Forecasts Update Report June 2016 Petrochemical sector - Q forecasts

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1 Petrochemical sector forecasts Report 2Q2016 Worst for crude oil prices may be over; Better performance likely in 2Q2016 earnings: Crude prices (Brent) return back above the USD 50/bbl mark in 2Q2016, increasing 22.6%QoQ to average at USD 46.8/bbl (quarter to date). Naphtha prices rose 16.9%QoQ in tandem with crude prices to average at USD 410/ton. Prices of Saudi Propane and Butane also increased more than 7.0%QoQ. Prices of petchem intermediates such as Ethylene, Propylene, and Styrene increased higher than PE derivatives during the quarter, which was primary due to lower demand in May. Lower liquid feedstock prices are expected to benefit margins of PP producers, as players expected to deliver better margin in 2Q2016 for their products based on liquids gas. Among polymers, Propylene prices (PP-Gulf) registered the highest QoQ increase at 13.5% to average at USD 944/ton. Ethylene and propylene prices inched up 9.6%QoQ and 15.9%QoQ to average at USD 1,126/ton and USD 695/ton, respectively. In Asia, prices of high-density Polyethylene (HDPE) showed a slight increase of 2.4%QoQ to average at USD 1,122/ton. In Asia, some olefins and their derivatives markets remained under pressure due to length in prompt supplies and weak buying sentiment leading to compress prices at the end of 2Q2016. Styrene prices rose only 3.3%QoQ to average at USD 1,023/ton, while Polystyrene prices increased 7.8%QoQ to average at USD 1,211/ton. Ammonia prices rose 9.6%QoQ to average at USD 333/ton, while fertilizer prices remained low. Urea (Gulf) and DAP prices fell by 1.0% and 6.9% QoQ to average at USD 205/ton and USD 352/ton, respectively. We believe higher inventories and overcapacity in urea market are likely to keep prices low for some time. TiO2 average prices also fell 3.9% QoQ to USD 2,277/ton in 2Q2016, primarily due to a slowdown in Chinese economy and lower imports, where China s titanium dioxide (TiO2) imports in April fell by 35% YoY, according to China Customs data. Overall, most of Petchem prices remained firm and improved during 2Q2016, which is likely to reflect in healthy revenue of Petchem players. Crude prices strongly recovered on higher consumption, Canadian wildfires, unrest in Nigeria and Libya, economic issues in Venezuela propel oil prices: Growing global oil supply disruptions, rising oil demand, and falling U.S. crude oil production contributed to the price increase. In 2Q2016, crude prices jumped above the USD 50.0/bbl mark due to lower non-opec oil production, Wildfires in Canada s oil sands region, violent attacks against Nigerian and Libyan energy companies, and expected economic meltdown in Venezuela led to oil prices reaching the USD 52.8 per barrel (bbl) level in June. In its latest Short-Term Energy Outlook, the US Energy Information Administration (EIA) mentioned that U.S. crude oil production averaged 9.4mn barrels per day (b/d) in Production is forecast to average 8.6mn b/d in 2016 and 8.2mn b/d in Global consumption of petroleum and other liquid fuels is expected to rise 1.5mn b/d in both 2016 and 2017, mostly driven by growth in countries outside of the Organization for Economic Cooperation and Development (OECD). EIA expects Brent to rebound to USD 76 per bbl in 2017: In its international outlook report, the EIA indicated oil prices may rebound to USD 76 per bbl in The increase would be primarily driven by higher consumption across the emerging economies in Asia, the Middle East, and Africa. Petrochemical price performance Q Q-2016 QoQ YoY Naphtha % % Propane-Saudi % % Butane-Saudi % % Ethylene 1, % % Propylene % % MTBE % % Benzene % % Styrene 1, % % Methanol-China % % HDPE-Aisa 1, % % LDPE-Asia 1, % % LLDPE-Aisa 1, % % PP-Asia % % PP - Gulf % % MEG (SABIC) % % MEG (Asia) % % PTA-Asia % % Ammonia-Gulf % % Urea-Gulf % % DAP-Fertilizer % % Acetic Acid-AA % % Vinyl Acetate Monomer-VAM % % TiO2* 2, % % Polystyrene-Asia % % Source: ICIS, Argaam, AlJazira Capital Research Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa 1

2 Petchem players with liquid gas feedstock to face margin contraction on some olefins derivatives: Despite these companies are in a better situation to adopt with any oil price decline; however, during 2Q2016, propane prices (Saudi propane feedstock is calculated on 20% discount compared to export prices from the port) increased by 7.5% QoQ and averaged at USD 325 as against USD 303 in 1Q2016. Due to lower demand, the polyethylene (PE) Asia and Gulf prices rose only by 2.4% to 3.6% QoQ respectively. Margin for Polyethylene producers is expected to slightly shrink in 2Q2016 as price increase in final product (PE) is lower than the price increase in liquid feedstock price. In the other hand, Petchem players using ethane (fixed cost) as feedstock are expected to report better margins in 2Q2016, thus leading to higher profitability. In the current scenario, liquid gas players are well positioned for PP producers, as the final products prices have outperformed the feedstock prices. Hence, we believe that in 2Q2016, PP players using liquid gas as feedstock such as Sahara, Advanced Petrochemical and Petrochem, would outperform players using Ethane as feedstock. Q Q Q Q Propane * $260.0 Propane $242.2 Butane* $292.0 Butane $269.7 Propane-PP polypropylene $974.3 polypropylene $869.1 Butane-PP polypropylene $974.3 polypropylene $869.1 Cost Margin 26.7% Cost Margin 27.9% Cost Margin 29.9% Cost Margin 31.0% spread $714.3 spread $626.9 spread $682.3 spread $599.4 *based on Export Saudi propane price with 20% discount *based on Export Saudi Butane price with 20% discount Higher PP-Propane and PP-Butane spreads to benefit players using NGLs: In 2Q2016, Saudi propane and butane prices rose only by 7.4% and 8.3% QoQ to an average price of USD 260/ton and USD 292/ton respectively. However, polypropylene prices increased more by 13.5% QoQ. Consequently, lower increase in propane and butane prices than propylene prices is expected to lead to expansion in PP-Propane and PP-Butane spreads in 2Q2016. PP-Propane spread is expected to expand 13.9% QoQ to USD 714/ton while PP-Butane spread is expected to expand 13.7% QoQ to USD 682/ton. Based on the polypropylene prices and spreads, we believe that the polypropylene producers using NGLs as their feedstock are likely to benefit in 2Q2016 compared with 1Q2016. Q earnings estimates - Petrochemical Sector Company code Company name Net profits Q2-2016(mn) EPS Q QoQ growth YoY growth Forecasted EPS 2016 Prospective PE SABIC 3, % -37.7% x 2020 YANSAB % 64.9% x 2290 SAFCO % -48.2% x 2310 Sipchem % -50.5% x 2330 Advanced % -25.8% x 2060 TASNEE (0.09) -34.9% -42.7% x 2350 KAYAN (0.11) -23.4% SAHARA % 472.8% X 2002 Petrochem % -50.3% x Source: Aljazira Capital * Our ratings are based on the closing prices of 28/06/2016 2

3 Petrochemical price trends 1,500 1,400 1,300 1,200 1,100 1, Ethylene-Asia 1,100 1, Propylene-Asia Ammonia-Gulf 520 DAP-Gulf Jul۱٥ Urea-Gulf 3,200 Weighted average TiO2 prices 3,000 2,800 2,600 2,400 2,200 Source: ICIS, Argaam, AlJazira Capital Research 3

4 Recent corporate announcements Date Company Announcement Yanbu National Petrochemical Co. The company announced payment of dividends of SAR 1.5 per share for 1H2016. The total amount of distribution is SAR 843.8mn Saudi Kayan Petrochemical Co Rabigh Refining and Petrochemical Co Advanced Petrochemical Co. Saudi Kayan Petrochemical Company awarded a project worth USD 116mn to Wison Engineering Services Co. Ltd for its ethylene oxide debottlenecking project in Jubail. The project is expected to be completed by 2H2017 and will be financed through local financial institutions. The trial run date and financial impact of the project will be announced after the completion of the project. Rabigh Refining & Petrochemical Company had faced a sudden disruption to electricity and steam supplies to its subsidiary Rabigh Arabian Water and Electricity Company, on May 18, The disruption resulted in the company halting its laboratories. Teams deployed by the company were able to activate the power supply. The company is estimating the financial impact of the disruption. The company has recommended distribution of dividend worth SAR 123mn for 2Q2016. This represents 7.5% of the Face value of the share or SAR 0.75 per share Saudi International Petrochemical Company Saudi International Petrochemical Co. completed its scheduled maintenance activity at its Carbon Monoxide of International Gases Co., Acetic Acid of International Acetate Co., and Ethyl Acetate of Sipchem Chemicals Co. units; these units have resumed operations. The financial impact of this activity is estimated to be SAR 22.5mn and would be reflected in 2Q Saudi Basic Industries Corp Rabigh Refining and Petrochemical Co Saudi Basic Industries Corp. The company has announced dividends worth SAR 16.5bn (SAR 3.0 per share), representing 55% of the share capital. The ethane cracker unit of the Rabigh Phase II Project became fully operational on April 19, 2016, with an additional processing capacity of 30 million standard cubic feet per day. Cumulatively, ethane processing capacity has been ramped up from 95 million standard cubic feet per day to 125 million standard cubic feet per day. Thus, the unit s production capacity has increased to 1.6 million metric ton per year from 1.3 million metric ton per year. The new ethane cracker unit is projected to generate about SAR 750mn in revenues in 2016, subject to the availability of feedstock. Saudi Arabian Fertilizer Co. (SAFCO) announced its plans to conduct a feasibility study to acquire Saudi Basic Industries Corp. s (SABIC) 50% stake in National Chemical Fertilizer Co. (Ibn Al-Baytar). The potential amalgamation will aid the company in study of new investment opportunities and achieve its strategic goals. The study is not expected to have any impeding impact on the company s financial results. Source: Tadawul, ICIS News 4

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