Saudi petrochemical sector continues to look attractive despite ethane squeeze

While Saudi Arabia’s state-run energy company Saudi Aramco (which currently charges its petrochemical companies $0.75/mmbtu) is still likely to increase the price sought (to $1-$1.25) for ethane (which comprised 70 percent of total feedstock–i.e. the basic raw material that is converted into another product in a chemical process–for petrochemical makers last year) at some point in the near-term (despite recent ambiguity) given the realities of tighter supplies, not only does the sector’s marked, global cost advantage remain intact–the average global market price for the gas is 6x higher at roughly $4.50 per million BTU–but it looks set to meet rising Chinese demand (which comprised roughly one-third of global needs in 2010 from one-quarter in 2006) as the Kingdom plans to invest some $100bn within the next five years to boost output to more than 80 million (from 60) metric tons/year (used, in turn, in the manufacture of numerous products such as synthetic rubber, synthetic fibers and plastics).  Two firms in particular, SABIC and Sipchem, down approximately -0.4 and -14.6% YTD respectively in response likely to regional capacity additions and Chinese monetary normalization, should benefit given fairly sticky projected gross margins in the face of a feedstock price rise: the former has both higher fixed costs (in cost of sales) and a more diverse downstream capabilities compared to peers which has hitherto allowed it more robust pricing power, while the latter finally finally seems ready to capitalize on the fruits of its latest expansion.  Meanwhile, while analysts with Al Rahji Capital, a regional investment bank, note that China is in the midst of adding substantial capacity, at the moment its trade imbalance has never been so pronounced and furthermore “it will take a few more years for these capacities to come on-stream.”  China’s petrochemical imports grew 42.3% in 2010 to $324.5bn after a dip in 2009 and per observers three specific drivers should indirectly underpin this trend going forward: “1) China‟s huge government spending on infrastructure (its government has allocated $1.3 trillion for infrastructure development over the next five years in the 12th Five Year Plan announced in the early 2011); 2) increasing domestic consumption which is expected to grow by 2 to 3 percent over the next five years; and 3) continuing housing construction (the government plans to build approximately 36 million affordable housing units by 2015).”