SABIC to lead ethylene charge, claims HSBC

17 April 2007 09:32  [Source: ICIS news]

SINGAPORE (ICIS news)--The Middle East will double its share of ethylene capacity in the region to 20% by 2011 depressing industry-wide margins but benefiting Saudi Basic Industries (SABIC), a report said.

 

The Saudi Arabian petrochemical giant’s strategy would displace existing marginal ethylene producers around the world rather than competing head-to-head on additional capacity expansion, said an analyst report by HSBC Saudi Arabia released Sunday.

           

“As SABIC brings on more plants, its competitive advantage against marginal producers is now even stronger,” said Peter Hutton, head of research for HSBC Saudi Arabia and a former executive at BP.

 

HSBC forecasts a period of margin decline until 2009 but even under these conditions SABIC performs well, generating strong levels of cash.    

 

SABIC’s success rests on its ability to access cost competitive gas and oil and to continue supplying high growth markets such as China more cheaply than other low cost local producers.          

 

Higher oil prices had increased SABIC’s cost advantage on its ethane-based production to around $450/tonne of ethylene against marginal capacity in Europe, Asia and the US, the report added.

 

“Investors are concerned that margins will decline to levels seen in previous cycles, but higher oil and gas prices in the US add $150/tonne of ethylene to the breakeven costs of marginal producers, a figure which goes straight to the operating margin of industry leaders, notably SABIC,” Hutton added.

 

HSBC’s report also said the industry was now facing radical change with leading companies experiencing higher margins going forward and a shorter downturn in the cycle.

 

Marginal ethylene crackers in the US are unlikely to benefit from the prediction as plants had an average age of 28 years.

 

Depreciation of assets and stricter environmental standards would force US operators to exit the market compared with producing at a loss, the report added.

 

 

SABIC	Adjusted	HSBC estimate	HSBC estimate	HSBC estimate
Year to	12/2006a	12/2007e	12/2008e	12/2009e
Revenue	85,527	89,965	84,162	79,502
EBITDA	37,179	39,717	34,385	25,566
Operating profit	31,063	32,698	27,802	17,767
Net profit	20,319	20,678	17,537	11,004

 

Source: HSBC

By: Matt Kovac
+65 6780 4359

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