates (including industrial gases) and polymers. The remainder is allocated for the fertilizer plant expansions. The major portion of the planned investment in petrochemical sector is associated with government base companies, which implies the high involvement of SABIC in future expansion. At present, 50.3% of the total planned investment in non-fertilizer petrochemical sector has been incurred. The major production capacity expansion in Saudi Arabia is associated with SABIC, Saudi International Petrochemical Company (SIPCHEM), Methanol Chemical Company Chemanol, Nama Chemical Company NAMA, Sino Saudi Petrochemical Company, Delta Oil Company and Jubail Chevron Phillips Company JCP. This will lead the country s production capacity to increase at a CAGR of 8.7%, during Saudi Arabia controls 33.2% of the total world petrochemical (excluding fertilizer) production capacity in The growth in the world petrochemical production capacity is mainly associated with the expected upcoming production capacity expansion of 5mn- 6mn tons from China and 16.9mn tons from the MENA region by This will lead the world production capacity to increase at a CAGR of 6.2%, during , to 163.4mn tons. According to Food and Agriculture Organization (FAO) forecasts, the world fertilizer capacity is expected to reach at 275.2mn tons in 2011 from 229.5mn tons in This depicts a CAGR of 4.6% in corresponding years. In addition, the additional capacity from the MENA region is expected to contribute to 57.1% in the total world additional production of 45.7mn tons. Furthermore, out of the total MENA region additional capacity of 28.4mn tons, Saudi Arabia is expected to contribute by 46.8% of the total additional new capacities of the region. 2 Saudi Basic Industries Corporation SABIC July 2008

5 Gas is the main feedstock for petrochemical complex (including fertilizer plants), which has now become a major challenge on the international level to manage their margins. Average gas prices have been surged to US$6.3 per mmbtu in 2007 from US$ 4.6 per mmbtu in 2003 after making all time high of US$7.3 per mmbtu in Petrochemical complexes, however, in Saudi Arabia are enjoying the benefit of getting gas at a highly subsidized rate of US$0.75 per mmbtu. Hence, petrochemical complexes in Saudi Arabia are not expected to be highly affected with high international gas prices and depict a competitive edge over other international players. We expect the profitability of the Company will show a growth of 13.5% in 2008 over However, the expected decline in cash reserves due to expansions will lead to lower financial income for the Company. Going forward, we expect the profitability of the Company will increase at a CAGR of 7.5% between 2007 and We initiate our coverage of SABIC with a BUY recommendation. Based on, consolidated fair value of SR168.5, which offers a potential upside of 25.1% over the current market price of SR per share as of July 27th To arrive at our consolidated fair value of the Company, we have assigned 80% weightage to the discounted cash flows (DCF) based value and 20% to value derived from the relative valuation technique. Table 01: Investment Indicators Price as on July 27th 2008 Shares in issue Market Cap 52-week price range (SR) (SR) (mn) (SR mn) High / Low , , / 90.8 Revenues Net Profit EPS BVPS ROE P/E P/BV Year (SR Mn) (SR Mn) (SR) (SR) (%) (x) (x) 2009E 185,266 31, % E 170,822 30, % A 126,747 27, % A 86,328 20, % Source: Annual Reports & Global Research * Historical P/E & P/B multiples pertain to respective year-end prices, while those for future years are based on closing price as at July 27th Chart 01: Share Price Performance Chart SR ,000 10,000 8,000 6,000 4,000 2,000 0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 TASI Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 SABIC TASI Source: Zawya, Global Research July 2008 Saudi Basic Industries Corporation SABIC

6 Company Overview Background Saudi Basic Industries Corporation-SABIC and, together with its subsidiaries and affiliates, the SABIC Group, a joint stock company incorporated under the laws of Saudi Arabia on 6th September 1976 and registered in Riyadh on 4th January The Company is a holding company for a group of companies that together constitute the Middle East s largest non-oil industrial group. The SABIC Group s principal business is the manufacture and sale of basic chemicals, intermediates (including industrial gases), polymers, fertilisers and metals. It is one of the world s leading producers of basic chemicals, intermediates and polymers. Historically, the marketing and sales activities for most of its affiliates and subsidiaries were conducted through two wholly owned subsidiaries of SABIC (i) Sabic Marketing Limited (SML) and (ii) Saudi Arabian Fertilizer Marketing Company (SANAPIK). Both SML and SANAPIK were merged into SABIC as part of the reorganisation of SABIC s business into SBUs and the marketing and sales activities conducted through these subsidiaries were assumed directly by SABIC. At present, SABIC group comprises of 21 petrochemical affiliates / subsidiaries, which are involved in the manufacturing of wide range of petrochemical products, which includes basic chemicals, intermediates (including industrial gases), polymers, as well as fertilizers and metals. These affiliates / subsidiaries has further categorized under six strategic business units (SBUs), which are (i) basic chemicals, (ii) intermediates, (iii) polymers, (iv) specialized products, (v) fertilizers and (vi) metals. The overseas business of the Company is conducted through its subsidiaries located in the respective countries or regions. Like, (i) the European operation is conducted by SABIC- Europe, which originally was the petrochemical business of DSM N.V., an integrated producer of Polyolefins and olefins, (ii) SABIC-Americas Inc. is an independent, wholly owned US corporate subsidiary of SABIC-Americas, which was established in 1997 and responsible to conduct operation in North & South American region on the behalf of SABIC, (iii) SABIC Asia Pacific Ltd is based in Singapore, which is responsible for Asian operation, (iv) Middle East operation is handled through the domestic headquarter in Riyadh and many of their major facilities located in Saudi Arabia, (v) the African region is controlled through a sales office in Cairo, Egypt and a distribution and storage facility in Durban, South Africa. Foot Prints of SABIC (Out Side Saudi Arabia ) Source: SABIC Annual Report2007 Saudi Basic Industries Corporation SABIC July 2008

7 Management The board of directors (BoD) of the Company is led by HH Prince Saud Bin Abdullah Bin Thenayan Al Saud. H.H Prince Saud holds several key positions in Saudi Arabian companies, including the chairmanship of the boards of Jubail United Petrochemical Company, and Power and Water Utility Company for Jubail and Yanbu. He is also a board member of both the Royal Family Board and also Prince Salman s Social Centre. The Prince started his career as an engineer at the Riyadh municipality. He was promoted to director general for survey and drawings and then to director general for operation and maintenance. In 1989, he was assigned the position of under-secretary for planning and programs at the Ministry of Municipality and Rural Affairs. H.H Prince Saud previous memberships included being the chairman of Water and Wastewater Treatment in Riyadh. He also served on the board of directors of the Water and Wastewater Treatment in Makkah, in Tabuk, and in the Eastern Province. He was also on the board of the General Establishment of Electricity, and of the General Establishment of Saline Water Conversion Company. Prince Saud is also a member of several committees formed by a Royal Decree to regulate the needs of Al-Jouf, Jizan, the Northern border and Hail areas in Saudi Arabia, in addition to the villages and areas in the western coast and the needs of Yanbu Governorates. Moreover, Prince Saud is a member of a joint committee that supervises the coordination between the Ministry of Municipality and Rural Affairs, the Ministry of Transportation, the Ministry of Agriculture and the Higher Committee for Childhood. Saud is also a regular participant in forums and scientific seminars in the kingdom and abroad, and has previously presented a number of research papers in the areas of economics, industry and investment. Table 02: Name & Position of BoD Members Names HH Prince Saud Bin Abdullah Bin Thenayan Al Saud Mohammed Hamad Al Mady Ahmad Ibrahim Al Hakami Abdullah Mohammed Al Issa Mohammed S Abanumay Abdulmuhsin Bin Abdulaziz Al Faris Saleh E Al Husseini Source: Zawya Position Chairman Vice Chairman Director Director Director Director Director Senior Management The senior management of the Company is comprised of qualified personnel who have vast experience in their respective field. The management of the Company is led by Mr. Mohammad Hammad Al Mady. At present, he is the Vice Chairman of BoD and the Chief Executive Officer of Saudi Basic Industries Corporation (SABIC). Prior to his appointment in 1998, he was SABIC s Director General for Projects. Mr. Al Mady also serves as chairman of the Saudi Arabian Fertilizer Company, SABIC R&T executive committee and the SABIC Euro Petrochemicals B.V. executive board. He also sits on the Board of Aluminum-Bahrain (ALBA) and the US-Saudi Business Council, and heads the Saudi-side of the Saudi-Taiwanese Joint Committee for Economic and Technical Cooperation. July 2008 Saudi Basic Industries Corporation SABIC

8 Table 03: Senior Management Names Mohammad Hamad Al Mady Mutlaq Bin Hamad Al Morayshed Homood Abdullah Al Tuwaijr Mosaed Suleiman Al Ohali Abdulsalam Al-Mazro Al Mazro Dr Abdulrahman Al Ubaid Khaled Al Mana Yousef Al Zamel Mohammed Saleh Al Jabr Mohammed Al Bathi Mansour Al Kharboush Fahad Al Sheaibi Ali Al Khuraimi Ibrahim Al Shuweir Source: Zawya Position Chief Executive Officer Vice President, Corporate Finance Vice President, Petrochemical Coordination Vice President, Fertilizer Vice President, Polymers Vice President, Polyolefin Vice President, Intermediate Chemicals Vice President, Basic Chemicals Vice President, Metals Vice President, Corporate HR & Communications Vice President, Shared Services Vice President, PVC & Polyester Vice President, Research & Technology Vice President, Legal & Audit Overseas Management The overseas management responsibility is to carry out the Company s operations in their respective regions and answerable to BoD. Table 04: Overseas Management Names Frans Noteborn Boy Litiens Abdullah Bazid Ali Al Shamrani Youssef Al Benyan Brain Gladden Source: Zawya Position Chief Executive Officer, SABIC Europe Chief Operating Officer, SABIC Europe Managing Director, SABIC Europe General Manager, SABIC Asia Pacific General Manager, SABIC Americas Chief Executive Officer, SABIC Innovative Plastics Subsidiaries / Affiliates Offer Wide Range of Products SABIC, at present, has 21 manufacturing subsidiaries / affiliates, in the entire world, which offers the Company a wide range of products including basic chemicals, intermediates, polymers, fertilizers and metals. In addition, all subsidiaries / affiliated of the Company are incorporated in Saudi Arabia except those, which are located outside the country. We have given brief overview of those subsidies / affiliates, which are incorporated in Saudi Arabia: - Saudi European Petrochemical-Ibn Zahr was formed in 1984 and having the production capacity of 2.2mn tons of Methyl Tertiary Butyl Ether (MTBE)-basic chemical and polypropylene-polymer. SABIC owns 80% stake of Ibn Zahr. - Jubail United Petrochemical Company-United was formed in 2001 and has total capacity to produce 2.3mn tons of ethylene-basic chemical, ethylene glycol (EG)-fiber intermediates and linear alpha olefins (LAOs)-intermediates. SABIC has 75% stake in United. Saudi Basic Industries Corporation SABIC July 2008

9 - National Industrial Gases Company-GAS was established in 1983 and a producer of oxygen gas. The unit has a capacity to produce 7mn tons of oxygen per year, which is used for industrial purposes. Moreover, the unit is categorized as an intermediate SBU. SABIC has 70% stake in GAS. - Yanbu National Petrochemical Company-YANSAB was established and obtained industrial license in The complex is in under-developmental phase and is designed to produce 4.1mn tons of petrochemical products, including basic chemicals, intermediates and polymers. SABIC owns 55% shareholding in YANSAB and public owns 28.7%. The remainder stakes are held by several financial institutions and corporate. - Arabian Industrial Fibers Company-Ibn Rushd was developed in 1993 and engaged in producing specialized products, which includes fiber for insulation and industrial purposes. The unit has a designed capacity of 1.3mn tons with SABIC interest of 47.2%. - Saudi Methanol Company-Ar Razi was formed in 1979 under a joint venture between SABIC and Japanese companies (led by Japan Saudi Arabia Methanol Company). This was the first joint venture of SABIC. The basic activity of Ar Razi is to produce chemical grade methanol with a designed capacity of 3.3mn tons. - Saudi Yanbu Petrochemical Company-YANPET is jointly owned by SABIC and ExxonMobil Corporation on equal basis i.e The complex is designed to produce 4.8mn tons of ethylene, propylene, EG, polypropylene and polyethylene. - National Methanol Company-Ibn Sina is a joint venture of (i) SABIC, which holds 50% stakes, (ii) Duke Energy Corporation, holds 25% stakes and (iii) Hoechst Celanese Chemicals, holds 25% stakes. The complex has a designed capacity to produce 2.1mn tons of Methanol and MTBE. - Saudi Petrochemical Company-SADAF, foundation of the complex was laid down in 1980 by SABIC and Royal Dutch Shell Group (via Shell Saudi Arabia), on equally owned basis. The complex is engaged in the production of ethylene, crude oil industrial ethanol, ethylene dichloride, caustic soda, styrene monomer and MTBE. However, the unit has a designed production capacity of 4.6mn tons. - Eastern Petrochemical Company-Sharq was established in 1981 under joint venture agreement between SABIC and Mitsubishi Corporation with a design capacity to produce 2.1mn tons of ethylene and ethylene related products. - Al Jubail Petrochemical Company-Kemya is another equally-owned petrochemical project of SABIC and ExxonMobil, which was formed in Kemya has a capacity to produce 1.9mn tons of ethylene related polymers of different grades. - Saudi Kayan Petrochemical Company-Saudi Kayan is 35% owned by SABIC, 25% owned by Al Kayan Petrochemical Company-KAYAN. The remainder is in the hands of public. Saudi Kayan is under-developmental phase and expected to come online by the end of 2010 with a designed capacity of 6mn tons of petrochemical including the world s largest ethylene production of 1.4mn tons. July 2008 Saudi Basic Industries Corporation SABIC

10 - Arabian Petrochemical Company-Petrokemya is a wholly owned subsidiary of SABIC, which was established in The subsidiary has a designed capacity to produce 5.3mn tons of ethylene, propylene, polystyrene, butene-1, benzene, butadiene and other polymers and monomers. - Saudi Arabian Fertilizer Company-SAFCO was formed in 1965 and have a design capacity to produce 5.1mn tons of fertilizer products, which include urea, ammonia, melamine and sulphuric acid. SAFCO owns 50% stakes in National Chemical Fertilizer Company, while SABIC holds 49.2% stake in SAFCO. - National Chemical Fertilizer Company-Ibn Al-Baytar was formed in 1985, as a fertilizer production unit. The unit has capacity to produce 1.1mn tons of compounded fertilizer per year, 500,000 tons of urea per year and 550,000 tons of ammonia per year. Effectively, SABIC owns 74.5% of Ibn Al-Baytar through direct ownership of 50% and 24.5% via SAFCO. - Al-Jubail Fertilizer Company-Al Byroni is a joint venture of SABIC and Taiwan Fertilizer Company to produce fertilizer products including urea, ammonia and plasticizes. The unit complex has a designed capacity to produce 1.2mn tons of urea and ammonia. - Saudi Iron & Steel Company-HADEED was established in 1979 and wholly owned by SABIC. The iron & steel unit has a designed capacity to produce 5.7mn ton of flat and long steel products. Shareholding The Company is traded on the Saudi Stock Exchange (Tadawul). The paid-up capital of the Company, after the issuance of 20% bonus shares, has increased to reach SR30mn (3mn SR10 each). Government is a major shareholder of the Company with an ownership of 70%. However, remaining shares are held by public, which is 30%. Table 05: SABIC Shareholders Shareholder Holding Government holdings 70.0% Public Pension Agency 1.4% Public 28.6% Source: Zawya Outside Saudi Arabia Acquisitions & New Subsidiaries The expansions of SABIC s operation started in 1987 with the establishment of whollyowned subsidiary in the North American region. However, the first acquisition of SABIC was made in At present, the Company has strong presence, outside Saudi Arabia, in Europe, Americas, Africa and Asia. SABIC Europe SABIC Europe comprises three petrochemical production sites in Geleen (Netherland), Teesside (UK) and Gelsenkirchen (Germany). 8 Saudi Basic Industries Corporation SABIC July 2008

11 Dutch State Mines (DSM) Petrochemical Netherland DSM-Petrochemical is the first acquisition of SABIC, outside the Middle East region, which happened in DSM is located in Netherland and is a previously government owned company. The company was started with as coal mining and processing business in 1902 and over a period of time DSM, through diversification strategy, started its petrochemical operation, through the commencement of ammonia production. However, in 1959, High Density Polyethylene (HDPE) plant started production, which transformed DSM as a petrochemical company. At present, the subsidiary markets 2mn tons of HDPE, LDPE, and LLDPE in Europe, out of which 1.3mn tons of the total marketed volume is produced in Europe. Wilton International and North Tees Chemical Complexes Huntsman Petrochemicals United Kingdom The production of Huntsman Petrochemical Company is carried out from its two complexes (i) Wilton International and (ii) North Tees Chemical complexes. The acquisition of Huntsman Petrochemicals Company by SABIC, in late 2006, has increased the manufacturing facilities portfolio of SABIC. Moreover, these manufacturing facilities operate a world-scale cracker with the capacity to produce 865,000 tons of ethylene, 400,000 tons of propylene and 100,000 tons of butadiene per annum. Moreover, theses manufacturing complexes have the capacity to produce 430,000 tons of paraxylene, which is closely integrated with a 1,3mn tons Aromatics facility at North Tees. SABIC is currently completing the construction of a new 400,000 tons capacity low density polyethylene (LDPE) plant at Wilton, Teesside. It is scheduled to come on stream in the first half of 2008 Gelsenkirchen Germany SABIC Europe, in Gelsenkirchen, produces several grades of polyethylene and polypropylene. The plant in Germany is well integrated with German manufacturing unit, from where feedstock for Olefin is mainly provided by cracking capacity on site, and by the Northwest European ARGpipeline from SABIC Europe s naphtha crackers in Geleen. In 2007, SABIC Gelsenkirchen produced about 960,000 tons of polyethylene and polypropylene (a 50%-50% split). SABIC Americas Inc SAI SAI is a wholly-owned United States subsidiary of SABIC. It was incorporated in Delaware in 1987 with offices in Connecticut, while the commercial offices moved to Houston in At present, SAI manages sales, marketing, business development, manufacturing, and research and technology throughout the Americas. SABIC through this subsidiary is a leading provider of basic and intermediate chemicals and fertilizer products to industries throughout the USA, Canada, Mexico, Central America, South America and the Caribbean. Acquisition of General Electric Plastic Unit SABIC Innovative Products (SIP) In August 2007, SABIC acquired the plastic unit of General Electric (GE) for a total purchase price of US$11.6bn (SR42.5bn). The GE plastic unit has been renamed as SIP. This plastic unit is a global supplier of plastic resins widely used in automotive, healthcare, consumer electronics, transportation, performance packaging, building and construction, telecommunications and optical media applications. Moreover, through SIP, the Company has added thermoplastics and engineering plastics businesses in its product portfolio. The other major products from this unit includes polycarbonate, acrylonitrile butadiene styrene, styrene acrylonitrile, acrylonitrile styrene acrylate, polyphenylene ether, polycarbonate / acrylonitrile butadiene styrene, polybutylene terephthalate and polyetherimide resins, as July 2008 Saudi Basic Industries Corporation SABIC

12 well as the high-performance specialty compounds. In addition, the specialty film and sheet manufactures high-performance sheets and film products offer leading plastics solutions for five key automotive segments: body panels and glazing; under the hood applications, components, structures, interiors and lighting. Chinese Joint Venture In early 2008 SABIC signed an agreement with Sinopec Corp. for the formation of a 50:50 joint venture company to invest in an ethylene derivatives complex. The complex is to be established in Tianjin, China. The complex will have a 1mn ton production capacity, including 600,000 tons of polyethylene and 400,000 tons of ethylene glycol. The complex will receive all of its ethylene feedstock from an ethylene cracker owned by Tianjin Petrochemical Company, a branch of Sinopec Corp. The total expected investment will be US$1.7bn and is expected to be completed by September Saudi Basic Industries Corporation SABIC July 2008

13 Feedstock prices Basic feedstock for the production of chemicals and fertilizer products is natural gas. However, some basic chemicals are mostly derived from naphtha, so it is also considered as a primary feedstock for some products. Gas prices. Crude oil prices are used as a benchmark to set gas-well head price in the international markets. However, gas prices are highly subsidized in certain regions of the world, mainly the Middle- East, North Africa, and South Asia. The gas-well head prices, in these regions, are subject to have pre-determined discounts. At the same time, gas well head prices in the international markets, have shot up by 44.2% from US$4.4 per mmbtu in 2001 to US$6.3 per mmbtu in Chart 02: Prices of Gas (US$ per mmbtu) 8.00 US$ per mmbtu E 2009E 2010E 2011E Gas US/mmbtu Source: EIA & Global Research Crude oil prices Over the period of last 6 years, the basket price of OPEC crude oil has surged by 192.5% from US$23.01 per barrel in 2002 to US$67.31 per barrel in The increase in crude oil prices over the period of 5 years are mainly due to the following reasons: Global political uncertainty High global economic growth Lack of refining capacity which caused a shortage of refined products. Chart 03: OPEC Historical Crude Oil Prices (US$ per barrel) Source: EIA & Global Research July 2008 Saudi Basic Industries Corporation SABIC 11

14 The average basket prices of OPEC crude oil reached at US$117.2 per barrel, during 2Q2008, which is all time high level. The current upward rally in the price of crude oil was started in the 4Q2007, which is mainly due to the weakening of US$ in international market. Going forward, we expect crude oil prices will ease down from the current level to US$110.2 per barrel in This assumption is based on the following factors: Stability in US$ in international market. Slowdown in economic development and shifting towards gas base industries New refinery will come on line by 2011, which will fulfill the shortage of refined products. Chart 04: Forecasted OPEC Crude Oil Prices (US$ per barrels) Source: EIA E 2009E 2010E 2011E Naphtha is a major feedstock for ethylene and propylene production. The natural gas, mainly ethane and propane, is also used in the manufacturing of these petrochemicals, despite the fact that the main component of the natural gas is the methane, which is primarily used for energy. Naphtha is a direct outcome of crude oil refining, hence the prices of naphtha is much correlated to the prices of crude oil. World Petrochemical Outlook Based on our expectations crude oil price will remain on the high side, even though after an expected relaxation, the average prices is forecasted to remain in the range of US$100- US$110 per barrel in 2011 as compared to 2Q2008 average prices of US$117.2 per barrel. Since the prices of petroleum products and gas feedstock are derived from crude oil prices, we expect the price of international feedstock will remain high as well. The higher feedstock prices will not allow global petrochemical industry to expand their margins, as the price of petrochemical products is subject to the feedstock prices. Consequently, we expect the major expansion in petrochemical capacities will happen in those areas of the world where the feedstock are available at cheap rates, which include the MENA region and China. The capacity expansion in MENA and China is mainly due to the following: Effort of economic diversification i.e. shifts from oil based economies to industrial based economies. Plenty of gas reserves, which accounted for 51.9% of the world reserves. This enables these countries to supply gas at cheap rates. Moreover, the region has plenty of crude oil reserves, which make the government to supply petroleum products with some specific discounts. Extraction of petrochemical products from coal has encouraged China to go for massive expansion in its petrochemical capacities. However, the effort is under process. 12 Saudi Basic Industries Corporation SABIC July 2008

15 World Petrochemical Industry Ease in capacity expansion Global capacity of petrochemical, during has increased at a CAGR of 3.2% to 128.4mn tons. The major increase in petrochemical production capacity was witnessed in 2005 and However, in 2007 the growth was limited to 2.5% due to higher feedstock prices than 2005 and Chart 05: World Petrochemical Capacity 150, % 5.3% 5.3% 100, , % 1.7% 1.6% tons World Petrochemical Capacity Growth rate Source: Global Research, Bloomberg & Industry Sources 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Growth rate Demand for petrochemical products... Demand is a driving force to increase the capacity and improve the capacity utilization, which results in an increase in production. The demand of petrochemical products has increased at a CAGR of 4% during However, the world has enough capacity to meet the existing demand. The rising prices of ethylene, propylene, and other basic petrochemical products have limited the demand growth between 4% and 5% during the last 3-years. Chart 06: World Petrochemical Demand 150, % 3.3% 100, tons 50, % World Petrochemical Demand Growth rate Source: Global Research, Bloomberg & Industry Sources 5.0% 4.1% 4.2% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Growth rate Higher capacity utilization leads to an increase in production... Over the last five years, the world capacity utilization has reached 90.3% in 2007, which is 3.3% higher than the capacity utilization in The improvement in capacity utilization has led the world production to increase at a 5-year CAGR of 3.9% to 117.7mn tons in the year on year production growth, during the last 3 years, remained at an average level of 5% as compared to a marginal growth of 1.1% in July 2008 Saudi Basic Industries Corporation SABIC 13

16 Chart 07: World Petrochemical Production 150, % 5.0% 4.0% 4.1% 4.2% 000 tons 100, , % World Petrochemical Production Growth rate Source: Global Research, Bloomberg & Industry Sources 6.0% 4.0% 2.0% 0.0% Growth rate Capacity Expansion in China... China, the world s third largest petrochemicals market, is currently undergoing extensive expansions in ethylene capacities, adding almost 6.6mn tons of ethylene between 2008 and Ethylene capacities in China are planned to increase by 11.4mn to 11.6mn tons between 2008 and China s ethylene output will go up from 9.6mn tons in 2006 to mn tons by It is worth noting that most Chinese crackers will be naphtha based, which will result in a rapid growth in the heavy feedstock consumption and consequently this will exert upward pressure on the international naphtha prices. Table 06: Chinese Ethylene Expansions Company Projects Underway Fujian Refining and Petrochemical Company Ltd Location Capacity (1,000 mt) Startup (JV with Exxon) PETROCHINA PetroChina Dushanzi PetroChemical Dushanzi, Xinjiang 1, PetroChina Fushun PetroChemical Fushun, Liaoning PetroChina Chengdu Ethylene Project (New plant) Chengdu, Sichuan SINOPEC Sinopec Zhenhai Refining & Chemical Co. Ltd Zhenhai, Zhejiang Sinopec Tianjin Petrochemical Tianjin Sinopec Wuhan Co. Wuhan, Hubei In Early Planning Sinopec Shanghai Chemical Park Ethylene Project Shanghai 1, Dalian Ethylene Project Dalian, Liaoning 1, Formosa Ningbo Ethylene Project Ningbo, Zhejiang 1, MTO China Shenhua Group MTO Plant * Erdos, Inner Mongolia Shaanxi Yulin MTO Project * Yulin, Shaanxi 1, Shenhua Dow * Shaanxi 1, Total 11,400 11,600 * Production will be 50% ethylene and 50% propylene Source: The Gulf Petrochemicals and Chemicals Directory, Volume I Year Quangzhou 800 1Q Saudi Basic Industries Corporation SABIC July 2008

17 Alternative Feedstock Experiments in China... Currently, China is undergoing extensive experiments to produce chemicals from coal, in an attempt to find an alternative cheap feedstock post the naphtha price surge. Coal represents almost 70% of the Chinese energy mix. Under this process, coal is converted to synthesis gas syngas, which can be then converted to different chemicals, among which is methanol. The methanol is converted to olefins (MTO) ethylene and propylene. Mostly in the planning stage, there are 12 to 14 MTO projects, with some under construction, that are based on coal. July 2008 Saudi Basic Industries Corporation SABIC 15

18 MENA Petrochemical Industry Petrochemical hub.. As of 2007, the MENA region s combined petrochemical production capacity reached 84.7mn tons, which represents 66% of total world capacity. This depicts that the region is the largest petrochemical producer in world. Chart 08: Share of MENA in World s Capacity 2007 Rest of the world 34% MENA 66% Source: Zawya & Global Research Saudi Arabia the largest petrochemical player In 2007, Saudi Arabia occupied 50.3% of the total MENA capacity, through SABIC. SABIC is not only a major player in Saudi Arabia but the company has vital position in the international market. In 2007, SABIC accounted for 53.9% of the total Saudi Arabia s capacity, 28.4% of MENA and 18.7% of the world. Next to Saudi Arabia, Iran, through National Petrochemical Company, has claimed 20.2% and Qatar has 11.3% of MENA capacity. Table 07: Country-Wise MENA Capacity in 2007 (in 000 tons) Country Capacity Share Saudi Arabia 42, % Iran 17, % Qatar 9, % Egypt 3, % Kuwait 2, % UAE 1, % Rest of MENA 8, % Source: Zawya Capacity Expansion in MENA MENA region has planned for a massive expansion of petrochemical capacity of different grades with an estimated cost of US$92.6bn. Based on the given expansion plans, the production capacity in MENA region will increase to 90.9mn tons in 2008 and 104.1mn tons in Going forward, we expect the production capacity will increase to 114.6mn tons by 2011, at a 4-year CAGR of 7.2%. Major capacity expansion in petrochemicals of different grades is expected in Saudi Arabia, which will account for 65.1% in 2008 followed by Kuwait which is expected to contribute by 22.5%. In addition, after 2011, production capacity in MENA region will further increase by 3.4mn tons in 2012, due to upcoming capacity expansion in Saudi Arabia and Qatar. 16 Saudi Basic Industries Corporation SABIC July 2008

19 Chart 09: MENA Capacity Expansion ooo tons 150, , , % 14.5% 7.3% 2.6% 20.0% 15.0% 10.0% 5.0% Growth rate E 2009E 2010E 2011E 0.0% Total Capacity Expansion Growth in Capacity Expansion Source: Zawya & Global Research Product-wise capacity expansion The total expected increase of 29.9mn tons in the petrochemical products capacities of different grades is based on the addition of (i) 16.2mn tons of basic chemical-olefins, (ii) 4.9mn tons of basic chemical-aromatics and (iii) 8.8mn tons of basic chemical-oxygenates. Table 08: Grade-Wise Capacity Expansion (Tons) MENA Region 2008E 2009E 2010E 2011E Basic-Olefins 3,407,500 7,262,500 3,629,250 1,909,750 Basic-Aromatic 1,523,750 2,241,250 1,200,000 - Basic-Oxygenate 1,339,000 3,643,000 2,788,000 1,020,000 Expected Expansion 6,270,250 13,146,750 7,617,250 2,929,750 Source: Zawya & Global Research Country-wise capacity expansion Saudi Arabia Capacity expansion Saudi Arabia is expected to make an addition of 3.84mn tons of basic chemical of different grades out of the total capacities additions of 6.27mn tons in The contribution, however, will increase to 6.54mn tons in 2009, while relax down to 4.2mn tons in Table 09: Saudi Arabia Additional Capacity (Tons) Saudi Expansion 2008E 2009E 2010E 2011E Basic-Olefins 2,232,500 5,437,500 3,600,000 1,900,000 Basic-Aromatic 573, , ,000 - Basic-Oxygenate 1,039, , Expected Expansion 3,845,250 6,541,750 4,200,000 1,900,000 Total Expected Expansion 6,270,250 13,146,750 7,617,250 2,929,750 Contribution in Expansion 61.3% 49.8% 55.1% 64.9% Source: Zawya & Global Research Kuwait Capacity expansion Based on the given expansion plan, production capacities of basic chemicals in Kuwait will increase by 1.6mn tons in 2008 and 2.7mn tons in This will lead to lift the country s capacity from 2.1mn tons in 2007 to 6.43mn tons in July 2008 Saudi Basic Industries Corporation SABIC 17

20 Table 10: Kuwait Additional Capacity (Tons) Kuwait Expansion 2008E 2009E Basic-Olefins 850, ,000 Basic-Aromatic 450,000 1,550,000 Basic-Oxygenate 300, ,000 Expected Expansion 1,600,000 2,700,000 Total Expected Expansion 6,270,250 13,146,750 Contribution in Expansion 25.5% 20.5% Source: Zawya & Global Research Oman Capacity expansion The additional capacity of Oman will come on stream in 3Q2008, which will lead to an increase in the country s total capacity to 2.1mn tons in The capacity is expected to increase further to reach 2.6mn tons in 2009 and to 3.7mn tons in The increase in capacity is mainly due to the full year impact of those capacities which come on-line in the middle of the years and addition of new capacities of oxygenates in 2Q2010. Table 11: Oman Additional Capacity (Tons) Oman Expansion 2008E 2009E 2010E 2011E Basic-Olefins Basic-Aromatic 500, , Basic-Oxygenate , ,000 Expected Expansion 500, , , ,000 Total Expected Expansion 6,270,250 13,146,750 7,617,250 2,929,750 Contribution in Expansion 8.0% 3.8% 10.6% 9.2% Source: Zawya & Global Research Qatar Capacity expansion Qatar is expected to contribute by 5.2% in total upcoming production capacity in The contribution is expected to increase to 25.9% in 2009, which is mainly due to another additional capacity from QAFAC-II complex in 1Q2009. Consequently, the production capacity is expected to reach at 13.3mn tons by Table 12: Qatar Additional Capacity (Tons) Qatar Expansion 2008E 2009E Basic-Olefins 325, ,000 Basic-Aromatic - - Basic-Oxygenate - 2,430,000 Expected Expansion 325,000 3,405,000 Total Expected Expansion 6,270,250 13,146,750 Contribution in Expansion 5.2% 25.9% Source: Zawya & Global Research 18 Saudi Basic Industries Corporation SABIC July 2008

21 Table 13: MENA Capacity Expansion (Tons) Country Basic- Olefins Basic- Aromatic Basic- Oxygenate Expected Production Saudi Arabia 252,000 2Q2008 Saudi Arabia 50,000 2Q2008 Saudi Arabia 950,000 4Q2008 Saudi Arabia 1,700, Saudi Arabia 3,800,000 3Q2010 Saudi Arabia 230, ,000 2Q2008 Saudi Arabia 2,100, Saudi Arabia 1,285,000 4Q2008 Saudi Arabia 600, Saudi Arabia 1,200, Saudi Arabia 1,700,000 3Q2008 Kuwait 1,100,000 1Q2009 Kuwait 850,000 3Q2008 Kuwait 450,000 3Q2008 Kuwait 850, , ,000 3Q2008 UAE 600, Egypt 350,000 4Q2009 Oman 1,080,000 2Q2010 Oman 3Q2008 Oman 1,000,000 3Q2008 Qatar 1,300,000 4Q2008 Qatar 1,300, Qatar 2,430, Algeria 1,000,000 4Q2010 Algeria 1,400, Bahrain 1,728, Source: Zawya & Global Research July 2008 Saudi Basic Industries Corporation SABIC 19

22 Saudi Petrochemical Industry Introduction Saudi Arabia is a key player in the global petrochemical industry commanding a 35% and 47.2% of the world and MENA petrochemical production capacity in 2007, respectively. The major part of Saudi Arabia s petrochemical production is exported. The Saudi petrochemical industry is mainly concentrated in the industrial cities of Jubail and Yanbu. Chart 10: World Share Chart 11: Regional Share Saudi Arabia 35% Rest of the world 65% MENA 47% Saudi Arabia 53% Source: Global Research Feedstock a competitive edge. The Kingdom s petrochemical industry enjoys high profit margins, mainly due to a natural competitive advantage of availability of low cost feedstock, on account of vast crude oil and natural gas resources. The cost of natural gas for the Saudi Arabian petrochemical industry is just US$0.75/mmbtu, which is far below than the international prices. Table 14: Gross Margins on Petrochemical Products in Saudi Arabia 2008E 2009E 2010E 2011E Ethylene Average Average Average Average Propylene Average Average Average Average MTBE Low Low Low Low Styrene Average High High High Benzene High High High High Paraxylene Low Low Low Low Mono Ethylene Glycol Average Average Average Low Di Ethylene Glycol Average Average Average Average Teri Ethylene Glycol Average Average Average Average Purified Terephthalic Acid - PTA Low Low Low Low Ethylene Di Chloride High High High High Caustic Soda Low Low Low Average Vinyl Chloride Monomer - VCM Average Average Average Average Polyethylene Average Average Average Average Polypropylene Average Average Average Average Polyvinyl Chloride - PVC High High High High Polyethylene Terephthalate Resin - PET High High Average Average Polystyrene - PS Low Low Low Low Source: Global Research Note: High Return = 50%, Average Return = 20%-50%, Low Return = Below 20% 20 Saudi Basic Industries Corporation SABIC July 2008

23 The WTO agreement confirmed Saudi Arabia has the right to retain low feedstock prices on the grounds that its hydrocarbon resources are a natural advantage and low prices are not classed as a subsidy. The agreement also allows a dual pricing system, where domestic users pay less than the export price for feedstock, under the reasoning that domestic customers do not require export infrastructure or export marketing. Major Players Saudi International Petrochemical Company (SIPCHEM) SIPCHEM is one of the leading private sector petrochemical companies in Saudi Arabia. The company continues to emphasize the development of projects in the petrochemical value chain (petrochemical projects which utilize production from existing petrochemical plants as feedstock, at an effective discount to market prices) and delivery of value added, export oriented products. The Company aims to participate and play a meaningful role in Saudi Arabia s endeavors to create a robust and viable downstream petrochemical industry. The company has established two world scale manufacturing plants owned and operated by International Methanol Company and International Diol. In addition, the company is currently undertaking the construction of an integrated acetyls complex project consisting of three world scale plants. Each plant in the acetyls complex is owned by a separate limited liability company i.e. (i) United Industrial Gas-UIG, (ii) International Acetyls Complex-IAC and (iii)vinyl Acetate Monomer-VAM in Jubail, Saudi Arabia, each of which is controlled by the company. The acetyls complex includes investments by minority shareholders. SIPCHEM is also exploring an integrated Olefins Complex in partnership with third party investors. Saudi Chemical Company Saudi Chemical s line of production includes the latest generation, safest, and world wide commonly used civil explosives and non-electrical detonators, which are KEMULEX, PRILLEX, and SANEL, respectively. KEMULEX is an emulsion type explosive characterized by its high detonation velocity and good waterproof properties and packaged in special plastic cartridges with different sizes that meet the clients needs. PRILLEX is a dry blasting agent, which is composed of Ammonium Nitrates and Fuel Oil (ANFO). Saudi Chemical Company also manufactures non-electric detonators SANEL that provide the precious control and accuracy that reduces blasting vibration and improves fragmentation for all kind of blasting. SANEL is produced in wide range of delay times, lengths, and models for different types of use. In addition, the company offers wide variety of Electrical Detonators, Detonating Cords, in addition to all accessories for rock blasting and oil exploration shooting. Progress continues and Saudi Chemical proceeds along the path of ongoing improvement, advancing in all aspects that go beyond expectation to provide domestic and global supplies of most modern explosives. This resulted in new production line for ENVIROSEIS, the latest in seismic explosives specially designed for seismic exploration. Proudly, ENVIROSEIS is now used for oil and gas exploration in Saudi Arabia. It is worth mentioning that the company s activity is not limited to production of civil explosives only, but also will be extended to include military explosives in manufacturing and demilitarization processes. July 2008 Saudi Basic Industries Corporation SABIC 21

24 Sahara Petrochemical Company Since its establishment in 2004, Sahara s management team has been successfully working on two projects, Al Waha Petrochemical Company, its first majority owned subsidiary and on its affiliated participation in Saudi Olefins and Polyolefins Company (SEPC), both of which are expected to become operational by the fourth quarter of Al Waha Petrochemical Company (Al-Waha) is located in the Industrial City of Jubail in the Eastern Province of the Kingdom of Saudi Arabia. The affiliate (Al-Waha) was established in September of 2006, as Sahara s first majority owned industrial project subsidiary. Al Waha is a limited liability joint venture company, which is to construct, own and operate a world scale petrochemical complex for the production of 460,000 tons of propylene that will serve as feedstock for the production of 450,000 tons of polypropylene. The polypropylene will be sold both within the region and into international markets. Sahara, together with Tasnee Petrochemical Company (Tasnee) 50.6% stake owner and the Basell group of companies (Basell) holding 25% stake, formed a new company to develop, finance, construct, commission, own, manage and operate a world-scale petrochemical complex for the production of some 1,000,000 tons of ethylene, 80% of which will be used as the primary feedstock for the production of approximately 800,000 tons of polyethylene. The Saudi Ethylene and Polyethylene Company (SEPC) is also located in Al-Jubail Industrial City, Saudi Arabia with commercial operations set to begin in the fourth quarter of Capacity expansion During the last 4 years, the growth in Saudi Arabia s economy is mainly due to the higher crude oil prices. This depicts a serious threat for the country in case of ease in crude oil prices. In order to minimize this risk the government of Saudi Arabia has promoted non-oil industries. Consequently, a massive expansion in petrochemical has been taken into account, which will increase at a CAGR of 7.8% during the period from 2007 to Chart 12: Saudi Arabia Capacity Expansion % 15.0% ooo tons % 5.5% 5.2% 10.0% 5.0% Growth E 2009E 2010E Capacity Expansion Growth Source: Zawya and Global Research 2011E 0.0% Major new capacities in Saudi Arabia are expected to locate in Jubail industrial area. In our valuations, we have not incorporated the upcoming capacity of SIPCHEM s olefins complex, as it will come online in 2012 with a designed capacity of 2.1mn tons. 22 Saudi Basic Industries Corporation SABIC July 2008