Equities. Global Research. Saudi Arabia. Sahara Petrochemicals Company. Seeking Value Through Partnerships

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1 Global Research Equities Saudi Arabia Sahara Petrochemicals Company Seeking Value Through Partnerships March 2009

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 Faisal Hasan, CFA Head of Research Phone No:(965) Umar Faruqui Financial Analyst Phone No:(965) Syed Taimure Akhtar Financial Analyst Phone No:(965)

3 Sahara Petrochemical Company - SAHARA Tickers: SPC AB (Bloomberg) 2260.SE (Reuters) Listing: Saudi Stock Exchange (Tadawul) March 2009 Buy Current Price: SR12.15 (As on 10 th March, 2009) Sahara Petrochemical Company Sahara, a Saudi Joint Stock Company, was founded by the Zamil Group. Al-Zamil Group is one of Saudi Arabia s leading industrial groups with diversified interests ranging from banking and industrial investments to petrochemicals and food manufacturing. The two main revenue sources for Sahara Petrochemicals will be Al-Waha Polypropylene plant, which is operated by its 75.0% owned subsidiary Al-Waha Petrochemicals, and Saudi Ethylene and Polythene Company in which Sahara has an effective stake of 24.4%. The total world Polypropylene Capacity is estimated to be 49.6mn tons in Basell, which is a 25.0% stakeholder in Al Waha Polypropylene plant, has a 24.0% share in world Polypropylene production. British Petroleum has a share of 11.0% while SABIC has a share of 10.0%. North-East Asia region is the largest consumer of polypropylene products with an estimated share of 33.0%. North America and Western Europe are the other major consumers of Polypropylene. Though Middle East has an estimated share of 7.0%, the region is likely to increase its share going forward on the back of economic growth focused on diversification. Al-Waha Polypropylene plant is expected to come online at the end of 1Q Al-Waha Petrochemicals is aiming to produce high specification polypropylene products using the most advanced propane dehydrogenation technology. The Polypropylene sales will be insulated from the current downturn to a certain extent as the company will produce those polypropylene grades which currently are imported in Saudi Arabia. Its affiliation with Lyondell Basell will also facilitate transfer of technology. Al-Waha Petrochemicals will sell its produce both in the domestic market and the international market. The company will enter into off-take agreements with third parties whereby the risk of selling will be transferred to these undertaking firms. The polypropylene will be marketed globally by Basell, which has a presence in more than 120 countries. According to our projections the consolidated revenue for Sahara Petrochemicals will grow at a CAGR of 17.2% to SR1.8bn. The increase in revenue will be driven by increase in volumes sold of polypropylene at a CAGR of 13.1% to 414,000 tons. We have assumed 60.0% utilization rate in the first year of its Al-Waha plant operations March 2009 Sahara Petrochemicals Company 1

4 in view of the falling demand for petrochemical products brought about by the prevailing global financial crisis. We estimate the utilization rate to increase steadily going forward to 92.0% in 2013 as the world economy enters the recovery phase. Al-Waha will source its feedstock from ARAMCO at a % discount. The discount will stay intact till 2011 after which it might be reduced or phased out to comply with the WTO regulations. We have assumed OPEC crude oil prices to range between US$ in the long-term. Sahara s share of income from Saudi Ethylene and Polythene Company (SEPC) is estimated to grow at a CAGR of 10.0%. We are conservative as the full year of ethylene production is yet to be realized. Falling demand along with new additional ethylene capacity will keep ethylene margins depressed in 2009 before they start recovering from 2010 on the back of expected improvement in economic conditions. The earnings will start filtering in from 2009 as Al-Waha Polypropylene plant and Saudi Polythene and Ethylene Plant come online. We expect net profit of Sahara to grow at a CAGR of 43.2%. According to our projections there will be a 59.5% rise in profitability in 2010 as there will be a full year impact of the new operations of both Al- Waha Petrochemicals and SEPC. We expect the earnings to further grow by 74.6% in 2011 due to an expected increase in utilization rates and margins for both polypropylene and ethylene. On 10 April, 2007 Sahara Petrochemicals announced a rights share issue of 100.0mn shares. However, the rights issue has been delayed since then due to various reasons. The company has resorted to bridge financing to meet the short-term liquidity needs. We have assumed an increase in loans from banks to make up for cash shortfalls in our projections. We initiate our coverage on Sahara with a BUY recommendation. The fair value of the company based on the discounted cash flow method is SR 17.4 which offers an upside of 43.2%. Table 01: Investment Indicators Year Prices as on 10th March 2009 (SR) Shares in issue (000) Market Cap (SR mn) ,500 2,278 Revenues (SR 000) Net Profit (SR 000) EPS (SR) BVPS (SR) ROE % 52-week price range (SR) High Low P/E (x) P/BV (x) 2011F 1,406, , % F 1,132, , % F 960,823 83, % A 3,393 (39,387) (0.21) % NM A 16,757 (5,112) (0.03) % NM 3.47 Source: Company Accounts and Global Research Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the Tadawul as of March 10th Sahara Petrochemicals Company March 2009

5 Chart 01: Share Price Performance 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4, Mar Apr May Jun Jul Aug-08 TASI 15-Sep Oct-08 Sahara 15-Nov Dec Jan Feb-09 Source: Zawya and Saudi Tadawul March 2009 Sahara Petrochemicals Company 3

6 Company Overview Sahara Petrochemical Company Sahara Petrochemical Company Sahara, a Saudi Joint Stock Company was founded by the Zamil Group. Al-Zamil Group is one of Saudi Arabia s leading industrial groups with diversified interests ranging from banking and industrial investments to petrochemicals and food manufacturing. Sahara made its Initial Public Offering in May 2004 when 6.0mn shares were offered at a price of SR50/share which represented 20.0% of the company s share capital at that time. Sahara invests in petrochemical, chemical industrial projects and related utilities requirements to manufacture basic and intermediate products such as propylene, polypropylene, ethylene, and polyethylene. Sahara Petrochemicals has a 75.0% stake in Al Waha Petrochemical Company (Al Waha). Al- Waha Petrochemicals plant will have a capacity to produce 450,000 tons per annum of polypropylene when it comes online in late 1Q Sahara also has a 32.5% stake in Tasnee and Sahara Olefins Company (TSOC) which is a Joint venture with National Industrialization Company. Tasnee and Sahara Olefins Company acts as a holding company with a 75.0% stake in Saudi Ethylene and Polyethylene Company. Chart 02: Sahara Petrochemicals Holding Sahara Petrochemicals 75.0% 50.0% Al-Waha Petrochemicals dd 32.5% Sahara and Maaden Joint venture Tasnee and Sahara Olefins 75.0% Source: Global Research Saudi Ethylene and Polythlene Company Table 02: Board of Directors Names Eng. Abdulaziz Bin Abdullah Al Zamel Mr. Fahad Bin Abdullah Al Zamel Dr. Abdulrahman Bin Abdullah Al Zamel Mr. Jabr Bin Abdulrahman Al Jabr Mr. Tariq Bin Metliq Al Metliq Mr. Saeed Bin Omar Al Esaey Mr. Abdul Rahman al Rawwaf Mr. Abdulrahman Bin Hael Saeed Mr. Rashed Bin Saif Al Gurair Dr. Saad Bin Hamdi Al Zaeem Mr. Sultan Bin Khaled Bin Mahfouth Source: Company Website Position in Sahara Chairman Managing Director Member Member Member Member Member Member Member Member Member 4 Sahara Petrochemicals Company March 2009

7 Table 03: Senior Management Names Fahed Abdullah Hamad Al Zamil Esam F Hymdi Hammad S Al Shammary Saeed Bayounes Abdulmohsen Al Hammad Source: Zawya Position in Sahara Managing Director Executive President GM. Administration and HR. Manager GM. Maintenance and Technical Services Finance Manager Al Waha Petrochemicals Company Al-Waha Petrochemical Company ( Al-Waha ) was established in September 2006, as Sahara s first majority owned industrial project subsidiary. It is located in the Industrial city of Jubail in the Eastern Province of the Kingdom of Saudi Arabia, Al-Waha is a limited liability joint venture company which will operate a petrochemical complex for the production of 460,000 tpa of propylene which will serve as a feedstock for the production of 450,000 tpa of polypropylene. The project is expected to come online at the end of 1Q2009. The target market includes both the regional and the international markets. A Shareholders Agreement was signed by Sahara and Basell on 1 December, Sahara has a 75.0% stake while Basell has a 25.0% stake. The agreement includes a license to utilize Basell s most advanced polypropylene technology, the Spherizone process. Saudi Aramco will supply the propane feedstock to the company. The polypropylene from the new plant will be marketed globally by Basell. The propane dehydrogenation unit will be based on the UOP Oleflex process. Basell, which merged with Lyondell Chemical Company in December 2007, is the world s largest producer of polypropylene and polyethylene as well as advanced polyolefin products. Basell is also a global leader in the development and licensing of polypropylene and polyethylene processes. Basell has presence in more than 120 countries through its manufacturing facilities and joint ventures. Tasnee and Sahara Olefins Company Tasnee & Sahara Olefins Company is a Joint venture between Sahara Petrochemicals and National Industrialization Company of Saudi Arabia. National Industrialization Company has a share of 60.4% while Sahara has a share of 32.5%. The rest is held by General organization for Social Insurance (GOSI). The joint venture established the Saudi Ethylene and Polyethylene Company (SEPC) which is located in Jubail. Tasnee & Sahara Olefins Company has a 75.0% stake in SEPC while the remaining equity is held by Basell Polyolefin. The plant will have a capacity of 1.0mn tpa of ethylene, 285,000 tons of propylene, 400,000 tons of high-density polyethylene, 400,000 tons of low density Polyethylene along with other derivatives. March 2009 Sahara Petrochemicals Company 5

8 Sahara and Maaden Joint venture Ma aden and Sahara Petrochemical Company have signed a Memorandum of Understanding in respect of the construction of the caustic soda production plant. The plant will be located at Jubail Industrial City to allow ethylene to be delivered by pipeline from the Tasnee Ethane Cracker. Caustic soda is an essential feedstock needed for the refining of bauxite to alumina. It is produced from the electrolysis of brine, along with chlorine which is later used in the manufacture of ethylene di-chloride (EDC). The joint venture also proposes to manufacture EDC for export. The cost of the project will be around US$ mn. The joint venture will supply caustic soda to a proposed 740,000 tons-per-year aluminum smelter that Maaden would jointly develop with Rio Tinto at a total cost of $10.5bn. 6 Sahara Petrochemicals Company March 2009

9 Shareholding and Liquidity Zamil Group Holding Company is a major shareholder in Sahara Petrochemicals with a 7.5% stake. 92.5% share is held by the general public. Table 04: Sahara Shareholders Shareholder Holding Zamil Group Holding Company 7.5% General Public 92.5% Source: Zawya Sahara petrochemical share turnover reached 326.9mn shares in 2006 which was in-line with a rise in total market turnover which reached 73.4bn. The company s market capitalisation doubled to SR8.1bn in However the capitalisation plunged by 72.0% in 2008 as petrochemical margins on the back of falling crude oil prices which took a nosedive in 2H08. Table 05: Stock Liquidity Year Volume Traded (mn) Market Price-Year End SR Market Cap (SR mn) , , , * ,278 Source: TADAWUL, Global Research *The volume traded figure for 2009 is the aggregate volume for the period 01 January-10March The market cap and share price are as of 10, March Share Price Movement Share price touched SR55 on 15 January, 2008 as sustained rise in oil prices and consequently a rise in petrochemical margins boosted investor sentiments. However the share price took a plunge in the 2H08 as Saudi Tadawul got engulfed in the global financial crisis. The Saudi stock market lost 52.6% of its capitalization in The petrochemical sector lost 66.1% in 2008 as crude oil price took a plunge in 2H08 indicating a massive slowdown in demand for petroleum and related products. March 2009 Sahara Petrochemicals Company 7

10 Petrochemicals Overview Petrochemical is an intermediate chemical derived from petroleum, hydrocarbon liquids or natural gas, such as: Ethylene, Propylene, Benzene, Toluene and Xylene. Two important sources of feed stock for petrochemicals are petroleum (naphtha & gasoline) and natural gas, which are cracked to produce ethylene and propylene. Generally, petroleum is a major source for producing ethylene, propylene and benzene while gas is mainly use to produce methane. On the basis of chemical composition, basic chemicals are divided into three main classes: 1 Olefins are the petrochemical industry s most common building blocks, used in the production of many petrochemicals and plastic products. The olefins products usually include (i) Ethylene, (ii) Propylene and (iii) Butene -1 2 Aromatics are a group of hydrocarbon products that form the basis for commodity chemicals used in the production of clothing, paints, packaging and other products. The aromatic products include (i) Styrene, (ii) Benzene and (iii) Para-xylene. 3 Oxygenates are a group of chemicals comprising alcohols and ethers. The primary oxygenate products are (i) Methyl Butyl Ether (MTBE), (ii) Methanol and (iii) crude industrial Ethanol. Chart 03: Natural Gas Composition Chart 04: Naphtha Composition Methane Hydrogen Sulphide Nitrogen Oxygen Ethane Propane Butane Ethylene Others Methane Propylene Source: NaturalGas.org Source: Adhesive Raw Material Fact Volume 2, Issue 4 General Production flow The production process of petrochemical products starts from the cracking of liquid petroleum (naphtha) and natural gas, the feedstock. The outcome of the cracking is a production of various petrochemical products like ethylene, propylene, benzene and so on, which are used as a feedstock for producing intermediates. Intermediate chemicals are those petrochemical products, which are used to produce polymers and other industrial products. 8 Sahara Petrochemicals Company March 2009

11 Chart 05: Production Flow Diagram Crude Oil Gas Gasoline Gasoline Gas Oil (Desiel) Naphhta Kerosene Naphtha Primary Feed Stock Secondary Feed Stock Processing Unit Basic Chemical Intermediates Polymers, raw material for industries Benzene Ethane Propane Butane Methane Basic Chemical Processing Unit Olefins Ethylene Propylene Butene Aromatics Styrene Benzene Para-Xylene Oxygenates Methanol Methyl Tertiary Butyl Ether (MTBE) Crude Industrial Ethanol I nt e rm e di a te s P y m o l e r s I nd u st r ia l U se s Source: Industry Sources & Global Research March 2009 Sahara Petrochemicals Company 9

12 MENA Petrochemical Industry Saudi Arabia: The largest petrochemical player In 2008, Saudi Arabia occupied 55.3% of the total MENA capacity of 88.5mn tons, mainly through SABIC. SABIC is not only a major player in Saudi Arabia, but the company has a vital position in the international market. In 2008, SABIC accounted for around 55.0% of the total Saudi Arabia s capacity and around 30.0% of MENA capacity. Iran through its National Petrochemical Company accounts for 19.4% while Qatar accounts 7.8% of MENA capacity. Table 06: Country-Wise MENA Capacity (mn tons) Country 2008 Share Saudi Arabia % Qatar % Egypt % UAE % Iran % Bahrain % Kuwait % Oman % Rest of MENA % Total MENA Capacity % 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$93.2bn (SR349.5bn). Based on the given expansion plans, the production capacity in MENA region will increase to 98.9mn tons in Going forward, we expect the production capacity to increase at a CAGR of 4.5% to 117.5mn tons. Major capacity expansion in petrochemicals of different grades is expected in Saudi Arabia, which will account for 63.5% of total capacity expansion in 2009 followed by Kuwait which is expected to contribute 19.9%. By 2012 the capacity in the MENA region will further increase largely due to capacity expansions in Saudi Arabia and Qatar. Chart 06: MENA Capacity Expansion (mn tons) E 2009F 2010F 2011F 2012F Total Capacity Expansion Growth In Capacity Expansion Source: Zawya & Global Research 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 10 Sahara Petrochemicals Company March 2009

13 Product-wise capacity expansion The total expected increase of 34.6mn tons in in petrochemical capacities of different grades in the MENA region will comprise of (i) 22.0mn tons of basic chemicalolefins, (ii) 6.2mn tons of basic chemical-aromatics and (iii) 6.4mn tons of basic chemicaloxygenates. Table 07: Grade-Wise Capacity Expansion in MENA (Tons) 2008E 2009F 2010F 2011F 2012F Basic-Olefins 2,336,250 6,731,250 4,906,750 3,409,750 4,630,000 Basic-Aromatic 1,848,750 2,566,250 1,200, ,000 Basic-Oxygenate 1,339,000 1,213,000 2,788,000 1,020,000 - Expected Expansion 5,524,000 10,510,500 8,894,750 4,429,750 5,230,000 Source: Zawya & Global Research Country-wise capacity expansion Saudi Arabia Capacity expansion Saudi Arabia is expected to make an addition of 6.6mn tons of basic chemical of different grades out of the total addition in regional capacities of 10.5mn tons in By 2012 it is expected to add a further 7.4mn tons. Table 08: Saudi Arabia Additional Capacity (Tons) 2008E 2009F 2010F 2011F 2012F Basic-Olefins 1,911,250 5,568,750 3,965,000 1,900,000 1,050,000 Basic-Aromatic 573, , , Basic-Oxygenate 1,039, , Expected Expansion 3,524,000 6,673,000 4,565,000 1,900,000 1,050,000 Total Expected Expansion 5,524,000 10,510,500 8,894,750 4,429,750 5,230,000 Contribution in Expansion 63.8% 63.5% 51.3% 42.9% 20.1% Source: Zawya & Global Research Kuwait Capacity expansion Based on the given expansion plans, production capacities of basic chemicals in Kuwait will increase by 2.6mn tons in This will increase the country s capacity from 2.1mn tons in 2007 to 6.3mn tons in Table 09: Kuwait Additional Capacity (Tons) 2008E 2009F Basic-Olefins 425, ,000 Basic-Aromatic 775,000 1,875,000 Basic-Oxygenate 300, ,000 Expected Expansion 1,500,000 2,600,000 Total Expected Expansion 6,170,250 13,046,750 Contribution in Expansion 24.3% 19.9% Source: Zawya & Global Research March 2009 Sahara Petrochemicals Company 11

14 Oman Capacity expansion 500,000 tons additional capacity of Oman will come on-stream in 2009 and will lead to an increase in the country s total capacity to 2.6mn tons in The capacity is expected to increase further to reach 3.41mn tons in 2010 and 3.7mn tons in The increase in capacity is mainly due to the full year impact of those capacities which come online in the middle of the year and an addition of new capacities of oxygenates in 2Q2010. Table 10: Oman Additional Capacity (Tons) 2008E 2009F 2010F 2011F 2012F Basic-Olefins Basic-Aromatic 500, , Basic-Oxygenate , ,000 - Expected Expansion 500, , , ,000 - Total Expected Expansion 5,524,000 10,510,500 8,894,750 4,429,750 5,230,000 Contribution in Expansion 9.1% 4.8% 9.1% 6.1% 0.0% Source: Zawya & Global Research Qatar Capacity expansion Qatar is expected to contribute 6.2% in total upcoming production capacity in 2009 mainly due to additional capacity from QAFAC-II complex coming online in 1Q2009. Consequently, the production capacity is expected to reach at 9.7mn tons by 2011 and will reach at 12.4mn tons by the end of Table 11: Qatar Additional Capacity (Tons) 2008E 2009F 2010F 2011F 2012F Basic-Olefins - 650, ,000 1,500,000 2,180,000 Basic-Aromatic ,000 Basic-Oxygenate Expected Expansion - 650, ,000 1,500,000 2,780,000 Total Expected Expansion 5,524,000 10,510,500 8,894,750 4,429,750 5,230,000 Contribution in Expansion 0.0% 6.2% 7.3% 33.9% 53.2% Source: Zawya & Global Research MENA expansion schedule The following table shows the capacity of major expansions and their scheduled completion dates. Major expansions of 3.8mn tons and 1.7mn tons are expected to come online in Saudi Arabia in In Kuwait additional capacity of 1.1mn tons is expected to come online by the end of 1Q2009. The other major capacity additions include 2.4mn tons in Qatar which is expected to come online in 1Q2010 and 1.7mn tons in Bahrain which is expected to come online in Sahara Petrochemicals Company March 2009

15 Table 12: MENA Capacity Expansion (Tons) Country Basic-Olefins Basic-Aromatic Basic-Oxygenate Expected Production Saudi Arabia 950, Q2008 Saudi Arabia 1,700, Saudi Arabia 3,800, Q2010 Saudi Arabia 2,100, Saudi Arabia 1,285, Q2008 Saudi Arabia - 600, Saudi Arabia 1,200, Kuwait - 1,100,000-1Q2009 UAE - 600, Egypt 350, Q2009 Oman - - 1,080,000 2Q2010 Qatar 1,300, Q2008 Qatar - - 2,430,000 1Q2010 Qatar 1,500, Qatar 880, , Qatar 1,300, Algeria - - 1,000,000 4Q2010 Algeria 1,400, Bahrain - - 1,728, Source: Zawya & Global Research March 2009 Sahara Petrochemicals Company 13

16 Saudi Petrochemical Industry Introduction Saudi Arabia is a key player in the global petrochemical industry and the largest producer in the MENA region. Saudi Arabia petrochemical production capacity contributed 55% to the MENA petrochemical capacity in A 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 07: Saudi Share in Region 2008 Rest of MENA, 45% Saudi Arabia, 55% 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. The companies also get a 25-30% discount on naphtha prices. 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. However the discount is likely to be abolished or phased out post Sahara Petrochemicals Company March 2009

17 Major Players Saudi Arabian Basic Industries (SABIC) SABIC is one of the world s leading petrochemical producing company and was established by the Saudi government in 1976 in furtherance of a government policy to diversify the Saudi industrial base outside the oil sector and in order to make use of crude oil-associated gases at well-heads which had, until that point, been flared off. The intention was to build a chain of basic, large-scale industries located close to or with easy access to gas resources and to develop export-oriented non-oil businesses of strategic importance to Saudi Arabia, including hydrocarbon-based chemicals and basic metal industries. Now SABIC has a total 21 petrochemical affiliates and YANSAB is one of them. The affiliates of SABIC are distinguished in six strategic business units (SBUs), organized by products. These are: Basic Chemicals, Intermediates, Polymers, Specialized Products, Fertilizers, and Metals. Each of these is headed by a Vice-President. These six business units make four different kinds of products: 1 Chemicals Basic Chemicals, Intermediates and Specialized Products (three SBUs) 2 Plastics Polymers (one SBU) 3 Fertilizers (one SBU) 4 Metals (one SBU) Table 13: SABIC s Affiliates Name of Affiliates Location Holding of SABIC Arabian Petrochemical Company Saudi Arabia 100.0% SABIC Asia Pacific Singapore Singapore 100.0% SABIC Industries Investments Company Saudi Arabia 100.0% SABIC Innovative Plastics United States 100.0% SABIC Luxembourg Luxembourg 100.0% SABIC Sukuk Company Saudi Arabia 100.0% SABIC UK Petrochemicals UK 100.0% Saudi Iron and Steel Company Saudi Arabia 100.0% Saudi European Petrochemical Company Saudi Arabia 80.0% Jubail United Petrochemical Company Saudi Arabia 75.0% National Industrial Gases Company Saudi Arabia 70.0% Yanbu National Petrochemicals Company Saudi Arabia 56.0% Arabian Industrial Fibers Company Saudi Arabia 53.9% Al Jubail Fertilizer Company Saudi Arabia 50.0% Al Jubail Petrochemical Company Saudi Arabia 50.0% Eastern Petrochemical Company Saudi Arabia 50.0% National Chemical Fertilizer Company Saudi Arabia 50.0% National Methanol Company Saudi Arabia 50.0% Saudi Methanol Company Saudi Arabia 50.0% Saudi Petrochemical Company Saudi Arabia 50.0% Saudi Yanbu Petrochemical Company Saudi Arabia 50.0% Saudi Arabian Fertilizer Company Saudi Arabia 42.9% Saudi Kayan Petrochemical Company Saudi Arabia 35.0% Gulf Petrochemical Industries Company Bahrain 33.3% Gulf Aluminum Rolling Mill Company Bahrain 30.3% Maaden Phosphate Company Saudi Arabia 30.0% Power and Water Utility Company for Jubail and Yanbu Saudi Arabia 24.8% Aluminum Bahrain [Via SABIC Industries Investments Co.] Bahrain 20.0% National Chemical Carriers Saudi Arabia 20.0% Source: Zawya March 2009 Sahara Petrochemicals Company 15

18 Saudi Chemical Company Saudi Chemical s line of production includes the latest generation, safest, and worldwide 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 a wide range of delay times, lengths, and models for different types of use. In addition, the company offers wide variety of Electrical Detonators, and 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. Capacity expansion During the last 4 years, Saudi Arabia s economy experienced high growth rates mainly due to high crude oil prices. This large dependence on crude oil revenues leads to high sensitivity to change 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 capacity is taking place which will increase at a CAGR of 6.8%. Major new capacities in Saudi Arabia are taking place in Jubail industrial area. Chart 08: Saudi Arabia Capacity Expansion E 2009F 2010F 2011F 2012F Capacity Expansion Growth Source: Zawya and Global Research 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 16 Sahara Petrochemicals Company March 2009

19 Major capacity expansion Company Wise Major additional petrochemical capacity in Saudi Arabia is expected from Saudi Kayan Petrochemical Company (KAYAN), which will come on line on 3Q2010. KAYAN is expected to contribute by 23.0% in the total Saudi Arabia expansion of 16.5mn tons. However, the capacity from Eastern Petrochemical (SHARQ) and YANSAB will contribute to 24.3%, with a combined capacity of 4.0mn tons. Table 14: Capacity Expansion by Company Basic- Basic- Basic- Expected Name Olefins Aromatic Oxygenate Completion date Saudi European-IBN ZAHR 950, Q2008 Sino-Saudi Petrochemical Project 1,700, Saudi Kayan 3,800, Q2010 YANSAB 2,005, Q2008 SIPCHEM-Olefins 2,100, Sahara/Tanesse-Saudi Ethylene & Propylene Plant 1,285,000 4Q2008 Petrokemya-PVC and Offsite Sadaf-Styrene Plant-Saudi Petrochemical - 600, Delta Oil 1,200, Source: Zawya & Global Research March 2009 Sahara Petrochemicals Company 17

20 Feed Stock Prices 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 pre-determined discounts. Gas well head prices in the international markets; shot up by more than 40.0% from US$4.4 per mmbtu in 2001 to US$8.0 per mmbtu in However the gas prices followed the sharp decline in crude oil prices in 2H2008. We estimate the gas prices stay in the range of US$ per mmbtu in 2009 and Chart 09: Prices of Gas (US$ per mmbtu) E 2010E 2011E 2012E Source: EIA & Global Research Crude oil prices Over the period of the last 5 years, OPEC Basket price witnessed a sustained rise in crude oil prices to an all-time high of over US$140.0 per barrel in July The surge in prices was primarily due to: Global political uncertainty High global economic growth Lack of refining capacity which caused a shortage of refined products Speculation in oil futures Chart 10: OPEC Historical Crude Oil Prices (US$ per barrel) Source: OPEC Crude Oil Price 18 Sahara Petrochemicals Company March 2009

21 However, in the 2H2008 the situation took a drastic turn as the oil prices dived to below US$40.0 per barrel, the lowest level in five years. Year 2008 also saw the demand decreasing for the first time since 1983 according to OPEC estimates. High oil prices and removal of subsidies in the developing countries in the first seven months led to demand destruction. The credit crunch raised its ugly head in the latter part of the year as bankruptcies and bail-outs became a regular feature, precipitating a slowdown in world economy and hence oil demand which was reflected in the sharply falling oil prices. Our long term forecast for OPEC crude oil is US$ Chart 11: Forecasted OPEC Crude Oil Prices (US$ per barrel) A 2009F 2010F 2011F 2012F 2013F Source: OPEC& Global Research Prices of Methanol The price of methanol has surged by 191.7% to US$472.6 per ton in 2007 as compared to US$162 per ton in The increase in the price of methanol during the period of is mainly because of higher gas prices, which have increased due to higher crude oil prices. Moreover, methanol is derived from methane which is mainly obtained from the cracking of natural gas while sometimes from naphtha. The availability of natural gas at highly subsidized price of US$0.75 per mmbtu further strengthened the margin of Saudi petrochemical units. Chart 12: Historical Average Prices of Methanol (US$ per ton) Methanol Average Historical Prices Source: Methanex Goring forward, the expected future prices of methanol is based on the movement of our expected crude oil prices, which will also affect the price of natural gas in international March 2009 Sahara Petrochemicals Company 19

22 market. Based on our expectations, the price of methanol will decline by 44.6% in 2009 to reach US$202 per ton compared to US$365 per ton in However, we expect a gradual increase in the average prices of methanol to US$221 per ton in 2012, in line with our expected prices of crude oil. Chart 13: Forecasted Average Prices of Methanol (US$ per ton) E 2010E 2011E 2012E Source: Methanex & Global Research Methanol Applications Methanol is used in manufacturing a wide variety of chemical products such as formaldehyde and Acetic Acid. Methanol, as a hydrogen carrier is being considered for fuel cell application and as an alternate fuel. Methanol was once known as wood alcohol, because it was originally produced as a by-product of the distillation of wood. 20 Sahara Petrochemicals Company March 2009

23 Polypropylene Market Polypropylene is a type of polymer which is used in a variety of applications including packaging, textiles, coating applications, plastic parts, containers for various users, decorative parts, automotive components, aircrafts interiors, stationary and cosmetics. The applications range from engineering and construction applications to consumer applications underlying the importance of polypropylene. Polypropylene is also replacing other plastics such as polyurethane because of its ability to be recycled. North-east Asia region is projected to be the largest consumer of polypropylene products in 2009 with an estimated share of 33.0%. North America and Western Europe are estimated to be the other major consumers of Polypropylene products as can be seen in the chart below. Though Middle East will have an estimated share of 7.0% in 2009, the region is likely to increase its share going forward on the back of economic growth focused on diversification. The total world polypropylene demand is projected to be 51.3mn tons in Chart 14: Forecasted Region-Wise Share in Polypropylene Demand 2009 North East Asia 33% South East Asia 9% North America 19% Indian SC 5% Africa/ Middle East 7% Source: Alberta Polypropylene Market Report Cenral Europe/FSU 3% South America 5% Western Europe 19% The total world Polypropylene Capacity is estimated to be 49.6mn tons in As can be seen in the chart below Basell, which is a 25.0% stakeholder in Al Waha Polypropylene plant, has a 24.0% share in Polypropylene production. British Petroleum has a share of 11.0% while SABIC has a share of 10.0%. Saudi Arabia, which dominated Polypropylene capacity additions in 2008, will dominate in 2009 as well with the coming up of five steam crackers and three PDH plants. Most of the propylene produced will be converted into polypropylene and exported. Chart 15: Company-Wise Share in Polypropylene Capacity in 2008 Basell 24% Other 37% BP 11% SABIC 10% Reliance ATOFINA Industries/IPCL 9% 9% Source: Alberta Polypropylene Market Report Propylene is the main input for production of polypropylene. Ethylene and Propylene are two main chemicals produced from Naphta crackers. The typical ethylene: propylene has March 2009 Sahara Petrochemicals Company 21

24 been 1:0.65. Historically the demand for Propylene has grown at a faster than demand for ethylene. Traditionally the gap has been filled by producing more propylene from fluidized catalytic crackers. There are other on purpose propylene production technologies available to fill the gap. The methods available include production from propane dehydrogenation, metathesis, and methanol-to-olefins conversion. Though, none of these technologies are new, they have been little used, with the exception of propylene recovery from FCCs. According to CMAI 67.0% of propylene production comes from steam crackers and about 30.0% from FCCs. The remainder is mainly produced by propane dehydrogenation. Propane Dehydrogenation Process The Oleflex process uses proprietary platinum on alumina catalyst. Four adiabatic reactors are operated in series. The dehydrogenation reaction is endothermic so interheaters are included between each reactor to maintain the desired reactor temperatures. The Oleflex process uses a CCR regenerator to continuously regenerate the catalyst and maintain high conversion and selectivity. (UOP Technology and More issue Oct 2005) Chart 16: Propane Dehydrogenation Process Source: 22 Sahara Petrochemicals Company March 2009

25 Polypropylene prices Polypropylene prices increased at a CAGR of 12.8%. The price rise coincided with rise in oil prices which grew at a CAGR of 24.5%. The economic boom world over increased the appetite for polypropylene which maintained upward pressure on prices. The world economic growth rate reached 4.0% during this era fuelled by massive growth in the developing countries particularly China and India. However the polypropylene reduced sharply from their peak of US$2,100 per ton in August 2008 to around US$800 in January 2009 as crude oil prices collapsed in 2H08. We have assumed Polypropylene average prices of US$1,008 per ton in Polypropylene prices have a high co-relation with crude oil prices. However, deviations can get larger if the demand in the end product market for propylene increases/decreases as it puts upward/downward pressure on the prices. Chart 17: Polypropylene (US$/ton) and Crude Oil prices (US$ per barrel) 1, , , , , , , F 2010F 2011F 2012F 2013F Polypropylene Crude Oil (RHS) Source: Bloomberg & Global Research With a slowdown in auto, construction and other large-scale manufacturing industries at large polypropylene prices are likely to stay depressed in We expect Polypropylene prices to stay in the range of US$1,000-1,100 per ton in The World Bank recently revised its estimate of world economic growth to 0.9% in 2009 reflecting the gloomy outlook. Going forward, we expect polypropylene prices to start recovering from 2011 to around US$1,100-1,200 per ton which is aligned with our crude oil projections. March 2009 Sahara Petrochemicals Company 23

26 Sahara Petrochemicals Financial Overview The two main revenue sources for Sahara Petrochemicals are Al-Waha Polypropylene plant, which is operated by its 75.0% owned subsidiary Al Waha Petrochemicals, and Saudi Ethylene and Polythene Company in which the company has an effective stake of 24.4%. Revenue from Al Waha Plant Al-Waha Polypropylene plant is expected to come online at the end of 1Q2009. We have assumed 60.0% utilization in the first year of its operations. The company will sell its produce both in the domestic market and the international market. The company will enter into offtake agreements with third parties whereby the risk of selling will be transferred to these undertaking firms. The polypropylene from the new plant will be marketed globally by Basell which has a presence in more than 120 countries. The Propylene sales will be insulated from the current downturn to a certain extent as the company will produce high specification polypropylene grades which are currently being imported in Saudi Arabia. Propylene production, the raw material for polypropylene production, has always lagged behind ethylene production as many of the petrochemicals projects in the past were based on ethane crackers producing ethylene only. The additions to propylene capacity have been very small until the recent past. According to our projections the revenue from Al-Waha plant will grow at a CAGR of 17.2% to SR1.8bn. The increase in revenue will be driven by increase in volumes sold at a CAGR of 13.1%.We have assumed that the polypropylene plant will operate at a 60.0% utilization rate in the first year of its operation and increase steadily going forward as demand starts picking up. Chart 18: Revenue Forecast from Polypropylene Sales (SR 000) 1,900,000 1,700,000 1,500,000 1,300,000 1,100, , F 2010F 2011F 2012F 2013F Revenue (LHS) Capacity Utilization (RHS) 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% Source: Global Research 24 Sahara Petrochemicals Company March 2009

27 Cost of propylene manufacturing Al-Waha will produce Propylene from Propane using the Propane Dehydrogenation (PDH) process and eventually convert propylene into polypropylene. Typically 1.2 tons of propane is used to produce 1.0 ton of Propylene. PDH process has three main advantages over propylene derivative producers. 1) - PDH plant produces a single product, propylene as opposed to naphtha cracking which is convenient for Al-Waha petrochemicals which is dedicated to producing polypropylene 2) - Production costs are diversified to a certain extent as the cost of propane is loosely connected with the prices of naphtha and propylene. 3) Subject to availability of propane, PDH is generally more cost effective then sourcing propylene from outside as cost of shipping and storing propylene can be high. Al-Waha will source its feedstock from ARAMCO at a 28.0% discount. The discount will stay intact till After that it might be reduced or phased out to comply with WTO regulations. We have kept the discount constant in our valuations. Chart 19: Propane and Conversion Cost (US$) per ton F 2010 F 2011 F 2012 F 2013 F Conversion cost Propane Cost Source: Global Research The propane price tends to follow the crude oil prices. We have based our propane price projections on our projections for crude oil prices. We estimate propane prices to stay around US$430 per ton in We expect the prices to recover to US$470 per ton in The conversion costs comprise of Utilities costs of around US$30.0 per ton, Catalysts and Chemicals cost of US$20.0 per ton and fixed expenses US$40.0 per ton. We have taken a 5.0% increase in conversion costs going forward. March 2009 Sahara Petrochemicals Company 25

28 Cost of Polypropylene manufacturing Basell recently introduced the Spherizone process which has superseded the Spheripol technology. The technology was commercialized in Spherizone uses a multi-zone circulating reactor and produces materials which have properties superior to any associated with other polypropylene manufacturing processes thus allowing Al-Waha petrochemicals to produce polypropylene grades currently imported in Saudi Arabia. Unlike Spherion, Spherizone utilizes the catalytic cracking technology. Polypropylene uses propylene as its feedstock. We have forecasted the input cost for propylene to be around US$ per ton which includes the depreciation cost. From 2011 onwards we expect the input price to increase to US$ due to increase in Propane prices. We have estimated the cost of conversion to be US$73.0 per ton in Going forward we have taken a 5.0% increase in conversion cost per ton. We expect the overall costs to range around US$ per ton going forward. Chart 20: Cost of Manufacturing Polypropylene (US$) per ton Source: Global Research 2009F 2010F 2011F 2012F 2013F Conversion cost Input Cost Saving from in-house production The estimated saving from in-house production of propylene will be around US$ per ton. According to our projections the market price for propylene will range around US$ during the period Sahara Petrochemicals Company March 2009

29 Propylene Margins Propylene margins have seen contrasting fortunes since the past few years as crude oil prices touched new highs before taking a dramatic turn to end up at current levels. Since 2005 the margins have fluctuated wildly from as high as US$800 per ton in the 2H2006 to around US$100 per ton in late On average the margins remained around US$300 per ton during Going forward we believe the margins will remain depressed in view of the global economic downturn. According to our estimates the margins will remain in the range of US$ Chart 21: Propylene Price and Margin Forecast (US$/ton) F 2010 F 2011 F 2012 F 2013 F Prices (LHS) Margin (RHS) Source: Bloomberg & Global Research Polypropylene Margins Polypropylene margins have fluctuated wildly as well since 2005 from below US$100 per ton in early 2005 to over US$500 per ton in 2H2008. Polypropylene prices touched US$2,000 per ton level in July 2008 before sliding down to US$800 per ton currently. The sharp slide coincided with the sharp fall in crude oil prices. Going forward we estimate the margins to range between US$ per ton. Chart 22: Polypropylene Price and Margin Forecast (US$/ton) 1,200 1,150 1,100 1,050 1, F 2010F 2011F 2012F 2013F Polypropylene Price Margin Source: Bloomberg & Global Research March 2009 Sahara Petrochemicals Company 27

30 Tasnee and Sahara Olefins Company Tasnee & Sahara Olefins Company, the joint venture between Sahara Petrochemicals and National Industrialization Company of Saudi Arabia is likely to be the next major source of revenue. National Industrialization Company has a share of 60.4% while Sahara has a share of 32.5%. The joint venture has established the Saudi Ethylene and Polyethylene Company (SEPC) which is located in Jubail. Tasnee & Sahara Olefins Company has a 75.0% stake in SEPC while the remaining equity is held by Basell Polyolefin. Sahara has an effective stake of 24.4% in the entity. The plant will have a capacity of 1.0mn tpa of ethylene, 285,000 tons of propylene, 400,000 tons of high-density polyethylene, 400,000 tons of low density Polyethylene together along with other derivatives. Ethylene price averaged US$1,249 per ton in However the prices took a nose dive in 2H2008 as crude oil prices fell sharply as the credit crunch and the financial crisis came to the fore. The prices are currently hovering around US$600 per ton in January We expect prices to stay around US$ in 2009 as a grim economic outlook will be accompanied by additional ethylene capacity coming online. However, we expect the prices to start picking up from 2011 onwards as the world economy gets back on track. Our long-term forecast for ethylene prices is around US$ per ton. Chart 23: Ethylene Price and Margin Forecast (US$ per ton) F 2010F 2011F 2012F 2013F Ethylene (RHS) Margins (LHS) Source: Bloomberg & Global Research Sahara Petrochemicals Company March 2009

31 Profitability The earnings will start filtering in from 2009 as Al-Waha Polypropylene plant and Saudi Polythene and Ethylene Plant come online. We expect net profit of the company to grow at a CAGR of 43.2% mainly on the back of increase in polypropylene volumetric sales and margins. Sahara s share of income from Saudi Ethylene and Polythene Company is projected to grow at a CAGR of 10.0%. We are conservative as the full year of ethylene production is yet to be realized. Falling demand along with additional ethylene capacity coming online in 2009 will keep the margins depressed for ethylene. Chart 24: Sahara Forecasted Net Profit (SR 000) 375, , , , , ,000 75, F 2010F 2011F 2012F 2013F Source: Global Research We estimate the net profit to be around SR83.1mn in We have assumed a 60.0% utilization rate for 2009 in view of the prevailing economic conditions. The financial and depreciation costs will come in making which will further strain the profits. According to our projections there will be a 59.5% rise in profitability in 2010 as there will be a full year impact of the new operations. We expect the earnings to grow further by 74.6% in 2011 as utilization rates and margins increase for both polypropylene and ethylene. We assume utilization rates to reach 90.0% in 2012 as the world economy recovers from the current slump. March 2009 Sahara Petrochemicals Company 29

32 EBITDA Margins The EBITDA margins for Sahara of 40.9% in 2009 and onwards are comparable to margins of SABIC, the largest petrochemical producer in Saudi Arabia. Though SABIC s portfolio is much more diversified, Sahara s use of efficient technology for production of high quality polypropylene will help prop up the margins through lower cost. Sahara s EBITDA margins are higher than YANSAB as Yansab s revenue stream is mainly concentrated on ethylene and related projects. Ethylene margins took a nosedive when oil prices came down in 2H08 accompanied by new ethylene capacities coming online. Table 15: EBITDA Margin % F 2010F 2011F 2012F Sahara NM SABIC SIPCHEM YANSAB NM Source: Companies Annual Reports & Global Research Net Margins We expect the net profit margin of Sahara to be 8.7% as financial costs and depreciation costs will be spread over a lower production base. Combination of expected price increase in polypropylene and capacity utilization rates will increase margins for Sahara to 20.0% in 2012 which will be slightly more than SABIC s estimated margin. SIPCHEM has the highest estimated margins as it concentrates on producing high margin petrochemical products. Table 16: Net Profit Margin (%) F 2010F 2011F 2012F Sahara NM SABIC SIPCHEM YANSAB NM Source: Companies Annual Reports & Global Research 30 Sahara Petrochemicals Company March 2009