Forecasts Update Report - December 2017

Saudi Petrochemical Sector: 4Q2017 earnings are expected to show a significant YoY increase due to multiple non-recurring impacts in the comparison period. Sales in 4Q2017 to increase on a QoQ basis, but margins to contract. OPEC deal is likely to help rebalance oil market in H2-2018, boosting further Petchem prices. LPG feedstock was priced at the highest level since Dec-2014; Petchem players with liquid gas feedstock to face margin contraction on olefins derivatives. Saudi Subsidy reform on petrochemical feedstock to give industry more space for breathing in the coming two years; enforcing the players to concentrate more on overall cost competitiveness and increasing value added manufacturing.

Improved performance is likely in 4Q2017, due to global healthy demand and higher products prices; however, margins are expected to contract after LPG prices hiked by Saudi Aramco: Crude price (Brent) holds at the highest level since July 2015 as it moved above the USD 67/bbl mark in 4Q2017, increasing 16.6%QoQ to average at USD 61.4/bbl (quarter to date). Crude Prices gained momentum after the shutdown of TransCanada Corp’s 590 kbpd Keystone pipeline following an oil spill, Libyan pipeline explosion and OPEC & non-OPEC producers agreed to extend oil output cuts until the end of 2018. The rebound in oil price was the key driver for the increases in the Petchem product prices; also positive economic data in China helped to cushion market sentiment. China’s manufacturing purchasing managers’ index (PMI) rose to 51.8 in November, up from 51.6 in October.

Naphtha average prices rose 22.5%QoQ, in tandem with crude prices, to average at USD 569/ ton. Prices of Saudi Propane and Butane also increased more than 39.8%QoQ and 30.6%QoQ respectively. Prices of basic petrochemicals such as Ethylene rose higher than its derivatives during the quarter by 12.8%QoQ in line with an average increase in Asian PE prices of 6.6% amid healthy downstream ethylene demand. Benzene prices rose by 9.8%QoQ to USD 835/ ton, while its derivatives Polystyrene prices increased only by 4.0%QoQ to average at USD 1,400/ton. This is due to domestic tightness from refinery outages, Chinese export demand and higher prices in the Asian benzene markets. Consequently, the higher sales prices and volume are expected to slightly offset the impact of margin contraction in 4Q2017, compared to the previous quarter. However, 4Q2017 earnings are expected to show a significant YoY increase due to multiple non-recurring impacts in the comparison period.

Ammonia and Urea continue to surge in the short-term: Ammonia and Urea rose by 40.3%QoQ and 22.4%QoQ to average USD 299/ton and USD 261/ton respectively in 4Q2017. We believe this is due to an increase in prices of natural gas-based urea in China since midNovember on the back of tightened domestic supply, which prompted the shutdowns of urea plants in China and tightening supply in the domestic market. The Chinese government restricts the industrial use of natural gas during winter, to priorities residential demand for heating purposes. Thus, China’s urea plants are running at an average rate of 51% in early December according to ICIS news. Although the long-term outlook on fertilizers market is not certain, we expect the urea prices to continue rising for the next month as improvement in demand is expected from Europe and the US and lower urea export from China as it concentrates on domestic demand that would lead to more benefits for fertilizers producers such as SAFCO Co.

Titanium dioxide reaches highest price in more than three years: The weighted average price of Titanium Dioxide (Tio2) rose by 4.7%QoQ to USD 3209/ton in 4Q2017, mainly due to a slowdown in Chinese Tio2 exports. There are signs that the rising price momentum is continuing in 1Q2018, driven by expected demand growth and basic supply constraints. Furthermore, demand in December is still proceeding well, despite some low seasonal factors, sustained by favorable economic conditions, and TiO2 demand is expected to strengthen further in FY2018. Consequently, TASNEE Co. is expected to show improvement in performance for the next quarters due to continued improvement in average sales prices and improved global demand for Tio2 product.

Methanol-china hits the highest price since March-2014 standing at USD 420/ton in Dec- 2017: Methanol-china average prices in 4Q2017 rose 19.3%QoQ to USD 365/ton backed by strong demand in Chinese market and tight supplies. The global demand remains strong, as MTO (methanol to olefins) production in china has rebounded significantly since 2H2017. Thus, we expect improved performance for Sipchem Co. in the coming quarters due to expected higher operating rate and our long-term optimistic outlook of methanol price, which is the key catalyst to support the company’s downstream prices.

OPEC deal is likely to help rebalance oil market in 2H2018, boosting Petchem prices; Venezuela’s oil sector and Irans nuclear deal under risk of US sanctions to speed up the oil market re- balance: Oil prices rose to their highest level since the middle of 2015 as OPEC and non-OPEC producers agreed to extend oil output cuts of 1.8 mbpd until the end of 2018. Although IEA lowered its demand growth estimate for 2018 and cautioned US shale supplies in 2018, prices gained momentum after the shutdown of TransCanada Corp’s 590 kbpd Keystone pipeline following an oil spill and Libyan decline in oil production after fire in one of its pipeline. OPEC agreement is expected to rebalance the market and consequently further improving the oil prices. Furthermore, global oil demand growth of 1.3 mb/d is foreseen for 2018 by IEA, which is likely to help rebalance oil market at the end of 2H-2018. We believe that the difficult conditions continuing to be enhanced since 2017, and we expect the supply-demand balance should start to tighten significantly during 2018 given continuing robust growth in demand and the global drawdown in stocks. As US commercial crude oil inventories declined to 431.9mn barrels in 22 Dec-2017 from 550mn barrels in March-2015. In addition, Venezuela’s oil sector and Iranian nuclear deal are at risk of US sanctions that is probable to speed up the oil market re-balance.