Spreads for most products in Saudi Arabia’s petrochemical sector is expected to decline sequentially in the fourth quarter (Q4) of 2019 amid weaker pricing environment and higher feedstock costs, said a report.
A recovery for product prices is unlikely till at least till the first half (H1) 2020, added the “Saudi Petrochemicals Report” published by Al Rajhi Capital, a leading financial services provider in the kingdom.
The Saudi petchem sector has remained under pressure in 2019, primarily due to weak sector fundamentals, owing to a) lower demand in the end-markets on the back of slowdown in global economy amid trade war concerns b) additional capacity coming in the market, and c) decline in oil prices and thereby product prices, the report highlighted.
“Among the names, Sipchem stock is best positioned in our view as we believe Methanol prices could improve. APCC gives the best comfort for dividends and earnings stability and deserves a premium. We believe Yansab may continue with SR1.75 ($0.46) per share DPS in 2H 2019 but may cut in 2020 if prices do not recover,” Al Rajhi Capital said in the report.
Petchem prices likely to remain under pressure in the near term on weak demand amid global trade concerns. Weak demand for petchem products amid trade war concerns, along with new capacity additions have impacted demand-supply balances in 2019, leading to a decline in prices of key petrochemical products during the first nine months (9M) of 2019.
In Q4 so far, petchem prices have continued its downward trajectory with polymer products’ prices declining ~15-20 percent y-o-y and ~3-9 percent q-o-q and reaching to multi-year low, the report said.
Similarly, prices of intermediate products are also trading lower, with MEG and VAM prices dropping in the range of 24-30 percent y-o-y. Earnings performance is likely to remain under pressure in Q4, mainly due to lower product spread amid weak product prices and increased feedstock prices (Propane price: +18.4 percent q-o-q; Butane: +24.4 percent q-o-q, Naphtha: +6.6 percent q-o-q so far in Q4 2019).
“While petchem prices are mostly around the bottom, we do not expect an immediate recovery in prices in the near-term, given weak momentum in oil prices and the slowdown in end-markets such as automotive production.
“Nonetheless, we expect prices to start gradually recovering by H2 2020, on likely easing demand concerns due to possible trade agreement and slowdown in capacity additions, the report said.
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