HSBC What Price is Right

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Wh

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By Sriharsha Pappu and Tareq Alarifi

Feedstock pricing changes likely to be announced in 2011. We expect this decision to be

influenced by a combination of both economic and policy factors, and we forecast a phased

increase that does not fundamentally alter the competitive position of the industry

The impact on margins from these feedstock price increases is highest for companies with the

biggest cost advantages (eg SAFCO), while those with lower cost advantages and margins

(eg SABIC) are least affected. The increase in HSBC's energy price forecasts however, outweighs

the impact of higher feedstock costs

Yet despite generally raising our target prices, we are cautious on the sector for 2011 given

recent strong performance, elevated expectations and high valuations. Our top picks in the

sector are Tasnee (OW(V), TPSAR44), Yansab (OW(V), TP SAR65) and SABIC (OW(V), TP SAR130).

We downgrade Petrochem (TP SAR25) and Sahara (TP SAR25) to N(V) from OW(V) and

Industries Qatar (TP QAR135) to UW from N

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Natu

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Sriharsha Pappu*

Analyst

HSBC Bank Middle East Limited, Dubai

+971 4423 6924

[email protected]

Sriharsha rejoined HSBC's chemical research team in 2009 after spending one and a half years covering the chemical sector on the

buyside at Dubai Group. Prior to that he was a part of HSBC's US chemicals research team from 2005 to 2008 and has been covering

chemicals on the sell side since 2004. Sriharsha holds a Bachelors degree in Electronics Engineering and an MBA from the Indian

Institute of Management. He was ranked No 3 in MENA in the 2010 Pan European Sell side Extel survey.

Jan

uary

2011

What price is right?Re-evaluating the feedstock price environment

Natural Resources & Energy/Middle East Chemicals - Equity

January 2011

Tareq Alarifi*

Analyst

HSBC Saudi Arabia Limited

+966 1299 2105

[email protected]

Tareq is a cross-sector equity analyst based in Riyadh. He joined the research team in 2008, prior to that he worked as a buy-side analyst

with HSBC. Tareq holds a bachelors degree in Biomedical Sciences from the State University of New York, and an MBA-Finance from

Rochester, New York.

110121_28253 DUB-Saudi Petchems - Sriharsha Pappu_F1:Layout 1 1/22/2011 12:50 AM

1

Natural Resources and Energy Middle East Chemicals January 2011

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The feedstock pricing question Pricing revision – topical in 2011

In the wake of constrained gas supply, multiple competing uses and a burgeoning cost advantage, there

are serious questions being raised about the feasibility of continuing with the current gas pricing regime

within Saudi Arabia. The view gaining traction among industry participants is that some form of

modification to the pricing framework is required both as an incentive for companies to provide new gas

supply and to ensure a more efficient distribution of limited gas resources. This discussion is particularly

relevant today as some of the feedstock formulae – particularly for liquids – run only until 2011, which

means a new pricing benchmark, at least for liquids, will need to be approved before the end of the year.

We believe that a new gas pricing framework will be approved at the same time, and therefore that a

change in the feedstock price environment is imminent.

A combination of economics and policy

In our opinion, any change to the feedstock pricing regime will be driven by a combination of economic

and policy factors. The economic argument based on incentives for supply growth, efficient allocation of

scarce resources and demand rationalisation would call for Saudi gas prices to reflect global levels of

USD4-5/mmbtu vs. the current price of USD0.75/mmbtu. However, an increase of this magnitude would

deliver a significant economic blow to the industry which would run counter to the key policy objective

of driving downstream chemical investment and generating employment.

We believe that policymakers will work to ensure that feedstock price increases take place in a manner so

as not to shock the industry or dramatically alter its competitive dynamic. We also believe that policy

makers will be just as conservative with their underlying energy price assumptions while assessing the

competitiveness of the petrochemical industry as they are while setting their annual budgets.

We are raising our estimates for Saudi gas and ethane equivalent prices from the current USD0.75/mmbtu to

USD2.0/mmbtu by 2015. We expect that this increase will take place in a phased manner, with prices rising

first to USD1.25/mmbtu by 2012 and in a staged manner thereafter (see table below). We also assume that the

liquids discount will decline by 1ppt each year from the current 28% before being fixed at 25% by 2014.

Summary

We expect to see a change in the feedstock pricing regime in 2011. We believe this will be influenced by a combination of both economic and policy factors and we are factoring in a phased increase in prices that does not fundamentally alter the competitive position of the industry. The increase in HSBC's energy price forecasts however, outweighs the impact of higher feedstock costs.

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In terms of margins, the rule of thumb is that companies with the biggest cost advantages and the highest

margins (eg SAFCO) are impacted more by an increase in feedstock prices than companies with lower

cost advantages and margins (eg SABIC). Our oil and gas team has increased its energy price forecasts

for 2011-15 by around 10% which has resulted in an increase in our product pricing estimates. In most

cases, the impact from higher product pricing outweighs the impact of higher feedstock costs.

Sector investment thesis Peak conditions to return by 2013/14, market likely to remain balanced in 2011

Rising emerging market demand and limited supply growth will create an environment of higher capacity

utilisation rates. Based on our supply assumptions and HSBC Economics global economic growth

forecasts, we expect to see a return to peak conditions (utilisation rates of over 90%) within the

commodity chemical sector by 2013/14.

However, while we are bullish on the sector in the medium term, we believe that in the near term supply growth in

2011 could potentially come in above expectations. We expect incremental supply from existing plants to match

demand growth for the year as improving macroeconomic conditions ease some of the bottlenecks (in terms of

feedstock supply) that resulted in a tight market in 2010. This should be particularly true for European cracker

operating rates, which are tied to operating rates at refineries in the region. An improving macro environment in

Europe should lead to higher ethylene supply on greater naphtha availability from refineries.

Furthermore, higher oil-product demand and higher oil prices could lead to an increase in OPEC

production quotas which would make more associated gas available, particularly in Saudi Arabia, and

result in an incremental increase in operating rates at newer crackers – which we estimate are currently

running on average at 80% – owing to feedstock supply constraints. In both these cases, incremental

supply would materialise from existing capacity only if demand growth continued to be strong and hence

should not result in a big dip in utilisation rates due to an oversupply situation. However, this incremental

supply would, in the short term, prevent a sharp rise in utilisation rates. We forecast ethylene utilisation

rates to improve by only 70bps in 2011 over 2010 levels.

Cautious on sector performance in 2011

We believe that after two years of exceptional stock market performance from the Middle East chemical

sector with stocks on average up 47% in 2009 and 24% in 2010, it is time to take a more cautious view on

the sector in 2011. Our cautious stance on performance is based on by high valuations and elevated

consensus expectations. Middle East chemical sector valuations are now above mid-cycle levels, with

stocks trading on average on a 15.6x forward PE versus the historical sector median forward multiple of

14x. While fundamentals are healthy, these appear to be already factored into share prices and we think it

it is unlikely that in 2011 the sector will generate the same level of returns seen in 2009/10.

HSBC Saudi feedstock pricing assumptions

2011e 2012e 2013e 2014e 2015e

Gas price (USD/mmbtu), New 0.75 1.25 1.50 2.00 2.00 Gas price (USD/mmbtu), Old 0.75 0.75 0.75 0.75 0.75 % Propane Discount, New 28% 27% 26% 25% 25% % Propane Discount, Old 28% 28% 28% 28% 28%

Source: HSBC estimates

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Consensus expectations for chemical company earnings in 2011 also fully reflect the recovery in

fundamentals in our opinion. Sector outperformance will require reported earnings to beat estimates

significantly, which we believe they will struggle to do given that current 2011 EPS consensus estimates

for the Middle East chemicals sector are on average 45% higher than they were a year ago.

We prefer stocks with structural pricing drivers – Tasnee and Yansab

Our favoured plays within the Middle East petrochemical sector for 2011 are Tasnee, Yansab and

SABIC. Tasnee and Yansab have strong price momentum within important product chains (TiO2 for

Tasnee and MEG for Yansab) which is being driven by structural factors.

SABIC has significant operating leverage to improving fundamentals at its acquired GE Plastics business.

The business at its peak had EBITDA of USD1bn, and we expect a return to close to peak profitability by

the end of 2011from levels of cUSD200m in EBITDA in 2010e. SABIC also has volume leverage from

the expected commercial start up of Kayan towards H2 2011. Kayan is by far the single largest plant

SABIC has ever built and should drive revenue and profit growth y-o-y for SABIC in 2011.

For Tasnee, we believe that the TiO2 market will remain undersupplied well into 2012 given the lead

times for adding new capacity. We therefore predict 12-18 months of strong pricing power within the

TiO2 segment. This segment constitutes 35% of Tasnee’s earnings and will be a key contributor to the

company’s earnings in 2011. For more details, see our 1 November 2010 report on Tasnee, Painting a

stronger picture.

Yansab is a key beneficiary of the record levels of cotton prices – cotton and polyester are both used in

the textile industry and large price differences between the two often provide a catalyst for substitution.

The current price delta between cotton and polyester fibre stands at USD1,780/tonne – over 5.2x the

average of the differential between 2000 and 2009 which should spur greater polyester demand. This

substitution demand drives pricing for the raw materials used to make polyester such as paraxylene and

Mono Ethylene Glycol (MEG). Yansab has the strongest leverage to rising MEG prices among our

coverage and is our preferred play on this theme of strong cotton prices and interfibre substitution.

Downgrading Petrochem and Sahara to N(V) from OW(V); Industries Qatar to UW from N

We downgrade Petrochem to Neutral (V) from Overweight (V) on account of the stock’s strong

performance since the start of 2010 (up 50%) and limited upside from current levels to our target price

(7%), which we maintain at SAR25. The valuation disconnect between SIIG and Petrochem, flagged in

our April 2010 note Shifting into focus, which was the primary driver for our buy case on Petrochem has

also now closed making us less positive on the stock.

We are downgrading Sahara to Neutral (V) from Overweight (V) on disappointing execution of the Al Waha

project, which has resulted in our target price being cut to SAR25 from SAR30. We had initially factored in a

Q2 2010 start-up for the Al Waha polypropylene plant but the company has repeatedly pushed back the

commercial start-up date for the plant, with the most recent date given being the end of Q1 2011. Al Waha now

accounts for c40% of our valuation for Sahara as the repeated delays coupled with continued start up risks have

resulted in an assumption of lower operating rates and value for the asset.

We also downgrade Industries Qatar (IQ) from Neutral (V) to Underweight (V) on valuation grounds, despite

increasing our target price to QAR135 from QAR110. The stock has rallied sharply in the last six months and

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is up more than 40% since the start of H2 2010. This rally is partly explained by stronger fundamentals for IQ’s

products – fertilisers and petrochemicals – and partly by a stronger macro environment for Qatar, including the

award of the 2022 Fifa World Cup. We believe that all of these factors are more than adequately priced into the

stock and that the risks to the current share price are to the downside.

In addition to these three ratings changes, we have also made some adjustments to our target prices for

much of the rest of our coverage. These changes have been driven by: changes to our product pricing

estimates and crude price assumptions; changes to our feedstock pricing assumptions; rolling forward our

DCF’s to a 2011 start date; and changes to our cost of equity to reflect the new HSBC Strategy team

assumptions for the risk free rate and country risk premium. The changes to our ratings and target prices

are summarised in the table below.

MENA Petrochemicals valuation table

Company Ticker Rating Target Price (LC)

Current Price (LC)

Potential Return

Market Cap

(USD m)

EV (USD m)

6M avg. traded value

_______P/E _______ ___ EV/EBITDA ____ Dividend Yield

(USDm) 2011e 2012e 2011e 2012e 2011e

APC 2330.SE Neutral (V) 30.0 26.70 12% 1,008 1,313 11.4 10.3 10.3 7.4 6.9 5.6%IQ IQCD.QA Underweight 135.0 153.00 -12% 23,108 22,553 12.3 13.6 12.1 11.4 10.0 3.7%Chemanol 2001.SE Neutral (V) 17.0 15.15 12% 488 777 9.9 15.1 12.2 7.8 6.9 3.3%NIC (Tasnee) 2060.SE Overweight (V) 44.0 33.50 31% 4,532 7,709 16.5 9.1 9.3 5.7 5.9 5.5%Petrochem 2002.SE Neutral (V) 25.0 23.35 7% 2,992 5,829 12.5 18.3 9.6 0.0%Sahara 2260.SE Neutral (V) 25.0 22.30 12% 1,742 2,247 6.6 12.5 13.2 24.8 11.8 4.0%SAFCO 2020.SE Neutral (V) 190.0 180.50 5% 12,048 11,049 7.8 14.2 15.1 12.4 13.2 6.4%SABIC 2010.SE Overweight (V) 130.0 107.25 21% 85,898 85,898 126.0 12.0 10.1 5.9 5.2 4.1%SIIG 2250.SE Neutral (V) 25.0 22.20 13% 2,667 5,916 5.2 21.6 9.4 32.2 7.0 0.0%Sipchem 2310.SE Neutral (V) 29.0 25.80 12% 2,296 3,275 8.6 16.1 16.4 7.9 7.6 1.5%Kayan 2350.SE Neutral (V) 22.0 19.25 14% 7,709 15,674 44.9 36.3 14.0 20.7 9.2 0.8%Yansab 2290.SE Overweight (V) 65.0 46.30 40% 6,953 10,051 27.9 10.3 8.9 8.9 7.5 2.9%Average 15.6 12.4 13.2 8.4 3.1%Median 13.6 12.2 8.9 7.5 3.4%

Note: * IQ in QAR, all else in SAR, Data as of market close on 19 Jan 2011

Source: Thomson Reuters DataStream, HSBC estimates

HSBC Middle East Chemicals: changes to ratings and target prices

Company Ticker _____________ Rating _____________ ________Target Price _______ Old New Old New

Advanced Petrochemical Company 2330.SE Neutral (V) Neutral (V) 30 30 Industries Qatar* IQCD.QA Neutral Underweight 110 135 Methanol Chemicals (Chemanol) 2001.SE Neutral (V) Neutral (V) 14 17 National Industrialisation (Tasnee) 2060.SE Overweight (V) Overweight (V) 40 44 National Petrochemical (Petrochem) 2002.SE Overweight (V) Neutral (V) 25 25 Sahara Petrochemical 2260.SE Overweight (V) Neutral (V) 30 25 Saudi Arabian Fertiliser Co (SAFCO) 2020.SE Neutral (V) Neutral (V) 135 190 SABIC 2010.SE Overweight (V) Overweight (V) 110 130 SIIG 2250.SE Neutral (V) Neutral (V) 19 25 Sipchem 2310.SE Neutral (V) Neutral (V) 30 29 Saudi Kayan 2350.SE Neutral (V) Neutral (V) 18 22 Yansab 2290.SE Overweight (V) Overweight (V) 65 65

*IQ in QAR, all others in SAR Source: HSBC

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Sector view – 2011 6

Feedstock pricing today 10

Feedstock pricing tomorrow 18

Impact on product pricing and margins 26

SABIC 34

Yansab 37

Tasnee 40

Sahara Petrochemical Co. 43

National Petrochemical Company (Petrochem) 46

Advanced Petrochemical Company (APC) 49

Chemanol 52

Sipchem 55

Industries Qatar 58

Saudi Fertiliser Company (SAFCO) 61

SIIG 64

Saudi Kayan 67

Disclosure appendix 73

Disclaimer 76

Contents

We acknowledge the assistance of Mohit Kapoor in the preparation of this report.

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Mid-cycle: trough behind, peak ahead The cyclical trough witnessed in late 2008 and

early 2009 is now well behind us with demand

having recovered during 2010, partly led by

restocking. The big question for 2011 and

thereafter is whether the recovery gains

momentum towards cyclical peak conditions or

whether it stalls, leading to a lower demand

growth, mid-cycle margin environment.

The view from chemical company management

teams, particularly after the Q3 2010 earnings

season, was that a robust recovery driven by

emerging market demand strength was in place

and would continue through 2011. This view was

reiterated by SABIC, Tasnee and Industries Qatar

on our recent investor trip in December.

The key takeaway from the trip for us was that

industry participants seemed to be the most

optimistic they have been for the best part of three

years. This bullish sentiment was based on robust

current demand, strong order books, expectations

of continued emerging market demand growth

outweighing weak developed market demand and

limited supply growth on the horizon.

Furthermore, the view was that chain inventories

are still well below pre-crisis levels which should

allow companies to push through any increases in

raw material prices. We expect to see this

environment of strong demand and limited supply

result in an increase in utilisation rates and a

return to a cyclical peak margin environment by

2013-14.

Long-term supply outlook favourable

After accounting for over 40% of global supply

additions over 2008-11, the Middle East has very

little to contribute in terms of new supply after

2011 (see chart at the top of the next page).

There are no new ethylene crackers planned in

Saudi Arabia between 2012 and 2015, and the

Dow-Aramco project is only tentatively set for

2016. Abu Dhabi, Qatar and Kuwait, which make

up the rest of the GCC petrochemical universe,

are contributing one additional cracker between

them in 2014. Iran, which has the potential to add

more supply, faces tremendous challenges from

economic sanctions and is unlikely to add

capacity in the medium term.

The lack of new Middle East supply is based on a

combination of factors: the limited availability of

cheap feedstock, the push towards downstream,

employment-generating industries and

diversification.

Sector view – 2011

Limited new capacity, robust emerging market demand to drive a

return to peak operating rates by 2013-14

However, market likely to remain balanced in the near term

We forecast a mid-cycle margin environment through 2011

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The only other region to add capacity apart from the

Middle East over the last decade has been Asia. We

do not see significant risks from current capacity

additions in Asia, particularly China. Based on the

latest directive from the National Development and

Reform Commission (NDRC) on domestic refining

and the chemicals sector for China’s 12th five-year

plan (2011-15), we believe the country will

continue to focus on increasing the average

production size of local refinery and chemical plants

while shutting outmoded capacity and thus

preventing overcapacity. For more details on

Chinese capacity addition plans please refer to our

Asian chemical team’s report from September 2010,

Asia Refining and Petrochemicals: Refining to hit

sweet spot in 2011-12.

Stronger demand, limited supply to drive next peak by 2013-14

Rising emerging market demand and limited

supply growth will create an environment of

higher capacity utilisation rates. As utilisation

rates increase pricing power starts to shift back to

producers; operating rates of over 90% are

considered peak conditions for the industry. Based

on our supply assumptions and HSBC Economics'

global economic growth forecasts, we expect to

see a return to peak conditions within the

commodity chemical sector by 2013-14 (see chart

at the top of the next page).

Talk of ‘supercycle’ premature, in our opinion

The limited visibility on any new supply in the

medium term has started to prompt talk in

investor circles of a potential “supercycle” in the

chemical sector. The idea being touted is that

feedstock availability concerns pose an

insurmountable obstacle to any meaningful supply

growth while rising emerging market demand

growth will continue to increase operating rates,

resulting in a multiyear period of high margins.

While we believe in a stronger fundamental

picture for the sector in the medium term, we are

not quite in the ‘super-cycle’ camp yet, for a

couple of reasons.

Firstly, we are barely 18 months removed from

one of the worst industry troughs in living

memory. Developed market demand for

commodity chemicals is still well below the levels

Middle East ethylene supply update Ethylene capacity adds (000 tons) Location Country 2008 2009 2010 2011 2012 2013 2014

Middle EastArya Sasol Bandar Assaluyeh Iran 940Gachsaran PC Gachsaran Iran 500 500Ilam PC Ilam Iran 458Jam PC Bandar Assaluyeh Iran 990 330Kavyan PC Bandar Assaluyeh Iran 1000Morvarid PC Bandar Assaluyeh Iran 500TKOC Shuaiba Kuwait 106 744QAPCO Umm Said Qatar 95QP/Exxon Mobil Ras Laffan Qatar 325RLOC Ras Laffan Qatar 975 325Jubail ChevPhill Al Jubail Saudi Arabia 150 150Kayan Al Jubail Saudi Arabia 325 1000Petro-Rabigh Rabigh Saudi Arabia 975 325Saudi Polymers Al Jubail Saudi Arabia 600 600SEPC Al Jubail Saudi Arabia 450 550SHARQ Al Jubail Saudi Arabia 100 1100Yansab Yanbu Saudi Arabia 867 433Borouge II Ruwais Abu Dhabi 700 700Borouge III Ruwais Abu Dhabi 750Total Middle Eastern Incremental Capacity adds 2731 3716 4358 3083 1100 500 2075

Completed and fully operationalCompleted and ramping upDoubtfulIncremental between now and 2014

Source: CMAI, HSBC estimates

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of 2007 with some major end markets, such as US

autos and US housing, still at a fraction of their

peak activity levels. While emerging market

demand remains robust, developed markets still

account for 60% of the commodity chemical

market by volume, and a sustained multiyear peak

is unlikely as long as developed markets continue

to drag, in our opinion.

Secondly, for a commodity sector with widely

diffused technology, multiyear peaks driven by

supply limitations often prove to be a mirage.

Once margins reach reinvestment levels, the

sector has a way of attracting new investment in

supply that leads to a balancing of operating rates.

A sustained period of higher margins would make

naphtha cracking attractive in the Middle East and

lead to a push for heavy feed crackers in the

region which would balance supply and demand.

To sum up our medium-term sector view in a

sentence: we are bullish on the chemical cycle,

but we are not super-cycle bulls.

Market to remain in balance in 2011 as incremental supply likely

While we are bullish on the sector in the medium

term, we believe that in the near term supply

growth could potentially come in above

expectations in 2011. We expect incremental

supply from existing plants to match demand

growth for the year as improving macroeconomic

conditions ease some of the feedstock supply

bottlenecks that resulted in a tight market in 2010.

This is particularly true of European cracker

operating rates which are tied to operating rates at

refineries in the region. As the chart at the top of

the next page illustrates, ethylene availability

from European naphtha-based crackers dropped

20% below 2007 peak levels as a result of reduced

naphtha supply. An improving macro

environment in Europe would lead to higher

ethylene supply due to greater naphtha availability

from refining.

Furthermore, higher oil-product demand and

higher oil prices could lead to an increase in

OPEC production quotas which would make more

associated gas available, particularly in Saudi

Arabia, and result in an incremental increase in

operating rates at newer crackers – which we

estimate are currently running on average at 80%

owing to feedstock supply constraints.

In both these cases, incremental supply would

materialise from existing capacity only if demand

growth continued to be strong. Therefore it should

HSBC: Ethylene operating rate outlook

88 .9%

8 7 . 0%

8 3 .4 %

84 .1%

8 5 . 3%

8 8 .0 %

90 .0%

8 1 .0 %

8 3 .0 %

8 5 .0 %

8 7 .0 %

8 9 .0 %

9 1 .0 %

20 08 2 00 9 2 0 10 2 01 1E 2 01 2 E 2 0 13 E 2 01 4E

Ope

ratin

g ra

tes

(%

)

HS BC Eth y le ne o pe r a tin g r a tes


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not result in a big dip in utilisation rates.

However, this incremental supply would prevent a

sharp rise in utilisation rates in the short term. We

forecast ethylene utilisation rates to improve by

only 70bps in 2011 over 2010 levels.

Cautious on chemical sector for 2011

We believe that after two years of exceptional

stock market performance from the Middle East

chemical sector, with stocks on average up 47% in

2009 and 24% in 2010, it is time to take a more

cautious view on the sector in 2011.

Our cautious stance is driven by two main

considerations: current market valuations and

consensus forecasts, and the outlook for supply in

2011.

Valuations and expectations

Middle East chemical sector valuations are now

above mid-cycle levels, with stocks trading on

average on a 15.6x forward PE vs. the historical

sector median forward multiple of 14x. While

fundamentals are healthy, these appear to be

already factored into share prices.

Consensus expectations for chemical company

earnings in 2011 also fully reflect the recovery in

fundamentals, in our opinion. Sector

outperformance will require reported earnings to

beat estimates significantly, which we believe

they will struggle to do given that current 2011

EPS consensus estimates for the Middle East

chemicals sector are on average 45% higher than

they were a year ago.

With supply also likely to surprise on the upside -

as production bottlenecks ease as discussed earlier

- we therefore think it unlikely that 2009-10 sector

stock performance will be repeated in 2011.

Western European cracker operating rates Saudi: new cracker operating rates in Q3 2010

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

WE ethylene supply from naphtha WE ethylene utilization rates

81% 81%

93%

75%

60%

65%

70%

75%

80%

85%

90%

95%

Yansab Sharq SEPC PetrorabighO

pera

ting

Rate

(%)

81% 81%

93%

75%

60%

65%

70%

75%

80%

85%

90%

95%

Yansab Sharq SEPC PetrorabighO

pera

ting

Rate

(%)

Source: CMAI, HSBC Source: HSBC estimates

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Current pricing regime Evolution of Saudi feedstock prices

The Saudi petrochemical industry was established in

an effort to diversify away from oil production by

taking advantage of associated gas production. The

associated gas was at that time being flared which

posed a challenge in terms of devising a pricing

mechanism for the gas. The basic framework used to

determine a gas price for the petrochemical industry

was to use an opportunity cost based pricing system

that accounted for the stranded nature of the gas. Gas

was stranded for two reasons: the absence of a

pipeline network to export the gas regionally and

unviable liquefaction economics at the time that

prevented LNG exports

A word about Saudi liquefaction economics

The major challenge presented by liquefaction at

the time was an unattractive return on capital

profile as the large capital investment required for

establishing an LNG industry would not have

been justified given the level of gas production

and its link to crude output. The historical capital

costs for LNG in the mid 1970s were around

USD1,500 per tonne of capacity, which on our

estimates would have translated into a USD18bn

investment to liquefy all of Saudi Arabia's

associated gas production.

Saudi Arabia’s annual gas output in 1975

(including flared gas) was 752 billion scfy which

would translate into c13 million tonnes of LNG

per annum on our estimates. Under the

assumption that gas production remained constant

and that all the gas was liquefied, LNG exports

would have generated USD1.9bn pa in revenues

at 1975 prices. Not only would this constitute a

low return on a capital investment of USD18bn,

but it would also have equated to only 6.7% of

Saudi oil revenue in 1975.

Feedstock pricing today

Low opportunity costs and industrialisation objectives shaped the

current pricing regime

Cost advantage spiralled as energy price environment underwent

a secular shift

Increased advantage, competing needs for gas placing upward

pressure on pricing

Current GCC feedstock pricing

Country Pricing regime (USD/mmbtu) Implied cost of ethane (USD/tonne)

Saudi 0.75 47 UAE 2.0 to 2.5 142 Kuwait 2.0 to 3.0 174 Qatar 1.5 to 2.5 126


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In reality, gas revenues would have been even lower

than in our calculation, since in practice not all of the

gas could have been channelled to an LNG facility,

given the lack of a gas pipeline network at the time.

And contrary to the assumption in our estimate, oil

production in Saudi Arabia did not remain stable,

falling by more than 50% at one point in the mid

1980s (see chart below) which would have

constrained gas supply to any linked LNG facility.

The lack of a pipeline and unstable supply meant

that monetising the stranded gas through the

export route was unviable and that using the gas

for domestic purposes was considered instead –

principally to fuel electricity generation and to

develop the petrochemicals industry

Petrochemicals

Apart from being a use for stranded natural gas, the

development of the petrochemical industry was also

driven by the need to diversify the local economy

away from dependence on crude oil and to provide

an industrial base. The first set of petrochemical

products were methane based – ammonia, urea and

methanol – these being the simplest of all

commodity chemicals. The next step in utilising the

stranded gas was to exploit the ethane content of the

gas by setting up ethylene production facilities and

moving into basic plastics.

Electricity

The logic behind using gas for power generation

was straightforward. At the time, Saudi Arabia

generated much of its electricity by burning heavy

Saudi Arabia: oil revenues vs. potential LNG revenues

0

50 ,00 0

100 ,00 0

150 ,00 0

200 ,00 0

250 ,00 0

300 ,00 0

350 ,00 0

19 75 19 77 197 9 1 981 19 83 19 85 198 7 1 989 19 91 19 93 199 5 1 997 19 99 20 01 200 3 2 005 20 07 20 09

0 .0%

5 .0%

1 0.0 %

1 5.0 %

2 0.0 %

2 5.0 %

3 0.0 %

3 5.0 %

4 0.0 %

4 5.0 %

5 0.0 %

Saudi O il r eve nue (USDmn) Po tent ial Saud i LNG reve nu e as % of o il

Source: Saudi Aramco

Trends in Saudi gas and oil production Domestic use of natural gas

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

1975

1979

1983

1987

1991

1995

1999

2003

2007

Saudi Oil Production (Mboe pa) Saudi Gas Production (Mboe pa)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Gas consumption- public (Mboe) Power Generation Capacity (MW) Source: SAMA Source: SAMA

12


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oil, which detracted from the amount of oil

available for export. Substituting stranded natural

gas for some of that oil, which was then exported,

was the most appropriate use of both the gas and

the heavy oil.

Master Gas System (MGS)

Once the decision was made to utilise the stranded

associated natural gas for domestic consumption,

there still remained two open questions: how to

deliver the gas from the oil fields to the

consumption centres on the coast, and what price

to charge for the gas. The answer to both of these

questions lay in the development of the Saudi

Master Gas System (MGS), a network of

pipelines linking gas produced at the oil fields to

various end users across the Kingdom designed to

provide Saudi Arabia with natural gas as a

commercial resource.

The MGS was developed in the late 1970s in an

effort by Aramco to recover associated gas

produced at the oilfields, process it and supply the

country with dry and liquid gases. The idea was to

feed the gas to the two main industrial cities that

were being developed concurrently: Jubail on the

eastern coast and Yanbu on the western coast.

The system was initially designed to process up to

3.5 billion scfd of gas, of which 2 billion scfd was

methane, primarily used as fuel for utilities and as

a feedstock for methanol and fertilisers. The

system was also designed to process 370 million

scfd of ethane as well as natural gas liquids

(NGL) which were to be used as petrochemical

feedstock.

The MGS (see chart below) is one of the largest

of its kind in the world and includes more than 65

gas/oil separation plants located at various oil

fields. Five gas processing plants separate out

methane gas which is then supplied by a 2,400km

pipe network that includes an east-west pipeline

running across the breadth of Saudi Arabia to

power plants, refineries, fertiliser plants, methanol

plants, and steel plants in the two industrial cities.

The system also includes two gas fractionation

plants that separate ethane, propane, butane and

natural gas liquids (NGLs) from the raw gas.

Ethane is then supplied to petrochemical plants in

Jubail and Yanbu. LPGs and NGLs are currently

used internally by the petrochemicals industry,

however at the time that the MGS was built, these

feedstocks were mostly exported.

In its early stages of implementation, the MGS

was used to power the entire energy requirements

of the east coast as well as a few desalination

plants along with multiple industrial projects. The

establishment of the MGS also resulted in several

international oil & gas companies setting up joint

venture projects in Saudi, mainly in the

petrochemical arena, to take advantage of the

availability, and relative inexpensiveness, of

feedstock at the newly inaugurated industrial

cities of Jubail and Yanbu.

Gas pricing and the MGS

Gas volume processed initially 3,500 mmscfd Heat content of delivered gas 35,00,000 mmbtu Gas price 0.5 USD/mmbtu Annual gas revenues 639 USD mn Initial investment in the MGS 12,000 USD mn Gas prices raised to fund expansion Expanded capacity 2,500 mmscfd Heat content of delivered gas 25,00,000 mmbtu Gas price increase 0.25 USD/mmbtu Incremental revenue from price increase 548 USD mn Cost of expansion 7,500 USD mn

Source: Saudi Aramco, HSBC

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The first MGS phase began operations in 1982

and was entirely dependent on associated gas

supply from the oil fields. This coincided with a

peak in Saudi oil production at the time and when

Saudi Arabia’s oil production dropped by over

50% to a low of 2.5mbpd in 1985 this resulted in

lower gas availability within the new system.

Power outages and shortages in feedstock supply

to the petrochemical sector followed, with

Aramco then deciding on supplementing the

system with the little non-associated gas supply it

had at the time.

The logic behind existing gas pricing

The cost associated with setting up the MGS

provided the first data points for establishing a gas

price given the lack of economically viable

alternate markets for the gas. Aramco needed to

charge end users a rate for the gas that would at

least provide some return on capital given the large

investment cost associated with the project. Based

on the capital invested and the amount of gas

processed, a price of USD0.5/mmbtu was deemed

appropriate at the time. The link between the MGS

and gas prices is further highlighted when one

considers the fact that the only time that gas prices

have been raised in the Kingdom (in 1998 from

USD0.5 to USD0.75/mmbtu) was when Aramco

decided to spend USD7.5bn on upgrading the MGS

and increasing its processing capacity.

Surge in petrochemical investment

The availability of feedstock, not so much its pricing

at the time, spurred investment in the basic

petrochemical industry in the region. The largest

investments came in Saudi Arabia which, given its

oil production, obviously had the most amount of

associated gas available. Saudi took the first step in

jumpstarting the regional sector by establishing the

Saudi Basic Industries Corp. (SABIC).

Saudi Master Gas System in 2011

RED SEA

JEDDAH

SAUDI ARABIAYanbu Indus trial City

Jubail Industrial City

YANBU

JU’AYMAH

BE RRI SHEDGUM

UTHMANIYAH

HAWIY AH

HARADH

NA Gas

NA Ga s

Gas WellNA Gas

RIYADH

Gas We ll

Natural gas pipeline

NGL pipe line

RED SEA

JEDDAH

SAUDI ARABIAYanbu Indus trial City

Jubail Industrial City

YANBU

JU’AYMAH

BE RRI SHEDGUM

UTHMANIYAH

HAWIY AH

HARADH

NA Gas

NA Ga s

Gas WellNA Gas

RIYADH

Gas We ll

Natural gas pipeline

NGL pipe line


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SABIC’s growth was driven by the successful

deployment of the Master Gas System and further

supported by subsidised electricity costs and soft

government loans. These incentives, coupled with

the creation of the industrial cities of Jubail and

Yanbu along with supporting industrial

infrastructure at the two cities. laid the foundation

for SABIC’s success.

Feedstock advantage rising

It was not generally expected in the 1990s that the

Middle East would hold the cost advantage that it

currently does as global energy prices remained

low through the 1990s which meant that

petrochemical investment was made in regions

with the largest markets – the US, developed

Europe – rather than feedstock-rich regions such

as the Gulf.

However, the boom in oil and gas prices over the

past decade increased the cost advantage enjoyed

by the fixed-cost ethane based petrochemical

producers in the Middle East and also drove a

wave of investment in new capacity (see charts at

the top of the page). The new capacity placed

constraints on gas availability at a time when

competing uses for gas started to emerge while

the significant increase in the cost advantage

enjoyed by the petrochemical companies started

to raise questions about a revision to the gas

pricing framework.

Gas pricing – the new normal Competing uses for gas, limited supply growth

The single biggest driver for a change to the

existing gas price regime is the number of

competing uses for what is now a scarce resource.

A return on infrastructure investment model,

which is what the existing USD0.75/mmbtu price

was based on, was acceptable when the MGS was

being built and there were limited uses for the

stranded gas. However, with a massive increase in

gas demand within the region and production

failing to keep pace, a new pricing mechanism is

necessary in order to balance both policy and

economic interests.

This is particularly relevant in light of limited

production growth. While Saudi proven gas

reserves have continued to grow, from 263trn scf

in 2008 to 275trn scf (or 286,200 trn btu) at the

end of 2009, the amount of gas being delivered

has not kept pace with reserve growth. According

to Aramco data sales gas (methane) deliveries

declined by 0.281 trn btu in 2009 and delivered

ethane only increased by 0.092 trn btu in 2009

(see chart at the top of the next page).

One of the key reasons for limited growth in

delivered gas is that, as argued in our note of 26

November 2009, Saudi Infrastructure: Spending for

this generation, Aramco’s highest priority has until

Growth of ethylene capacity in the Middle East (000 tonnes) Saudi capacity vs. ethane cost advantage

----

5,000

10,000

15,000

20,000

25,000

30,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

IranIraqKuwaitQatarKSAUAEMiddle East

----

5,000

10,000

15,000

20,000

25,000

30,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

IranIraqKuwaitQatarKSAUAEMiddle East

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan-1990

Jan-1992

Jan-1994

Jan-1996

Jan-1998

Jan-2000

Jan-2002

Jan-2004

Jan-2006

Jan-2008

Jan-2010

0

200

400

600

800

1,000

1,200

LHS: Saudi Ethylene capacity ('000 ton)US Ethane (USD/Ton)Saudi Ethane (USD/Ton)

Source: CMAI, HSBC Source: CMAI, HSBC

15


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recently been oil-related exploration projects. Given

the lead time between exploration and production

within the oil and gas sector, the lack of focus on gas

in the last decade or so is constraining current

supply. However, this has now changed, with

Aramco increasingly aware of the requirement to

increase gas supply. Aramco has set itself a goal of

discovering 3 to 7 trillion scf of additional non-

associated gas reserves annually.

Another supply constraint is that much of the gas

extracted is a by-product of oil production, despite

the fact that non-associated gas accounts for 75%

of total gas reserves versus 48% in 1990; i.e.

while non-associated gas reserves have grown,

production from those fields has not. Aramco has

again refocused on developing its non-associated

gas production, which is evident from the fact that

currently 50% of all offshore rigs are deployed for

gas production, as opposed to between 20% and

40% in the past.

Moreover there are several sources of competing

demand for this gas, mainly from electricity

generation - which currently uses about 1 billion

to 1.5 billion scfd of gas and 0.9m bpd of oil in

Saudi Arabia - and water desalination which

currently uses 0.5 billion scfd of gas. Aramco

expects total domestic fuel demand to rise from

3.3 million bpd of oil equivalent in 2009 to

approximately 8.3 million bpd of oil equivalent in

2028. To put this in context, Saudi Arabia’s

current production capacity is 13.75 million bpd

of oil equivalent. To rephrase, if demand were to

increase as projected without a concurrent

increase in supply, within two decades over 60%

of Saudi Arabian energy production would go

towards meeting domestic consumption. This

would not only result in a significant revenue loss

for Saudi Arabia, but would also be very bullish

for global energy prices given Saudi Arabia’s

position as a swing producer of crude.

We outline the various calls on Saudi gas

production from the various sectors below.

Power demand

The Saudi Electricity and Cogeneration

Regulatory Authority has said about 0.9 million

barrels of oil are currently used to generate power

every year and, as the authority plans to raise

power capacity from 44.6GW at the end of 2009

to 121GW by 2032, the requirement will increase

to 2.4 million barrels of fuel oil per day – this

excludes the current amount of natural gas used.

Saudi Electricity (SEC) expects power

consumption to increase from 193GWh in 2009 to

251GWh in 2013, similar to our expectations

(please see our note of 9 June Saudi Electricity

Company – N: New tariff plan priced in, next

move key to unlock value) which is equivalent to a

Saudi gas deliveries (bn scf) Saudi Electricity Company: planned capex (SARm)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005 2006 2007 2008 2009

Delivered sales gas Delivered ethane gas

30,000

0

5,000

10,000

15,000

20,000

25,000

2010e 2011e 2012e 2013e 2014e

Generation Transmission and Distribution Replacement Total

30,000

0

5,000

10,000

15,000

20,000

25,000

2010e 2011e 2012e 2013e 2014e0

5,000

10,000

15,000

20,000

25,000

2010e 2011e 2012e 2013e 2014e

GenerationGeneration Transmission and DistributionTransmission and Distribution ReplacementReplacement TotalTotal

Source: Saudi Aramco Source: Corporate reports, HSBC

16


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requirement of another 0.3 million boe per day.

To meet growing consumption, SEC plans to

increase generation capacity by 7GW between

2009 and 2013, with a further 4.5GW coming on

line over 2014 and 2015. We estimate that another

6GW will come on line via Independent Power

Producers (IPPs) and Integrated Independent

Water and Power Projects (IWPPs) by 2015.

At present half of electricity generation comes

from gas, with consumption of electricity set to

increase by c30% by 2013, according to SEC. It is

expected that this will lead to a significant

increase in gas requirement in the kingdom.

Water

Water is a critical issue for the Saudi government.

Domestic water consumption is equivalent to 230

litres per day per person, compared with Europe’s

100-200 litres per day, but is not covered fully by

desalinated water. Production of desalinated water

in 2008 was 1.1bn cubic metres, up 3.4% y-o-y.

The government estimates that demand for

drinking water will increase to about 10m cubic

metres per day over the next 20 years, if the

increase in the daily per capita consumption rate

continues at its current level. A significant

increase in desalination capacity is planned to

meet the higher demand. We estimate that

desalination capacity needs to double over the

next 20 years to cover drinking water needs alone,

and calculate that this would lead to a requirement

for an additional c0.5 billion scfd of gas.

Refining and petrochemicals

Integrated refining projects are a priority for the

government in order to both meet fuel demand and

introduce a more complex set of petrochemical

products that would help create a downstream

chemical industry and spur employment. Introducing

natural gas into the feedstock mix for integrated

refining projects will enhance margins thereby

improving the initial payback and encouraging more

complex petrochemical projects.

We estimate that the refineries due to come on

line will consume around 0.3 billion scfd of gas.

However, until the non-associated gas fields come

online, the majority of non-integrated

petrochemical projects will be delayed

indefinitely, in our view. The key integrated

refining and petrochemical projects that will

require gas supply over the next four to five years

are detailed below.

Saudi Aramco Total refining & petrochemical

company (SATORP): Aramco (62.5% share of

the JV) and Total are building a joint venture

400,0000 bpd refinery at Jubail which could

potentially add an world-scale integrated cracker

complex. Financing for the refinery part of the

project is complete and parts of the project are

under construction.

Yanbu refinery: The proposed Yanbu export

refinery, a 400,000 bpd full-conversion refinery on

the Red Sea coast, is designed to produce refined

products and petrochemicals. ConocoPhillips pulled

out of the venture in April 2010 and Aramco has

since said that it will go it alone if it cannot find a

partner. The refinery is a priority as it is needed to

process the additional heavy crude that is due to

come out of the Manifa oil field.

Aramco/Dow petrochemical project: Aramco and

Dow Chemical were originally planning to build an

integrated petrochemicals complex alongside a

400,000 bpd expansion to the existing 500,000 bpd

Ras Tanura refinery. This was modified in April

2010 when the two companies announced that they

would move the project to Jubail. The cost of the

complex has been reduced from USD20bn initially

to less than USD15bn. It is most likely that the

project will now be fed largely by ethane gas

provided by Aramco and, to a lesser extent, liquid

feedstocks provided by the Jubail refinery.

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Gas exploration – the supply response

State oil companies such as Aramco have started

to respond to the rising demand for gas. For

Aramco, increased production of non-associated

gas is now a priority and new discoveries have

been principally made offshore as the exploration

in Rub al-Khali (the Empty Quarter, onshore) has

continued to disappoint. As a result, more

offshore exploration is under way with Aramco

increasing the number of active offshore rigs to

about 15 in 2009 from just one in 2000,

dedicating USD6bn (or 10% of its capital

investment) to the development of six offshore

facilities over the next five years.

The most significant non-associated gas field to

come online will be the Karan offshore field.

When completed in 2013, the field will be capable

of delivering 1.8 billion scfd of raw gas. Under

the USD1bn Shaybah scheme, Aramco wants to

build a plant to separate the equivalent of 228,000

bpd of natural gas liquids from crude oil produced

at the field.

In addition, under the Wasit scheme, estimated to

cost USD 6bn, Aramco aims to produce 2.5

billion scfd of sulphur-rich gas from the newly

discovered offshore Arabiyah and Hasbah fields

before transporting it to a central processing

facility at Wasit. The plan is to construct seven

offshore wellhead production platforms at the

Hasbah field, which can produce up to 1.3 billion

scfd of gas from the field, and six wellhead

platforms at the Arabiyah field, capable of

producing 1.2 billion scfd.

The scheme also includes six 12-inch flowlines, a

150km pipeline linking the facilities with Wasit, a

150km pipeline between Arabiyah and Wasit, and

a 91km submarine power cable. However, the

lead time required for completing such

developments, and the constraints on production

of oil due to OPEC quotas, will mean gas

production will be limited for the next three years.

Pressure on gas pricing

In the wake of constrained gas supply, multiple

competing uses and a burgeoning cost advantage,

there are now serious questions being raised

regarding the feasibility of continuing with the

current gas pricing regime within Saudi Arabia.

The view gaining traction among industry

participants is that some form of modification to

the pricing framework is required both to provide

an incentive for new gas supply and to ensure a

more efficient distribution of limited gas

resources.

This discussion is particularly relevant at the

current time given that some of the feedstock

contract pricing formulae – particularly for liquids

– run only until 2011, implying that a new pricing

benchmark, at least for liquids will need to be

approved before the end of the year. We believe

that a new gas pricing framework will also be

approved at the same time and so a change in the

overall feedstock price environment is imminent.

However, any such change is unlikely to be driven

by economic factors alone, with policy factors

likely to play just as big a role in the decision. We

outline our thoughts on the potential framework

for a change to the feedstock pricing mechanism

in the next section.

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The economic argument Rising energy prices have increased the cost advantage

When the Saudi petrochemical sector was first

established in the early 1980s, foreign technology

partners for SABIC were attracted to Saudi Arabia

by low cost gas feedstock at a price of

USD0.50/mmbtu. With US natural gas prices in

the USD1-2/mmbtu range at the time the Saudi

gas price, while attractive, was not dramatically

lower than prevailing international prices.

The Saudi gas price was raised once to

USD0.75/mmbtu in 1998 and has since remained

at that level despite there having been a secular

shift in the global energy price environment in

recent years. The chart at the bottom of the page

illustrates this shift. The Saudi cost advantage for

the production of ethylene using pure ethane as

feed has tripled on average over the 2003-10

period compared to its 1990-2003 average, driven

exclusively by changes in global energy prices.

The dramatic increase in the cost advantage enjoyed

by Saudi petrochemical producers is at odds with the

lack of changes to the domestic feedstock pricing

regime over the last twelve years. The economic

argument for an increase in domestic feedstock

prices is therefore twofold: that the current cost

advantage is well in excess of what was implicitly

guaranteed when the industry was established; and

that with rising energy prices having allowed the

Feedstock pricing tomorrow

Economics would suggest a sharp increase to USD4-5/mmbtu

However, policy more than economics will set future feedstock prices

We expect to see a gradual rise in feedstock prices, with fundamental

industry competitiveness unaltered

Saudi ethylene cost advantage vs. Naphtha based producers (1990-2010)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1990 1993 1996 1999 2002 2005 2008 2011

USD

/ton

Saudi ethane cost advantage

1990 to 2003 average USD240/ton


0

200

400

600

800

1000

1200

1400

1600

1800

2000

1990 1993 1996 1999 2002 2005 2008 2011

USD

/ton

Saudi ethane cost advantage




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Saudi petrochemical industry to generate exceptional

profits over the last seven years, some of those

profits now need to be shared with the government

through an increase in feedstock costs.

Higher prices needed to incentivise production growth and limit demand

New sources of gas, higher production costs

With the exception of Qatar, which has large

resources of non-associated gas, the Gulf

Cooperation Council (GCC) countries have

traditionally been reliant on associated gas (a by-

product of crude production) for their gas needs.

The amount of associated gas available, though, is

limited by the amount of crude production, which

in turn is limited by OPEC quotas.

In recent years, as demand for gas from the power,

infrastructure and petrochemical sectors has grown,

oil companies in the region have started to focus

heavily on exploring for non-associated gas. Their

efforts have borne fruit to a certain extent as the

chart at the bottom of the page shows. Gas

production has increased by 50% since the start of

the last decade while crude production has grown by

only 2% over the same period, highlighting that the

bulk of the gas production growth has come from

non-associated gas fields.

As non-associated gas production grows, the

question of gas pricing starts to gain greater

attention. It is one thing to price associated gas at

very low levels because the costs of production –

since it is a by-product – are minimal and this gas

would have been flared if it were not used by the

petrochemical industry. However, when gas is

produced from non-associated fields, the costs of

production and extraction are dramatically higher

than those for associated gas. In addition, there

are now competing uses for gas from the power,

fertiliser, metal and petrochemicals sectors which

render the traditional argument of a lack of

alternative uses void.

Furthermore, there is a strong case to be made that

if this growth in non-associated gas production is

to be maintained, then exploration companies,

particularly the international ones, need sufficient

incentives to invest in exploring for offshore gas

fields. These companies need to see the potential

to generate an adequate return on capital that

compensates them for both discovery, as well as

production, costs. As almost all of this new gas

production will be consumed domestically,

capping domestic gas prices at the current low

levels limits the attractiveness of gas exploration

in the region and therefore constrains potential

supply. The economic argument for raising

GCC ex Qatar: Oil vs. gas production

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(000

bbl

/d)

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

(bcf

/d)

GCC ex Qatar (oil production) GCC ex Qatar (gas production)

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(000

bbl

/d)

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

(bcf

/d)

GCC ex Qatar (oil production) GCC ex Qatar (gas production)

Source: BP World Energy Statistical Review 2010

20


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domestic gas prices therefore is that higher prices

would incentivise new production and allow

supply to keep pace with growing demand.

Lower prices result in uneconomic resource allocation

The other economic argument for higher domestic

gas pricing comes from the demand side. Low gas

prices and consequently low retail electricity

prices mean that there is little incentive for users

to ration their consumption, driving rapid demand

growth as shown in the charts at the top of the

page. Power demand in both Saudi Arabia and

Qatar is expected by MEED to double from

current levels over the next decade.

In the absence of supply growth from non-

associated gas, the incremental increase in power

generation will have to come from burning

heavy/fuel oil to generate electricity. On our

estimates, this would imply an increase in fuel oil

consumption to 2.4m bpd from the current levels

of 0.9m bpd, an incremental loss of 1.5m bpd that

could potentially have been exported and a

potential revenue loss of USD110m per day at

current international market prices.

The low gas prices also create the potential for using

ethane for fuel rather than converting it into higher

value added petrochemicals. Ethane can be burnt for

fuel use and at the current delta between Saudi

ethane prices and global fuel oil prices (see table at

the bottom of the page), ethane is being sold at

roughly one tenth of its heating value equivalent.

Ethane has so far not been used for fuel, given its

value as a petrochemical feedstock. However, if

power generation demand continues to grow at the

projected rate and results in a large fall in revenue

due to lost fuel oil sales, the argument for

replacing some of the heating oil that is consumed

with ethane at a tenth of its price will likely start

to take hold. Raising domestic prices would not

only incentivise new gas supply, freeing up

heating oil for export, it would also make ethane

less attractive as a heating oil substitute resulting

in a more economic resource allocation.

To sum up, the economic rationale would be to

raise feedstock prices to levels in line with global

natural gas prices (USD4-5/mmbtu). This would,

in theory, still provide a degree of cost advantage

to the petrochemical producers relative to crude-

based producers while incentivising new supply

and curtailing runaway demand growth.

GCC ex Qatar: Gas consumption Projected growth in power demand (Saudi and Kuwait)

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gas consumption (bcf/d)

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gas consumption (bcf/d)

40

10.8

85

21

0102030405060708090

Saudi Arabia Kuwait

GW

2010 2020e

40

10.8

85

21

0102030405060708090

Saudi Arabia Kuwait

GW

2010 2020e

Source: BP World Energy Statistical Review 2010 Source: MEED, HSBC

Heating value comparison

Btu/lb Price Units USD/lb price on heating value

Methane 23811 0.75 USD/mmbtu 0.02 Ethane 22198 0.75 USD/mmbtu 0.02 Bunker fuel oil 18000 80.0 USD/bbl 0.24

Source: EIA, HSBC

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The policy response There appears to be widespread agreement

between companies that we cover – SABIC,

Tasnee, Sahara – and Saudi Aramco that

feedstock prices for the chemical sector need to

rise from the current levels. The areas of

disagreement pertain to the quantum and timing of

any potential price increases.

The energy producers such as Aramco argue for

an early increase to levels in line with US gas

prices based on the economic rationale stated

earlier. Chemical industry participants on the

other hand argue in favour of a phased approach

to any pricing increase which would allow the

industry to focus on cost management and raise its

competitiveness over time.

In general, we believe that regional policy makers

are sympathetic to calls for a phased approach to

feedstock price increases for the reasons outlined

below.

Shock treatment not the answer

The table below illustrates the impact on methanol

cash margins of a sudden increase in gas prices

from the current levels of USD0.75/mmbtu to US

gas price levels of USD4.5/mmbtu. As can be

seen, the financial impact is substantial, with cash

margins for methanol being cut almost in half

from over 75% to under 40%. While from a

global chemical industry standpoint cash margins

of roughly 40% are very attractive, the impact of a

halving of margins on the domestic petrochemical

sector would be severe.

Methanol, admittedly, is an extreme example as

the cost curve is not linked to crude and the

margin impact on other crude based

petrochemicals such as ethylene would be much

lower. However, the basic principle still holds – a

sudden increase in gas prices to international

levels would severely impact the profitability of

the industry without giving it time to adjust to the

realities of a new feedstock price regime.

The financial stresses that such a change would

place on industry balance sheets would not be

welcomed by banks and project finance institutions,

which as capital providers and enablers of industry

development had factored a certain degree of

profitability into their forecasts. Furthermore, such a

move would run against the precedent of policy

changes in the region which generally occur in a

gradual manner following a consultative process and

keeping a long-term outlook in mind.

Diversification still essential for job creation

Policy makers in the region have employment

generation as their key long-term objective and

have not lost sight of the fact that industrial

growth is essential to meet that objective.

The challenge of job creation is most acute in Saudi

Arabia. Home of the largest population base in the

GCC, over half of Saudi Arabia’s population of 18.5

million is under 20 years old and only 3 million, or

16% of the population, are in the workforce. Around

2 million Saudis are between the ages of 20 and 24,

and in this age range only 0.5 million are employed,

including expats. Of the 1.8 million Saudis between

the ages of 15 and 19, few have jobs. All this

Cash margin impact of a change in gas prices

Gas prices (USD/mmbtu) 0.75 4.50

Methanol production cash costs incl freight (USD/tonne) 91 230 Methanol prices (USD/tonne) 380 380 Cash margins (USD/tonne) 289 150 Cash margins (%) 76% 39% Change in cash margins -37ppt


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suggests that around 1.7 million jobs must be found

in the next 10 years – more if women are to play a

greater role in the workforce (see charts at the

bottom of the page).

As the region’s primary non-oil industry, the

petrochemical sector is the logical first stop for

employment generation. Commodity chemicals

are primarily export orientated and do not create

enough jobs to make a dent in the region’s

employment statistics. Job intensity rises the

further one moves down the petrochemical chain

and, in order to meet the policy objective, the

regional petrochemical industry needs to make the

move towards downstream chemical businesses.

It would be hard to incentivise chemical

companies to make the move downstream while

simultaneously hurting their competitiveness with

a shock increase in feedstock prices. Saudi

chemical companies have strong balance sheets

and have capital available to invest in emerging

markets such as China and India.

The investment decision for new chemical

capacity invariably boils down to whether to

invest where feedstock competitiveness is secure

(such as the Middle East) or where the market is

secure (China/India). If regional feedstock

competitiveness were greatly reduced by policy

action, chemical companies would likely see no

reason to invest in downstream sectors within the

Middle East, dealing a blow to the key policy

objective of job creation.

Supply incentives need not revolve around price alone

The question of whether to provide incentives for

non-associated gas exploration in order to boost

supply is the most challenging one facing policy

makers. With extraction costs likely to be

substantially higher than current sale prices of

USD0.75/mmbtu, there is no incentive for

companies to explore for gas. As discussed above,

it is unlikely that prices will be raised to levels

that would make gas exploration lucrative,

particularly if one were to factor in exploration

costs as well as development and extraction costs.

However, in our opinion policy makers do have

some tools that allow them to provide supply

incentives without needing to resort to a fully

market-based gas pricing model.

Gas sale terms to National Oil companies

(NOCs) could be on a minimum guaranteed

return on capital basis which would allow

foreign joint venture partners to meet their

hurdle rates while transferring the subsidy

burden to the state.

There could be differential pricing terms and

rights for gas and condensate. The gas could

be sold to the NOC on a fixed price basis

while the foreign JV partner could be given

rights to any condensate that is produced

alongside the gas which could be sold in the

international market. This would effectively

Population growth – CAGR (2002-09) Labour force growth pa (%)

9.0%

4.4%

7.2%8.0%

2.7%3.7%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

UAE Kuwait Qatar Saudi Arabia Average

9.0%

4.4%

7.2%8.0%

2.7%3.7%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%


9.0%

4.4%

7.2%8.0%

2.7%3.7%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%


4.4%

7.2%8.0%

2.7%3.7%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%


0123456789

GCC Bahrain Kuwait Oman Qatar Saudi Arabia

UAE1980-1990 1990-2000 2000-2010

0123456789

GCC Bahrain Kuwait Oman Qatar Saudi Arabia

UAE1980-1990 1990-2000 2000-20101980-1990 1990-2000 2000-2010

Source: Arab Labour Force, HSBC Source: World Bank, HSBC

23


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give the JV partner the lion’s share of market-

priced condensate while the NOC gets the

rights to fixed-priced gas.

Another incentive could be potential

collaboration on downstream petrochemical

projects which allows the E&P partner to benefit

directly from domestic use of the gas found.

Consideration for future exploration acreage,

if other upstream oil opportunities were to

open up, is another potential incentive for

foreign JV partners.

A combination of one or more of these incentives

was offered to the four exploration JVs that

Aramco approved in 2004, with the aim of

increasing domestic natural gas output by

exploring in the Rub al-Khali. While the success

of this exploration effort has been mixed, it does

illustrate that supply incentives do not need to

come from price increases alone.

The compromise solution Phased increase in feedstock prices over several years

We believe that the template for feedstock pricing

increases in the Middle East will be based on the

precedent set with liquid feedstock pricing starting in

2002. The table at the bottom of the page shows the

discount factors applied to liquid feedstocks, such as

propane, butane and light naphtha, and how that

discount has evolved over the last decade.

While liquid feedstock prices have increased by

an average of 700bps between 2002 and 2011, the

increase has been anything but sudden, with the

average annual increase being less than 80bps.

This gradual increase in feedstock prices allows

the industry to wean itself off cheap feedstock

over time while developing operational

experience and competitiveness.

Given the experience with liquid feedstock

pricing, we believe that policy makers will adopt a

similar stance to the pricing of natural gas and

ethane as well.

Industry to remain highly competitive vs. prevailing global gas and crude prices

We started this section by highlighting the sharp

increase in the cost advantage enjoyed by Saudi

petrochemical companies driven by the increase

in global energy prices. It is worth mentioning

that just as the cost advantage increased in line

with rising energy prices, there exists a risk of the

advantage shrinking if there were to be a sharp

decline in energy prices.

We believe that policy makers would want to

insulate the cost advantage enjoyed by the

regional petrochemicals sector from any wild

fluctuations in energy prices. Feedstock prices,

even when raised, would likely only be raised to a

level at which the local industry would remain in

the first quartile of the cost curve even in a worst-

case scenario for global energy prices.

Saudi liquids pricing factors

Year beginning Propane factor Butane factor A 180 factor naphtha

01-Jan-02 0.621 0.655 0.658 01-Jan-03 0.632 0.660 0.666 01-Jan-04 0.643 0.665 0.674 01-Jan-05 0.654 0.670 0.682 01-Jan-06 0.665 0.675 0.690 01-Jan-07 0.676 0.680 0.698 01-Jan-08 0.687 0.685 0.706 01-Jan-09 0.698 0.690 0.714 01-Jan-10 0.709 0.695 0.722 01-Jan-11 0.720 0.700 0.730


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A hint as to what policy makers consider a floor for

energy prices is available in the oil price assumption

used while setting annual budgets. Saudi Arabia, for

example, used an average crude price of USD55/bbl

while setting its budget for 2011. It would be

unlikely that the very same policy makers would

then move to considering the current oil price of

USD90/bbl when examining the issue of feedstock

costs for the petrochemical industry.

The table at the bottom of the page outlines our

approach to calculating potential feedstock price

increases for the petrochemical sector. We believe

that the base oil price used to derive industry

competitiveness will be similar to that used by the

Saudi government to set its budget – USD55/bbl.

At that level of crude prices, the marginal cost of

producing a tonne of ethylene is around

USD700/tonne.

Working back from that marginal cost of ethylene

and backing out variable and other operating costs

for the Middle East we get an implied equivalent raw

material cost for the Middle East of USD500/tonne.

At this stage we assume that in order to keep the

competitiveness of the Middle Eastern industry

intact and its cost position firmly within the first

quartile, policy makers would allow a cost advantage

equivalent to the historical average over the 1990-

2010 period of USD375/tonne.

Adjusting for the allowed cost advantage would

imply Saudi ethane costs of USD101/tonne which,

given the ethane requirements for a tonne of

ethylene, translates to an implied gas price of

USD2.1/mmbtu.

Liquids discount unlikely to drop below 25%

Both gas and liquid feedstocks are priced on an

opportunity cost basis. For stranded gas, that

opportunity cost is very low allowing gas to be

priced at a substantial discount to international

prices. For liquids such as propane and butane

which have liquid international markets, the

discount provided to the domestic industry is not a

subsidy, but is in fact a ‘netback’ equivalent price.

In Saudi, for example, if Aramco were to sell

propane in the international market rather than

supplying it to the domestic sector, its effective

net realised price would be significantly lower

than observed market prices on account of supply

chain costs (such as liquefaction, storage,

shipping, distribution and tariffs).

These chain costs are the justification for the

current c30% discount on liquid feedstock prices.

The current schedule for liquids pricing (see table

on page 25) runs up to 2011. We expect to see a

further decrease in the discount, to 25% over the

Potential Saudi feedstock cost framework

Naphtha consumption 3.46 tonne/tonne

Floor Crude price assumption 55 USD/bbl Naphtha costs 495 USD/tonne Raw material costs 1,716 USD/tonne Co product credits 1390 USD/tonne Variable operating costs 300 USD/tonne Incremental costs 80 USD/tonne Marginal cost of ethylene production at crude price of USD55/bbl 706 USD/tonne Working back to derive a Middle East feedstock price in this context Marginal cost of ethylene production at crude price of USD55/bbl 706 USD/tonne less Middle East variable and incremental costs 200 USD/tonne Implied raw material costs 506 USD/tonne less average cost advantage over 1990-2010 period 375 USD/tonne Implied Saudi ethane costs 131 USD/tonne Ethane requirement for a tonne of ethylene 1.29 tonne/tonne Implied ethane costs per tonne 101.3 USD/tonne Implied ethane [gas?] costs 2.1 USD/mmbtu


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next five years, but believe that given the netback

argument and the fact that the bulk of new Saudi

ethylene capacity has a large proportion of liquids

cracking it is unlikely that the liquids discount

will drop below 25%.

Feedstock pricing forecasts As discussed earlier in the section, we believe that

while there is broad consensus that feedstock

prices in Saudi need to be raised, the decision on

the quantum and timing of the increase will

balance economic considerations with policy

objectives.

While the Saudi government is keen to incentivise

new gas exploration and supply and to ensure

economic resource allocation, it is also cognisant

of the role the Saudi petrochemical industry needs

to play in employment generation. This will likely

be a key consideration driving policymakers to

ensure that feedstock price increases take place in

a phased fashion without shocking the industry or

dramatically altering its competitive dynamic.

We also believe that policy makers will be just as

conservative with their underlying energy price

assumptions when assessing the competitiveness

of the petrochemical industry as they are when

setting the annual budgets. We assess the range of

possible feedstock prices under these constraints

and derive our feedstock pricing framework as

detailed on the previous page.

We raise our forecasts for Saudi gas and ethane

equivalent prices, now factoring in a gradual

increase to USD2.0/mmbtu by 2015, vs a flat

USD0.75/mmbtu previously (see table at the bottom

of the page). We also assume that the liquids

discount will decline by 1ppt each year from the

current 28% before being fixed at 25% in 2014.

HSBC Saudi feedstock pricing assumptions

2011e 2012e 2013e 2014e 2015e

Gas price (USD/mmbtu), New 0.75 1.25 1.50 2.00 2.00 Gas price (USD/mmbtu), Old 0.75 0.75 0.75 0.75 0.75 % Propane Discount, New 28% 27% 26% 25% 25% % Propane Discount, Old 28% 28% 28% 28% 28%


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Feedstock price impact driven by product and feedstock mix The increases to our feedstock pricing estimates,

taken in isolation, result in a drop in product

margins for the companies within our coverage.

The extent of the drop in margins, though,

depends on the product portfolio of each company

as well as their feedstock mix.

The biggest increases in our feedstock price

estimates are those for natural gas, which impact

products that are methane based – methanol,

ammonia and urea – the most. While the increase in

gas prices also affects the price of ethane, as ethane

prices are quoted on a gas equivalent basis, the drop

in ethane-based product margins is far lower due to

the higher degree of value added in ethane-based

products versus methane-based products (see table at

the bottom of the page).

For liquids based products, the margin impact is

easier to forecast as the product margins are

directly linked to the discount (c30%) to global

feedstock prices. As the discount is reduced in our

estimates by 1ppt each year through 2015, the

margin impact would be similar (ie a drop of 1ppt

each year for liquids based products).

Impact on product pricing and margins

HSBC crude oil price forecast raised to USD82/bbl for 2011, rising a

dollar a year thereafter

We modify our chemical product price and margin estimates to reflect

higher energy prices as well as changes in feedstock pricing

On average the impact of higher crude prices outweighs higher

feedstock costs

Impact of gas feedstock price increases (methane vs. ethane-based products)

Natural gas price (USD/mmbtu) 0.75 2.00

Methane price (USD/mmbtu) 0.75 2.00 Raw material costs for 1 tonne of methanol 26.25 70.00 Change in raw material costs 43.75 Current methanol price (USD/tonne) 380 Margin impact from cost increase -12%

Implied ethane price (USD/tonne) 36.7 97.8 Raw material costs for 1 tonne of ethylene 47.3 126.2 Change in raw material costs for PE (polyethylene) production 78.85 Current LDPE (low density PE) prices (USD/tonne) 1450 Margin impact from cost increase -5%


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Very few companies have either a purely liquid or

purely gas-based product portfolio and therefore

there are multiple moving parts when trying to

assess the impact of a change in feedstock prices

on company profitability. We list the impact of

our feedstock pricing changes on each company

under our coverage assuming constant product

prices below. The rule of thumb is that companies

with the biggest cost advantages and the highest

margins (eg SAFCO) are impacted more on a

percentage basis than companies with the lowest

advantage and margins (eg SABIC).

Of course, one cannot look at product margins on

a feedstock basis alone. Product prices are an

important factor within our margin outlook and

are influenced by both energy costs and supply/

demand. Our bullish long-term supply/demand

outlook (as detailed earlier in the note), coupled

with increases in our oil and gas team’s energy

price forecasts, have resulted in an increase in our

product pricing estimates. In most cases, the

impact from higher product pricing outweighs the

impact of higher feedstock costs.

Changes to HSBC’s oil price forecasts Our global oil and gas team have raised their forecasts

for crude oil prices. The extract below is from the note

“Oil sector outlook” published on 23 January 2011

(Paul Spedding, +44 207 991 6787) highlighting the

rationale behind the change in their oil price forecasts.

Please see the full note for greater detail.

Oil price assumptions

Our Brent assumption for 2011 rises from USD76

to USD82, rising a dollar a year thereafter. We

assume a USD1 premium for WTI.

Oversupply remains

We estimate that OPEC has spare capacity of up

to 6MMbbl/d, or nearly 7% of world demand.

Even assuming not all of this capacity is palatable

to the world’s refining system due to quality,

spare capacity is still probably in the 5MMbbl/d

area. Unlike many other commodities, therefore,

the crude market is not tight; it is potentially in

oversupply.

It is only OPEC’s discipline in keeping crude off the

market since the price collapse in late 2008 that

enabled crude prices to recover to current levels.

What has perhaps been surprising is how stable

crude prices have been during much of 2010, at

least until recently. With hindsight, we suspect

that OPEC was helped by the strong recovery in

its efforts to help oil prices recover from around

USD40 in early 2009.

This meant that it was rarely called upon to

defend the oil price on the downside. So, OPEC

was normally faced with the relatively simple

Impact of feedstock price changes on EBITDA margins *

Company ________ 2012e__________ _________2013e _________ _________ 2014e _________ ________ 2015e _________ New Old New Old New Old New Old

APPC 35.4% 36.7% 33.2% 35.5% 36.3% 39.5% 37.5% 40.6% IQ 47.1% 47.1% 47.3% 47.3% 48.5% 48.5% 48.3% 48.3% Chemanol 47.3% 49.2% 46.4% 49.2% 44.1% 48.8% 43.7% 48.4% NIC 29.2% 29.7% 29.3% 30.2% 31.5% 33.0% 31.7% 33.1% Petrochem 43.8% 43.8% 42.9% 42.9% 46.3% 46.3% 46.4% 46.4% Sahara 37.4% 38.2% 37.7% 39.1% 40.3% 42.4% 41.0% 43.0% Safco 72.4% 76.0% 70.8% 75.8% 67.6% 75.5% 67.6% 75.5% SABIC 32.8% 33.6% 31.6% 32.9% 33.3% 35.3% 33.1% 35.1% SIIG 35.9% 36.1% 36.3% 36.6% 39.5% 39.9% 39.9% 40.3% Sipchem 53.2% 55.9% 52.5% 56.5% 49.0% 55.5% 49.1% 55.6% Kayan 54.4% 54.7% 53.0% 53.7% 54.8% 55.8% 54.3% 55.3% Yansab 51.0% 52.2% 48.9% 50.9% 51.1% 54.1% 51.0% 54.0%

Source: HSBC estimates, * assuming constant product prices

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decision of how much additional crude to let on to

the market. Some short-term cuts in OPEC

production did prove necessary during 2010 but

they were small and normally only involved Saudi

Arabia taking an active role. At no stage was a

collaborative cut necessary.

With OPEC seemingly in control of the market, it

is in theory in a position to set the price. (In

reality, we believe it is more that its largest

producer, Saudi Arabia, is in a position to do so.)

What price does OPEC want?

At present therefore, the key question is what oil

price does OPEC (or Saudi Arabia) want?

Although there are a range of views (doves and

hawks) within OPEC as to what constitutes an

acceptable oil price, we believe that it is Saudi

Arabia that carries the most weight. It is the

largest producer in OPEC by a factor of two and

accounts for around 60% of spare capacity.

The hawks, including Venezuela, Iran and

Ecuador, seem to regard USD100-120/bbl as an

“adequate” price judging by their comments at the

recent OPEC meeting (14 December 2010).

However, it is Saudi Arabia that matters most, and

for the past 18 months its official policy has been

that oil prices in the USD70-80 range are

“acceptable”. We believe that the Kingdom

believed that this price range was:

Sufficient to fund the financial needs of most

OPEC members, including itself;

Low enough not to derail what appeared to be

a fragile economic recovery; and

Low enough not to encourage a rebound in

investment in non-OPEC projects or

efficiency measures that could take market

share from OPEC.

Move to USD70-90?

However, comments from Saudi Oil Minister Ali

al-Naimi in November implied that the target

band may have widened. On November 1, he

commented at a speech in Singapore that

“consumers are looking for oil prices around

USD70 but hopefully below USD90”.

Comments from the Kuwait Oil Minister echoed a

similar theme when Sheikh al-Abdullah al-Sabah

said after the December OPEC meeting that “we

would rather see it [the oil price] between USD75

and USD90.”

Although Naimi has subsequently reiterated that

Saudi Arabia still favours a USD70-80 price range

(13 December 2010), the lack of any comment

about action to lower prices has meant crude

prices have remained comfortably above the ‘old’

Saudi target range since early November.

Several members of OPEC, including Saudi

Arabia, commented since the OPEC meeting that

the crude market was balanced, the implication

presumably being that the move into a new range

was due to speculative activity.

Oil price assumptions (USD/bbl)

Brent 2010a 2011e 2012e 2013e

New 79.1 82 83 84 Old 79.1 76 77 78 Futures 92.6 92.4 92.1 WTI New 79.7 83 84 85 Old 79.7 77.2 77 78 Futures 91.1 91 90.2

Source: Bloomberg, HSBC estimates

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But another theme that has been articulated by

some OPEC members is that although nominal

prices are acceptable, real prices are not. We

believe this is a reference to the rise in soft

commodity prices, which OPEC members tend to

import. Having kept the oil price in a range that

many consumers and producers see as acceptable,

it is perhaps not surprising that some OPEC

members might feel aggrieved at such an upward

move in the price of their import bill.

Long-term competitive position?

Unlike some in OPEC, Saudi Arabia policy on oil

prices appears to take into account its long-term

competitive position (in addition to its short-term

funding requirements). In order to ensure that

future generations can benefit from its oil

reserves, it considers the impact its pricing

decisions might have on supply and demand in the

long term. The marginal costs of non-OPEC

production vary, but we believe the following are

reasonable guidelines.

Canadian tar sands (Greenfield): USD80-90/bbl.

US Gulf, Ultra Deepwater/Deep reservoir (eg

Paleogene): USD60-70/bbl.

US Gulf, Deepwater (eg Miocene): USD30-

40/bbl.

Brazil Presalt, Ultra Deepwater/Deep

reservoir: USD35-40/bbl.

We estimate that in aggregate, OPEC members

need around USD60-70/bbl to balance their

budgets. This means that OPEC is unlikely to be

able to back conventional deep-water projects out

of the market without some members suffering

short-term financial pressures.

However, tar sands projects could be deterred at

prices below USD90. It was noticeable during

2009 and early 2010 that few of these projects

made much progress towards taking a

development approval. From an OPEC

perspective, another reason for deterring tar sands

projects is that they have extremely long profiles

(40 years potentially). In addition, they do not

decline like conventional oil fields and so could

be considered a ‘perennial’ problem once

production starts.

We would also argue that it would make sense for

OPEC to set an upper limit to the oil price that did

not lead to major energy-efficiency initiatives or

substitution of oil by other energy sources.

We believe that USD90/bbl is probably an

important level in all these respects. In our view,

with prices below USD90/bbl, investment in new

tar sands projects will be constrained. In addition,

unless mandated by governments, we doubt the

trend to more efficient energy usage will

accelerate materially.

It may be that the trigger price is lower than

USD90/bbl. Total’s CEO commented in early

December that:

“USD70-80 starts to be a little bit low to invest in

these more difficult environments.”

(He was referring to Canadian tar sands and

deepwater, high-pressure, high-temperature

projects in the US Gulf of Mexico.)

We think therefore that there are very good

reasons for Saudi Arabia to try and limit any

increase in oil prices over USD90.

Supply demand balance

Demand reverting to trend?

Demand for crude products looks to us to have

increased by around 2MMbbl/d in 2010, the

fastest annual rate of growth since 2004. Unlike

2004, however, much of this increase seems due

to the ‘recapture’ of 2009’s ‘lost’ demand. We

expect 2011 to see lower growth of around

1.4MMbbl/d as the 2010 base benefited from

unusually cold winter weather. For 2012 and

beyond, we expect annual demand growth to

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average around 1.7MMbbl/d. We see modest

growth within the OECD, with the main drivers of

growth being non-OECD Asia (especially China),

the Middle East and Latin America.

Supply growth rate to slow?

Non-OPEC supply (including bio-fuels), which

accounts for around 60% of global output, has

risen on average by around 0.5MMbbl/d since

2003. This is well below the 1.2MMbbl/d rise in

global demand. Although we believe 2010 is

likely to see non-OPEC output rise by around

1.3MMbbl/d, we believe the rate of growth will

slow in 2011 and beyond as decline rates

accelerate. Some new large projects in Brazil and

Kazakhstan should provide growth, but these are

needed to offset the underlying decline rate of the

non-OPEC base, which we believe is at least 5%

or 2.5MMbbl/d.

We therefore expect the amount of oil that the

market needs from OPEC will rise over the next

several years. Some of this growth is likely to be

met by natural gas liquids (NGLs) from OPEC

and biofuels, but the call for conventional crude

oil is still likely to rise in our view.

The call on OPEC crude rises steadily until 2015,

suggesting a tightening market.

OPEC capacity

At present, we believe that OPEC has spare capacity

of around 6MMbbl/d, although around 1MMbbl/d of

that may not be able to be produced at short notice or

may not be suitable for many of the world’s lower

quality refineries. According to the IEA, additional

OPEC capacity of around 1.5MMbbl/d is due on

stream by 2015, around two-thirds of that coming

from Iraq. However, the level of production from

Iraq is hard to predict as it depends on:

Investment in water injection facilities, crude

pipelines, storage and export terminals.

The pace of investment by the oil companies

that have signed production agreements with

the Iraqi government.

The sanctity of contracts (in the past, the

opposition has said it will revoke some

contracts).

Preventing insurgents from damaging

infrastructure or disrupting development work.

In theory, the contracts that Iraq has signed with

the oil industry have the potential to deliver peak

production of 12MMbbl/d some time around

2016-17. But the IEA estimate of 1.1MMbbl/d

added by 2015 suggests that the peak is unlikely

to be reached this decade, in our view.

However, the IEA estimate is likely to be too low,

in our opinion, as two of the projects, BP’s

Rumaila and ENI’s Zubair are making good

progress. These two projects are ahead of the

others and could reach their interim target of

OPEC production capacity (MMbbl/d) OPEC spare capacity (MMbbl/d)

28

30

32

34

36

38

2009 20 10 201 1 2 012 201 3 2014 2015

OPEC 10 Iraq

0

2

4

6

8

200 8 2009 2 010 e 20 11e 2012 e 2013 e 20 14e 2 015 e

Source: IEA, HSBC estimates Source: IEA, HSBC estimates

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producing 2.8MMbbl/d by the end of 2014, an

increase of 1.5MMbbl/d. We see Iraqi production

rising from 2.5MMbbl/d to 4MMb/d in 2015 with

new projects offsetting a natural decline rate of

around 500Mbbl/d over the period. (The level of

Iraqi output remains a key uncertainty for the

direction of the oil price in the longer term.)

We estimate that this would take OPEC’s overall

capacity from around 35MMbbl/d currently to

around 37MMbbl/d by 2015. This increase will

help meet some of the increase in demand that we

anticipate. However, there will still be a reduction

in OPEC’s spare capacity under our estimates.

Under this forecast, the amount of spare capacity

in OPEC falls close to that seen during the 2008

oil price spike. That does not necessarily mean

that we will see a repeat of USD150 oil prices as a

key factor in 2008 was a shortage of middle

distillate due to temporary issues. These included

the China Olympics, the cut-off of Argentine gas

supplies to Chile, and an explosion at a gas

processing plant in Western Australia. These

caused increased demand for diesel to fuel

portable power generators at a time of the year

when the refining system is geared up to produce

gasoline. Nevertheless, it seems to us that as we

progress towards mid-decade, the risks of a tighter

crude market developing increase.

Why USD82?

We believe that it is risky to assume that the Saudi

target of USD70-80 has definitely moved

upwards. The Kingdom’s response to price spikes

in the past has been subtle, a gradual increase in

production combined with quiet comments

regarding the level of oil prices it views as

acceptable.

We believe that there will be a gradual increase in

Saudi output if prices stay above USD90. But we

also believe that it makes sense for the Kingdom

to manoeuvre prices so that they sit in the top half

of its acceptable range. We would also note that

the two most common benchmark crudes, Brent

and WTI, are extra light crudes which trade at a

premium to the OPEC basket. The basket, which

is made up of a mix of crude with a range of

different gravities (densities), tends to trade at a

USD2-3/bbl discount to Brent.

Our USD82 assumption is therefore close to the

top end of the ‘official’ Saudi price target of

USD70-80 for the OPEC basket and the middle of

the ‘unofficial’ range of USD70-90.

Product price forecasts Our chemical product price forecasts are driven

by our ethylene supply/demand model and our

proprietary ethylene cost curve, which are used to

forecast ethylene prices. Our ethylene cost curve

is in turn driven by our oil and gas team's revised

crude price forecasts for 2011-15.

Given the importance of ethylene as a key

intermediate chemical, once we have our ethylene

price model and a few other raw material price

estimates, we can forecast prices for a suite of

downstream petrochemicals – polyethylenes,

polyesters, glycols and the styrene chains.

These products constitute the bulk of the product

portfolio for the MENA petrochemical universe

and the pricing table at the bottom of the next

page is the starting point for our financial models

as these prices, along with the installed capacity

base for each company, drive our top-line

forecasts.

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Margins are unique to each company as they vary

according to the price paid for feedstock, the product

portfolio and the location of capacity (SABIC has a

substantial non-Saudi capacity base). The net impact

of changes in both our product and feedstock pricing

forecasts are discussed individually in the company

sections that follow.

Changes to our valuation framework We use a DCF methodology to value the chemical

companies under our coverage and have updated

our risk free rate and country risk premium to

reflect the new HSBC Strategy team assumptions

(for more details see the note of 20 December

2010, Cost of Equity). Our updated assumptions

for Saudi include a 3.5% risk free rate and a 6%

country risk premium, which gives us a pre-beta

adjusted cost of equity of 9.5% vs. our earlier

estimate of 11%.

We also move to using stock specific betas vs. an

earlier sector beta assumption of 1. These stock

specific betas are based on a two year historical

correlation between the individual stock prices

and the Saudi Tadawul index and are listed on the

table at the top of the next page, along with our

new costs of equity for each company and the

changes to our WACC estimates.

For Industries Qatar, our updated assumptions for

Qatari cost of equity include a 3.5% risk free rate

and an 8% country risk premium, which gives us

a pre-beta adjusted cost of equity of 11.5% vs. our

earlier estimate of 11%. The beta calculation for

IQ is based on a two year historical correlation of

the stock price with the Qatari DSM Index.

We are also rolling forward all our DCF’s to 2011

start dates from 2010.

HSBC chemical product pricing assumptions

Product (USD/tonne) 2011e 2012e 2013e 2014e 2015e

ABS 2,656 2,666 2,733 2,816 2,790 Ammonia 375 375 375 375 375 Ammonium Phosphates 345 345 345 345 345 Benzene 872 838 873 933 998 Cumene 1,055 1,021 1,056 1,124 1,177 Cyclohexane 981 976 1,015 1,076 1,151 Ethylene 1,050 1,108 1,108 1,246 1,246 Ethylene Dichloride 613 636 633 671 669 Ethylene Glycol 717 750 752 829 831 HDPE 1,352 1,415 1,420 1,563 1,569 LDPE 1,373 1,437 1,443 1,588 1,594 LLDPE 1,377 1,436 1,440 1,573 1,578 Methanol 328 332 336 340 344 Mixed Xylenes 823 776 782 813 837 PET 1,232 1,180 1,277 1,404 1,631 Phenol 1,172 1,219 1,259 1,337 1,406 Polycarbonate 2,529 2,539 2,603 2,682 2,657 Polyester Fiber 1,215 1,294 1,408 1,514 1,547 Propylene 1,194 1,159 1,187 1,265 1,289 Polypropylene 1,400 1,417 1,434 1,451 1,468 Polystyrene 1,200 1,281 1,314 1,406 1,461 PVC 973 1,086 1,081 1,155 1,192 Urea 350 350 350 350 350 MTBE 777 769 789 814 830 Acrylic acid 1,613 1,571 1,605 1,698 1,727 VCM 779 869 865 924 953 Butanediol 2,084 2,126 2,147 2,169 2,190 Acetic acid 605 607 609 612 614 VAM 912 936 937 991 992


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Changes to our cost of equity and WACC

RfR ERP Adjusted Beta New CoE Old WACC New WACC

SABIC 3.50% 6.00% 1.47 12.32% 9.43% 9.78% SAFCO 3.50% 6.00% 0.8 8.30% 9.95% 7.24% Yansab 3.50% 6.00% 1.39 11.84% 7.86% 8.66% Kayan 3.50% 6.00% 1.19 10.64% 7.80% 7.71% IQ 3.50% 8.00% 1.11 12.38% 10.00% 11.10% Sipchem 3.50% 6.00% 1.09 10.04% 9.10% 8.47% Sahara 3.50% 6.00% 1.35 11.60% 8.90% 9.27% APC 3.50% 6.00% 1.22 10.82% 8.90% 8.73% Tasnee 3.50% 6.00% 1.25 11.00% 9.10% 9.14% SIIG 3.50% 6.00% 1.17 10.52% 8.90% 8.52% Petrochem 3.50% 6.00% 1.19 10.64% 8.90% 8.60% Chemanol 3.50% 6.00% 1.08 9.98% 9.10% 8.14%

Source: Bloomberg, HSBC estimates

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Why is SABIC different

SABIC has three key differentiators, which set it

apart from the rest of the Middle Eastern chemical

industry: a diverse product portfolio, a fully-

owned supply chain and marketing platform and

direct exposure to developed markets.

SABIC’s product portfolio spans the entire range

from basic commodity chemicals to ‘differentiated

commodities’, unlike other companies in the region

which are mostly focussed on one or two product

chains. This broad range allows SABIC

opportunities to integrate downstream that are not

available to other companies with the sector. SABIC

also has a fully developed in-house supply chain and

distribution system, and a global distribution

footprint, which allows the company to maximise

netbacks on its production. Furthermore, as the only

regional company with significant asset exposure to

the US and Europe, SABIC should benefit through

2011 from an improving fundamental environment

within developed markets.

2011: What to expect

Volume Growth: SABIC should be one of the

few chemical companies in the region to see

volume growth in 2011, as its affiliate Saudi

Kayan (35% stake) is expected to start

commercial production by H2 2011. Kayan is by

far the biggest plant that SABIC has ever built,

and should be a key contributor to the company’s

revenue and earnings growth in 2011.

Heading back to normality at SIP: SABIC’s

Innovative Plastics business (SIP) which was

acquired from GE Plastics in 2007 has been a drag

on the company’s results for the last couple of years.

At its peak though, the unit had EBITDA of

cUSD1bn on an annual basis and we estimate that

the business could return towards those levels of

earnings by the end of the year from current levels of

SABIC

Operating leverage in 2011 from improving fundamentals at the

Innovative Plastics unit

Volume growth from commercial production at Saudi Kayan

Reiterate Overweight (V) rating, raising target price to SAR130

from SAR110

SABIC: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________ New Old New Old New Old

Revenue 184,404 164,399 196,223 168,480 198,439 170,492 EBITDA 57,240 52,978 62,651 57,753 62,815 58,342 Net Income 26,845 23,700 31,805 27,300 32,237 27,900 EPS 8.95 7.90 10.60 9.10 10.75 9.30 EBITDA Margin 31.0% 32.2% 31.9% 34.3% 31.7% 34.2% Net Margin 14.6% 14.4% 16.2% 16.2% 16.2% 16.4%


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cUSD200m. Bayer has a MaterialScience business

which is similar in assets and geographic spread to

SIP and in its Q3 2010 earnings release, Bayer stated

that it expected its unit to be back to pre-crisis

earnings levels by the end of 2011, much earlier than

previous expectations. We would expect to see a

similar improvement in earnings at SIP which would

be a key driver of SABIC’s y-o-y earnings growth in

2011.

Changes to our estimates and valuation

There are three major moving parts impacting our

estimates: changes in our feedstock pricing

assumptions as highlighted in the first part of this

report, changes to product price estimates in line

with the increase in the HSBC oil and gas team's oil

price forecasts, and the update to our cost of equity

assumptions as explained earlier. The changes to our

financial forecasts are detailed in the table at the

bottom of the previous page.

Valuation and risks Valuation

Our preferred methodology for valuing commodity

chemical companies is DCF. In our DCF valuation

we model cash flows and EBITDA explicitly up to

2015, after which we build in semi-explicit cash

flow forecasts running off a sales growth assumption

and a profitability metric through to 2018.

Thereafter, we move to a terminal valuation phase.

For our WACC calculation, we have updated our

assumptions for the risk free rate and country risk

premium to reflect the new HSBC Strategy team

assumptions. These changes have been detailed

earlier in the note. Our new cost of equity for

SABIC is 12.3% (vs. 11% earlier) and includes a

risk free rate of 3.5%, a market risk premium of 6%

and a beta of 1.47.

We are lowering our cost of debt to 4% from 6%

earlier to reflect the most recent SABIC bond

issuance in October 2010 which was priced at

165bps over benchmark mid-swaps of 2.17% i.e. at

3.8%. This cost of debt assumption and a 30% debt

weighting (unchanged) lead to our WACC estimate

of 9.78% (up from 9.43%). Under our research

model, for stocks with a volatility indicator, the

Neutral band is 10 percentage points above and

below the hurdle rate for Saudi stocks of 9.5%.

Our new DCF-derived target price for SABIC is

SAR130 (vs SAR110 previously) and implies a

21% potential return from current levels. This is

above the Neutral band of our ratings model, so we

maintain our Overweight (V) rating on the stock.

Risks

Cyclicality: All of SABIC’s products are

commodity products, whose earnings are inherently

cyclical and driven by industry operating rates and

supply/demand fundamentals. Although we would

argue that the cycle for each product is different and

so provides a degree of offset, there is no denying

that earnings are linked to global GDP growth as

well as being affected by supply cycles for the

products themselves.

Operating risks: In addition to normal business

risk in the petrochemicals market, we see other

potential risks that are more difficult to assess, both

in terms of probability and effect. Such risks

include interruption to production from operating

problems or explosions. As the bulk of SABIC’s

production is based in Saudi Arabia, some

investors may associate it with increased risk of

political strife. However, the more practical,

everyday issue is the normal risk attached to a

production process involving potentially explosive

hydrocarbons – an area in which global standards

of health and safety are rigorously applied.

Kayan start-up: Saudi Kayan is expected to start

commercial operations in 2011 and should

generate a key part of SABIC’s earnings growth

this year. There are typically some teething

problems during the start-up phase of a greenfield

project. Any such operational issues at Kayan

would represent a downside risk to our

Overweight (V) rating on SABIC.

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Financials & valuation: Saudi Basic Industries Co Overweight (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Profit & loss summary (SARm)

Revenue 103,092 152,529 184,404 196,223EBITDA 28,536 47,669 57,240 62,651Depreciation & amortisation -9,933 -10,120 -11,728 -12,255Operating profit/EBIT 18,603 37,550 45,512 50,396Net interest -3,076 -3,635 -3,057 -2,532PBT 17,085 35,001 43,455 48,864HSBC PBT 17,085 35,001 43,455 48,864Taxation -800 -2,163 -1,738 -1,955Net profit 9,062 21,577 26,845 31,805HSBC net profit 9,062 21,577 26,845 31,805

Cash flow summary (SARm)

Cash flow from operations 25,876 51,997 48,891 57,477Capex -24,158 -11,154 -11,656 -12,181Cash flow from investment -22,884 -11,154 -11,656 -12,181Dividends -3,750 -10,800 -13,350 -15,900Change in net debt 7,211 -18,781 -9,013 -14,291FCF equity -263 39,756 36,235 44,296

Balance sheet summary (SARm)

Intangible fixed assets 21,734 21,734 21,734 21,734Tangible fixed assets 159,988 161,023 160,951 160,876Current assets 108,030 115,317 122,479 129,646Cash & others 57,122 65,903 64,916 69,207Total assets 296,232 304,553 311,644 318,736Operating liabilities 36,961 44,506 48,101 49,289Gross debt 107,015 97,015 87,015 77,015Net debt 49,892 31,112 22,099 7,808Shareholders funds 108,243 119,020 132,514 148,419Invested capital 195,669 187,665 192,147 193,761

Ratio, growth and per share analysis

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -31.6 48.0 20.9 6.4EBITDA -38.8 67.1 20.1 9.5Operating profit -49.2 101.8 21.2 10.7PBT -54.2 104.9 24.2 12.4HSBC EPS -58.9 138.1 24.4 18.5

Ratios (%)

Revenue/IC (x) 0.5 0.8 1.0 1.0ROIC 9.4 18.4 23.0 25.1ROE 8.6 19.0 21.3 22.6ROA 6.8 12.1 14.5 15.7EBITDA margin 27.7 31.3 31.0 31.9Operating profit margin 18.0 24.6 24.7 25.7EBITDA/net interest (x) 9.3 13.1 18.7 24.7Net debt/equity 32.9 19.2 12.6 4.1Net debt/EBITDA (x) 1.7 0.7 0.4 0.1CF from operations/net debt 51.9 167.1 221.2 736.1

Per share data (SAR)

EPS Rep (fully diluted) 3.02 7.19 8.95 10.60HSBC EPS (fully diluted) 3.02 7.19 8.95 10.60DPS 1.70 3.60 4.45 5.30Book value 36.08 39.67 44.17 49.47

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 3.5 2.3 1.8 1.6EV/EBITDA 12.8 7.3 5.9 5.2EV/IC 1.9 1.8 1.8 1.7PE* 35.5 14.9 12.0 10.1P/Book value 3.0 2.7 2.4 2.2FCF yield (%) -0.1 12.6 11.5 14.1Dividend yield (%) 1.6 3.4 4.1 4.9

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (SAR) 107.25 Target price (SAR) 130.00 Potent'l return (%) 21.2

Reuters (Equity) 2010.SE Bloomberg (Equity) SABIC ABMarket cap (USDm) 85,904 Market cap (SARm) 321,750Free float (%) 30 Enterprise value (SARm) 346382Country Saudi Arabia Sector ChemicalsAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

2434445464748494

104114

2009 2010 2011 2012

2434445464748494104114

Saudi Basic Industries Co Rel to TADAWUL ALL SHARE INDEX

Source: HSBC Note: price at close of 19 Jan 2011

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Earnings power demonstrated

Yansab is a single-project company, with no

exposure to capacity growth beyond the ramp-up of

existing production facilities. Given limited growth

opportunities and minimal maintenance capex – the

plant is less than a year old – we believe Yansab is

an exceptional cash generation story.

The company started commercial operations in

March 2010 and had EBITDA margins of 51% for

the first three quarters of 2010. We estimate that

the company will generate EBITDA of SAR4.4bn

in 2011, with free cash flow net of interest

expense and maintenance capex of SAR3.3bn.

This, compared to the current market

capitalisation of SAR27.2bn, represents a free

cash flow yield of c12%.

We believe that with the earnings power of the

company demonstrated, the start-up discount on

the stock should be eliminated as execution and

project start-up risks start are reduced.


Robust MEG pricing: We expect MEG prices to

continue to benefit from the current record levels

of price delta between cotton and polyester fibre.

The current price delta between cotton and

polyester fibre stands at USD1,780/tonne – over

5.2x the average of the differential between 2000

and 2009, which should spur greater polyester

demand. This substitution demand drives pricing

for the raw materials used to make polyester such

as paraxylene MEG. For details see our 5 January

2011 note, 2011: Year of the rabbit. Yansab has

the greatest exposure to rising MEG prices within

our coverage. A USD100/tonne change in MEG

prices has a SAR0.44 impact on Yansab’s EPS.

Cash returns: 2011 will be the first full year of

operations for Yansab. We believe that since

Yansab will not have further avenues of growth

through expansion, the focus will shift to cash

returns, as the company’s earning power is fully

demonstrated. The firm’s cash generation ability

Yansab

MEG prices expected to remain robust in the medium term

Focus to shift to cash returns

Reiterate Overweight (V) rating, maintain target price of SAR65

Yansab: Changes to estimates




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should allow ample room for substantial cash

returns to shareholders along with debt

repayment.






with the increase in the HSBC oil and gas team's

oil price forecasts, and the update to our cost of

equity assumptions as explained earlier. The

changes to our financial forecasts are detailed in

the table at the bottom of the previous page.


Our preferred methodology for valuing

commodity chemical companies is DCF. In our

DCF valuation we model cash flows and EBITDA

explicitly up to 2015, after which we build in

semi-explicit cash flow forecasts running off a

sales growth assumption and a profitability metric

through to 2018. Thereafter, we move to a

terminal valuation phase.

Our new cost of equity for Yansab is 11.8% (vs.

11% earlier) and includes a risk free rate of 3.5%,

a market risk premium of 6% and a beta of 1.39.

We are lowering our cost of debt for Yansab to 4%

from 6% earlier to reflect the current annualised

interest rate that Yansab currently pays (3.6%). This

cost of debt assumption and a 40% debt weighting

(unchanged) lead to our WACC estimate of 8.66%

(up from 7.86%).

Under our research model, for stocks with a

volatility indicator, the Neutral band is 10

percentage points above and below the hurdle rate

for Saudi stocks of 9.5%. Our DCF-derived target

price for the company of SAR65 implies a 40%

potential return from current levels, which is

above the Neutral band of our model, so we

maintain our Overweight (V) rating on the stock.

Risks

Plant shutdown: Yansab began commercial

operations in Q1 2010, and any design or equipment

issues tend to manifest themselves during the first

year of operations. Though there were no major

problems in 2010, the company had a two-week

shutdown due to technical issues in Q3 2010. Any

further production problems would hurt Yansab’s

earnings in 2011 and would represent a downside

risk to our Overweight (V) rating on the stock.

MEG pricing: MEG prices were up 41% y-o-y in

2010, as the interfibre substitution between cotton

and polyester, due to high cotton prices, helped

propel MEG prices upwards. Though we believe

MEG prices will remain strong in the medium

term, they represent a downside risk to our

Overweight (V) rating on the stock, due to the

high sensitivity of Yansab’s bottom-line to these

prices.

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Financials & valuation: Yanbu Petrochemical Overweight (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 0 5,910 7,808 8,819EBITDA -29 2,998 3,987 4,397Depreciation & amortisation 0 -938 -947 -961Operating profit/EBIT -29 2,060 3,040 3,436Net interest 0 -373 -450 -450PBT -29 1,687 2,590 2,986HSBC PBT -29 1,687 2,590 2,986Taxation 0 -42 -65 -75Net profit -29 1,645 2,526 2,911HSBC net profit -29 1,645 2,526 2,911


Cash flow from operations -1,787 3,065 3,201 3,728Capex -1,471 -174 -188 -284Cash flow from investment -1,455 -174 -188 -284Dividends 0 -489 -759 -878Change in net debt 3,242 -2,402 -2,254 -2,566FCF equity -3,258 2,891 3,014 3,444


Intangible fixed assets 0 0 0 0Tangible fixed assets 18,916 18,152 17,393 16,716Current assets 2,208 2,333 3,775 5,376Cash & others 606 932 1,966 3,311Total assets 21,124 20,485 21,168 22,092Operating liabilities 845 1,126 1,263 1,374Gross debt 14,611 12,536 11,315 10,094Net debt 14,006 11,604 9,349 6,783Shareholders funds 5,668 6,824 8,590 10,623Invested capital 19,673 18,427 17,939 17,407


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 32.1 12.9EBITDA 33.0 10.3Operating profit 47.6 13.0PBT 53.5 15.3HSBC EPS 53.5 15.3

Ratios (%)

Revenue/IC (x) 0.0 0.3 0.4 0.5ROIC -0.2 10.5 16.3 19.0ROE -0.5 26.3 32.8 30.3ROA -0.1 9.7 14.2 15.5EBITDA margin 0.0 50.7 51.1 49.9Operating profit margin 0.0 34.9 38.9 39.0EBITDA/net interest (x) 8.0 8.9 9.8Net debt/equity 247.1 170.1 108.8 63.9Net debt/EBITDA (x) -479.5 3.9 2.3 1.5CF from operations/net debt 26.4 34.2 55.0


EPS Rep (fully diluted) -0.05 2.92 4.49 5.18HSBC EPS (fully diluted) -0.05 2.92 4.49 5.18DPS 0.00 0.87 1.35 1.56Book value 10.08 12.13 15.27 18.89

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 6.4 4.5 3.7EV/EBITDA 12.6 8.9 7.5EV/IC 2.0 2.0 2.0 1.9PE* 15.8 10.3 8.9P/Book value 4.6 3.8 3.0 2.5FCF yield (%) -12.5 11.1 11.6 13.2Dividend yield (%) 0.0 1.9 2.9 3.4


Issuer information


Reuters (Equity) 2290.SE Bloomberg (Equity) YANSAB ABMarket cap (USDm) 6,953 Market cap (SARm) 26,044Free float (%) 40 Enterprise value (SARm) 37648Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

10152025303540455055

2009 2010 2011 2012

10152025303540455055

Yanbu Petrochemical Rel to TADAWUL ALL SHARE INDEX


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Diversified portfolio Tasnee is a holding company with interests in

petrochemicals and manufacturing. The

petrochemicals business, which accounts for over

85% of the company’s revenues, is made up of

investments in Cristal (66% stake, TiO2), Saudi

Polyolefins (75% stake, polypropylene plant), SEPC

(45.3% stake, 1mtpa integrated ethylene cracker),

and SAMC (44.5%, integrated acrylics plant,

scheduled to come onstream in Q3 2012). The

manufacturing business consists of a number of

small scale battery, packaging and services

businesses and accounts for c15% of Tasnee’s

revenue.


Strong TiO2 market: We expect strong pricing

power within the TiO2 segment for the next 12-18

months, as the TiO2 market should remain

undersupplied well into 2012, given the lead times

for adding new capacity. This segment constitutes

35% of Tasnee’s earnings and will be a key

contributor to the company’s earnings in 2011.

For more details, see our 1 November 2010 note,

Tasnee: Painting a stronger picture.










bottom of the page.

Tasnee

We see strong pricing power within the TiO2 segment for the next

12-18 months

Leverage to TiO2 pricing to drive earnings growth in 2011

Reiterate Overweight (V) rating and raise target price form SAR40

to SAR44

Tasnee: Changes to estimates




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Our cost of equity for Tasnee is unchanged at

11% and includes a risk free rate of 3.5%, a

market risk premium of 6% and a beta of 1.25.

We use a 5% cost of debt assumption and a 30%

debt weighting (both unchanged) which yields a

WACC estimate of 9.14%.




for Saudi stocks of 9.5%. Our new DCF-derived

target price for the company of SAR44 (vs

SAR40 previously) implies a 31% potential return

from current levels, which is above the Neutral

band of our model, so we maintain our

Overweight (V) rating on the stock.

Risks

Project delays: SAMC is currently in the

construction phase and is scheduled for

commissioning in Q3 2012. We are, however,

assuming a 2013 start-up. Any delays would have

a negative impact on our valuation for Tasnee.

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Financials & valuation: National Industrialization Overweight (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 10,863 16,676 17,051 16,304EBITDA 2,477 4,677 4,903 4,503Depreciation & amortisation -983 -1,392 -1,249 -1,268Operating profit/EBIT 1,494 3,285 3,654 3,235Net interest -625 -706 -513 -388PBT 1,064 2,730 3,320 3,033HSBC PBT 1,064 2,730 3,320 3,033Taxation -92 -31 -133 -121Net profit 519 1,509 1,865 1,833HSBC net profit 519 1,509 1,865 1,833


Cash flow from operations 491 6,605 4,386 4,279Capex -2,616 -941 -1,021 -1,023Cash flow from investment -1,790 -862 -1,021 -1,023Dividends -461 -760 -937 -912Change in net debt 1,441 -4,983 -2,428 -2,345FCF equity -2,192 5,512 3,186 3,071


Intangible fixed assets 3,697 3,697 3,697 3,697Tangible fixed assets 18,505 18,200 17,972 17,727Current assets 9,867 12,076 11,822 11,084Cash & others 3,585 6,333 5,935 5,378Total assets 33,168 34,993 34,511 33,528Operating liabilities 5,581 7,557 7,651 7,569Gross debt 16,015 13,779 10,954 8,053Net debt 12,429 7,447 5,019 2,674Shareholders funds 7,790 8,539 9,466 10,387Invested capital 22,903 20,084 19,906 19,561


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 8.2 53.5 2.2 -4.4EBITDA 41.0 88.8 4.8 -8.1Operating profit 53.2 119.9 11.2 -11.5PBT 51.3 156.6 21.6 -8.6HSBC EPS -13.6 164.1 23.6 -1.7

Ratios (%)




Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e



Issuer information


Reuters (Equity) 2060.SE Bloomberg (Equity) NIC ABMarket cap (USDm) 4,532 Market cap (SARm) 16,976Free float (%) 80 Enterprise value (SARm) 28876Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

8

13

18

23

28

33

38

2009 2010 2011 2012

8

13

18

23

28

33

38

National Industrializatio Rel to TADAWUL ALL SHARE INDEX


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Downgrading on disappointing execution, continued delays We are downgrading Sahara to Neutral (V) from

Overweight (V) due to the disappointing

execution on the Al Waha project, which has

resulted in a reduction in our target price. The trial

run at Al Waha began in April 2009 with

commercial operations scheduled to start from Q4

2009. However the commercial start-up has been

delayed several times, and is now scheduled for

the end of Q1 2011. Al Waha now accounts for

c40% of our valuation for Sahara and the repeated

delays coupled with continued start up risks has

resulted in an assumption of lower operating rates

and value for the asset. We reduce our target price

for Sahara from SAR30 per share to SAR25.


Al-Waha start-up: Commercial operations at Al-

Waha are now scheduled to begin at the end of Q1

2011. A successful start-up would help reduce

some of the execution risk associated with the

project as well as drive earnings and revenue

growth for the company.










bottom of the page.

Sahara Petrochemical Co.

Execution on Al Waha disappointing with multiple start-up delays

Cutting operating rate assumptions for Al Waha due to continued

execution risks

Downgrade to Neutral (V), reducing target price from SAR30 to

SAR25

Sahara: Changes to estimates


Revenue 1,122 2,071 2,397 2,188 2,975 2,842 EBITDA 359 587 764 635 994 980 Net Income 524 546 493 469 647 654 EPS 1.79 1.87 1.68 1.60 2.21 2.23 EBITDA Margin 32.0% 28.4% 31.9% 29.0% 33.4% 34.5% Net Margin 46.7% 26.4% 20.6% 21.4% 21.7% 23.0%


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We use a DCF to value Sahara. Our new cost of

equity for Sahara is 11.6% (vs. 11% previously)

and includes a risk free rate of 3.5%, a market risk

premium of 6% and a beta of 1.35. We use a 4%


(both unchanged) which yields a WACC estimate

of 9.27% (vs. 8.9% previously).





target price for the company of SAR25 (SAR30

previously) implies a 12% potential return from

current levels, which is within the Neutral band of

our model. We therefore downgrade our rating on

the stock to Neutral (V) from Overweight (V)

Risks

Plant start-up delays: Sahara has yet to start

commercial production at its Al Waha

polypropylene unit. Initially expected to start in

Q4 2009, the plant has faced delays on technical

issues. Management expects the plant to finally

commence commercial production at the end of

Q1 2011. Any further delay to the start-up of the

facility represents a downside risk to our rating

while a sooner-than-expected or more successful

start-up would represent upside risks to our

Neutral (V) rating.

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Financials & valuation: Sahara Petrochemical Co. Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 0 0 1,122 2,397EBITDA -83 -7 359 764Depreciation & amortisation 0 0 -144 -213Operating profit/EBIT -83 -7 215 551Net interest 0 0 -107 -162PBT 78 394 614 758HSBC PBT 78 394 614 758Taxation -1 -5 -25 -30Net profit 77 389 524 493HSBC net profit 77 389 524 493


Cash flow from operations -238 200 583 771Capex -634 -722 -741 -411Cash flow from investment -815 -722 -741 -411Dividends -38 -190 -263 -249Change in net debt 627 797 421 -112FCF equity -622 -923 -664 -9


Intangible fixed assets 0 0 0 0Tangible fixed assets 4,170 4,892 5,489 5,687Current assets 791 644 919 1,675Cash & others 555 484 409 767Total assets 5,980 6,554 7,427 8,380Operating liabilities 351 0 201 429Gross debt 2,276 3,002 3,348 3,594Net debt 1,721 2,518 2,939 2,827Shareholders funds 2,945 3,144 3,405 3,649Invested capital 4,055 5,051 5,798 6,166


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -100.0 113.6EBITDA 113.2Operating profit 156.3PBT 405.1 55.6 23.6HSBC EPS 406.9 34.6 -5.9

Ratios (%)

Revenue/IC (x) 0.0 0.0 0.2 0.4ROIC -2.4 -0.2 3.8 8.8ROE 3.3 12.8 16.0 14.0ROA 1.4 6.2 9.9 11.2EBITDA margin 0.0 0.0 32.0 31.9Operating profit margin 0.0 0.0 19.2 23.0EBITDA/net interest (x) 3.4 4.7Net debt/equity 51.5 71.2 76.1 65.1Net debt/EBITDA (x) -20.8 -343.3 8.2 3.7CF from operations/net debt 8.0 19.8 27.3



Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 7.9 3.8EV/EBITDA 24.8 11.8EV/IC 1.9 1.7 1.5 1.5PE* 85.0 16.8 12.5 13.2P/Book value 2.2 2.1 1.9 1.8FCF yield (%) -10.6 -15.7 -11.1 -0.2Dividend yield (%) 0.6 2.9 4.0 3.8


Issuer information


Reuters (Equity) 2260.SE Bloomberg (Equity) SPC ABMarket cap (USDm) 1,742 Market cap (SARm) 6,523Free float (%) 33 Enterprise value (SARm) 8415Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

7

12

17

22

27

32

2009 2010 2011 2012

7

12

17

22

27

32

Sahara Petrochemical Co. Rel to TADAWUL ALL SHARE INDEX


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Strong recent performance limits upside Petrochem shares are up 48% since the start of

2010, while SIIG has been flat over the same

period. This has closed the valuation disconnect

between the two companies flagged in our April

2010 note, Shifting into focus, which was the

primary driver for our buy case on Petrochem.

Given recent gains we believe that there is limited

upside from current levels, particularly as the start

of commercial operations, which could be the

next catalyst for the stock, is at least six to nine

months away. We maintain our target price of

SAR25 and downgrade the stock to Neutral (V)

from Overweight (V).


Start of commercial operations: Petrochem

expects Saudi Polymers to begin commercial

operations in Q3 2011. We are, however,

assuming a 2012 start-up in our estimates. The

beginning of commercial operations will be the

driving factor for Petrochem in the medium term.

As revenues and earnings start to flow through,

the earnings power of the company should be

demonstrated and help reduce the execution risk

typically associated with a greenfield project.






National PetrochemicalCompany (Petrochem)

Strong recent performance and catch-up in valuation versus SIIG

limits Petrochem’s upside from current levels

Start-up of Saudi Polymers should be the next catalyst

Downgrade to Neutral (V), maintain target price of SAR25

Petrochem: Changes to estimates


Revenue 0 0 6,924 6,960 8,884 8,872 EBITDA -10 -10 2,794 2,952 3,604 3,766 Net Income -29 -9 611 707 1,130 1,228 EPS -0.06 -0.02 1.27 1.47 2.35 2.56 EBITDA Margin NA NA 40.4% 42.4% 40.6% 42.4% Net Margin NA NA 8.8% 10.2% 12.7% 13.8%


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We use a DCF to value Petrochem. Our new cost

of equity for Petrochem is 10.6% (vs. 11%

previously) and includes a risk free rate of 3.5%, a




WACC estimate of 8.6% (vs. 8.9% previously).







within the Neutral band of our model. We

therefore downgrade our rating on the stock to

Neutral (V) from Overweight (V)

Risks

Saudi Polymers start-up: There are typically

some teething problems during the start-up phase

of a greenfield project. As Saudi Polymers is

Petrochem’s only asset, any operational delay in

the Saudi Polymers project would have a

significant negative impact on our earnings

estimates and valuation for the company, and

represents a downside risk. Conversely a faster

than expected start-up represents an upside risk to

our Neutral (V) rating.

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Financials & valuation: National Petrochemical Co Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 0 0 0 6,924EBITDA -9 -9 -10 2,794Depreciation & amortisation -14 0 0 -1,084Operating profit/EBIT -23 -9 -10 1,710Net interest -1 -1 -1 -708PBT -9 -11 -11 1,002HSBC PBT -9 -11 -11 1,002Taxation -53 -90 -20 -40Net profit -60 -99 -29 611HSBC net profit -60 -99 -29 611


Cash flow from operations 655 -97 -31 1,122Capex -9,012 -5,000 -5,500 -217Cash flow from investment -9,092 -5,000 -5,500 -217Dividends 0 0 0 -153Change in net debt 5,097 5,531 -753FCF equity -8,426 -5,097 -5,531 905


Intangible fixed assets 0 0 0 0Tangible fixed assets 11,170 16,170 21,670 20,804Current assets 3,276 2,676 1,645 3,861Cash & others 3,272 2,675 1,645 2,397Total assets 14,581 18,980 23,449 24,799Operating liabilities 967 967 967 1,508Gross debt 8,712 13,212 17,712 17,712Net debt 5,440 10,536 16,067 15,314Shareholders funds 4,757 4,659 4,629 5,088Invested capital 10,208 15,204 20,704 20,760

Ratio (%)

Revenue/IC (x) 0.0 0.0 0.0 0.3ROIC -3.1 -0.7 -0.2 7.9ROE -2.5 -2.1 -0.6 12.6ROA -0.7 -0.5 -0.1 6.8EBITDA margin 0.0 0.0 0.0 40.4Operating profit margin 0.0 0.0 0.0 24.7EBITDA/net interest (x) 3.9Net debt/equity 112.2 221.9 340.6 277.1Net debt/EBITDA (x) -627.4 -1157.4 -1680.9 5.5CF from operations/net debt 12.0 7.3


EPS Rep (fully diluted) -0.13 -0.21 -0.06 1.27HSBC EPS (fully diluted) -0.13 -0.21 -0.06 1.27DPS 0.00 0.00 0.00 0.32Book value 9.91 9.71 9.64 10.60

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 3.9EV/EBITDA 9.6EV/IC 1.6 1.4 1.3 1.3PE* 18.3P/Book value 2.4 2.4 2.4 2.2FCF yield (%) -74.6 -45.1 -49.0 7.8Dividend yield (%) 0.0 0.0 0.0 1.4Note: * = Based on HSBC EPS (fully diluted) Issuer information


Reuters (Equity) 2002.SE Bloomberg (Equity) 3569689Z ABMarket cap (USDm) 2,992 Market cap (SARm) 11,208Free float (%) 17 Enterprise value (SARm) 21834Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

1113151719212325

2009 2010 2011 20121113151719212325

National Petrochemical Co Rel to TADAWUL ALL SHARE INDEX


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Pure-play polypropylene producer APC is a pure-play polypropylene (PP) producer.

It has the highest leverage to polypropylene prices

within our coverage universe as it is one of the

few Saudi companies whose feedstock is entirely

linked to crude prices and therefore its margins

vary depending upon the change in polypropylene

and crude prices.

As a single plant entity the growth options for APC

are fairly limited. The company has paid out c98%

of its earnings as dividends for 2009- H1 2010.


Price leverage: APC has a high structural

leverage to PP prices. A rising crude oil price

scenario typically implies rising PP, as well as

naphtha, prices (as a rule of thumb, a USD1/bbl

change in the crude oil prices translates into a

USD9/tonne change in the naphtha price and a

USD20/tonne change in the polypropylene price),

leading to margin expansion/contraction for APC

depending on the direction of the change. We

expect APC to benefit from rising crude prices in

the near term.

Dividend policy: APC has paid out close to 100%

of its earnings as dividends for 2009 and H1 2010.

As a single plant entity, APC has limited options

for expansion. If no expansion takes place, we

believe the company will continue to maintain its

high dividend payout ratio.

Advanced Petrochemical Company (APC)

Significant leverage to higher polypropylene prices and a strong

dividend yield play

Firm fundamentals mostly priced in at current levels

Maintain Neutral (V) rating and target price of SAR30

APC: Changes to estimates


Revenue 2,053 2,131 2,100 2,144 2,149 2,155 EBITDA 620 665 624 677 633 689 Net Income 365 395 367 419 384 439 EPS 2.58 2.79 2.60 2.97 2.72 3.10 EBITDA Margin 30.2% 31.2% 29.7% 31.6% 29.4% 31.9% Net Margin 17.8% 18.5% 17.5% 19.6% 17.9% 20.4%


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We use a DCF to value APC. Our new cost of

equity for APC is 10.82% (vs. 11% previously)












within the Neutral band of our model, so we

maintain our Neutral (V) rating on the stock.

Risk

Commodity Prices: APC has high leverage to PP

prices. Any significant changes to the correlation

between PP and naphtha price movements would

constitute a risk to our earning estimates and

valuation for the company, either to the downside

or the upside.

Operating rates: As a single plant entity, APC’s

earnings have a high degree of sensitivity to its

operating rates. Any significant outages remain a

key downside risk to our earning estimates and

valuation of the company.

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Financials & valuation: Advanced Petro Chemical C Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 1,467 2,017 2,053 2,100EBITDA 358 586 620 624Depreciation & amortisation -184 -212 -208 -207Operating profit/EBIT 174 374 413 417Net interest -48 -34 -34 -36PBT 127 341 380 383HSBC PBT 127 341 380 383Taxation 0 -4 -15 -15Net profit 127 337 365 367HSBC net profit 127 337 365 367


Cash flow from operations 435 271 564 562Capex -11 -25 -25 -38Cash flow from investment -46 -25 -25 -38Dividends -70 -212 -212 -212Change in net debt -331 -23 -327 -312FCF equity 419 245 537 523


Intangible fixed assets 83 83 83 83Tangible fixed assets 2,498 2,322 2,139 1,970Current assets 833 1,022 1,203 1,348Cash & others 309 257 428 554Total assets 3,414 3,426 3,425 3,400Operating liabilities 261 224 225 232Gross debt 1,474 1,400 1,244 1,058Net debt 1,165 1,143 816 504Shareholders funds 1,670 1,796 1,949 2,104Invested capital 2,844 2,945 2,772 2,614


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 0.5 37.5 1.8 2.3EBITDA -2.2 63.8 5.9 0.6Operating profit -31.7 115.3 10.4 1.0PBT -39.7 169.4 11.4 0.6HSBC EPS -39.7 166.2 8.3 0.6

Ratios (%)




Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 3.4 2.4 2.2 2.0EV/EBITDA 13.8 8.4 7.4 6.9EV/IC 1.7 1.7 1.7 1.6PE* 29.8 11.2 10.3 10.3P/Book value 2.3 2.1 1.9 1.8FCF yield (%) 11.1 6.5 14.2 13.8Dividend yield (%) 1.9 5.6 5.6 5.6


Issuer information


Reuters (Equity) 2330.SE Bloomberg (Equity) APPC ABMarket cap (USDm) 1,008 Market cap (SARm) 3,775Free float (%) 47 Enterprise value (SARm) 4917Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

12141618202224262830

2009 2010 2011 2012

12141618202224262830

Advanced Petro Chemical C Rel to TADAWUL ALL SHARE INDEX


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Margin expansion yet to materialise Chemanol started commercial operation of its

expansion project towards the end of Q2 2010.

The project includes a 231ktpa methanol plant

which is part of the company’s backward-

integration plan. The plant was intended to

eliminate the company's dependency on market-

priced methanol by allowing it to produce its own

methanol at cash costs of below USD80/tonne

(based on a gas price of 0.75 USD/mmbtu).

Chemanol’s Q3 2010 net income was, however,

disappointing at a net loss of SAR15.6m, versus

SAR8.8m in Q2 2010. Reported financials show

no impact yet from the integration project on the

margin front and we believe that the company will

need to deliver on the promised margin expansion

from the integration project over the next few

quarters or run the risk of seeing the shares

derated. The stock currently trades at the high end

of the range for regional petrochemical multiples

at 15.1x 2011e.


Integration impact: 2011 will be the first full

year of operations for Chemanol’s methanol

integration project. Despite capital expenditure of

cSAR1bn, the new project has not delivered any

increase in margins yet and we believe that

delivery on margin expansion will be the key

driver of Chemanol’s share price in the near term.

Potential rights issue overhang: Chemanol took on

an additional USD85m of short-term debt, beyond

the initial project financing, due to cost overruns at

the methanol expansion project. The conditions of

this new loan stipulate repayment by the end of 2011

by means of either excess operating cash or a rights

issuance. On our estimates Chemanol will find it

difficult to generate that amount of cash flow

through operating activities alone by the end of

2011. We therefore believe that a rights issue before

Chemanol

Margin expansion yet to materialise

Potential rights issue remains an overhang

Maintain Neutral (V) rating, raising target price from SAR14 to

SAR17

Chemanol: Changes to estimates


Revenue 762 788 810 805 816 808 EBITDA 355 387 377 397 370 395 Net Income 121 152 150 169 150 174 Eps 1.00 1.26 1.24 1.40 1.24 1.44 EBITDA Margin 46.6% 49.1% 46.6% 49.3% 45.3% 48.9% Net Margin 15.9% 19.3% 18.5% 20.9% 18.3% 21.6%


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the end of 2011 is quite likely and constitutes a

potential overhang for the stock.












We use a DCF to value Chemanol. Our new cost

of equity for Chemanol is 9.98% (vs. 11%













our model, so we maintain our Neutral (V) rating

on the stock.

Risks

Potential rights issue overhang: As mentioned

earlier Chemanol had to take on an additional

USD85m in short-term debt due to cost overruns

at the methanol expansion project. The loan must

be repaid by the end of 2011 by means of either

excess operating cash or a rights issuance. We

believe a rights issue before the end of 2011 is

quite likely and could be a potential overhang for

the stock, creating a downside risk.

Operating rates: In our estimates, we build in

operating rates of 90% for the company in 2011

and 95% thereafter. Any significant variation in

the operating rates would constitute a key risk,

either on the upside or downside, to our Neutral

(V) rating on the stock.

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Financials & valuation: Methanol Chemicals Co. Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 402 606 762 810EBITDA 59 136 355 377Depreciation & amortisation -27 -87 -163 -163Operating profit/EBIT 32 50 192 214Net interest -9 -31 -66 -58PBT 24 19 126 156HSBC PBT 24 19 126 156Taxation -2 -4 -5 -6Net profit 22 15 121 150HSBC net profit 22 15 121 150


Cash flow from operations 67 84 242 300Capex -551 -27 -41 -41Cash flow from investment -474 -27 -41 -41Dividends 0 0 -61 -75Change in net debt 408 -57 -141 -184FCF equity -488 57 201 259


Intangible fixed assets 2 2 2 2Tangible fixed assets 2,507 2,474 2,352 2,230Current assets 486 543 677 727Cash & others 271 289 392 425Total assets 3,032 3,056 3,068 2,996Operating liabilities 175 195 185 188Gross debt 1,448 1,409 1,371 1,221Net debt 1,177 1,120 979 795Shareholders funds 1,411 1,425 1,486 1,561Invested capital 2,550 2,534 2,454 2,345


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -29.5 50.7 25.6 6.3EBITDA -19.4 131.7 161.0 6.2Operating profit -30.1 54.1 287.5 11.5PBT -38.1 -23.7 579.6 23.5HSBC EPS -42.3 -32.7 715.7 23.5

Ratios (%)




Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e



Issuer information


Reuters (Equity) 2001.SE Bloomberg (Equity) CHEMANOL ABMarket cap (USDm) 488 Market cap (SARm) 1,827Free float (%) 60 Enterprise value (SARm) 2910Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

910111213141516171819

2009 2010 2011 2012

910111213141516171819

Methanol Chemicals Co. Rel to TADAWUL ALL SHARE INDEX


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Returns from acetyls project have been disappointing Sipchem started commercial operations at its Phase

II plants in 2010. The acetic acid and carbon

monoxide plants commenced commercial operations

in June 2010, while the acetyls plant started in

August 2010. While Sipchem’s revenue was up 22%

and 37% q-o-q in Q2 2010 and Q3 2010,

respectively, the net income changes were +8% and

-4% for the same periods. And although Sipchem

reported strong revenue growth in Q4 2010, due to

the strength in methanol prices which were up 26%

q-o-q, the company missed consensus estimates. We

think it is therefore fair to say that, to date, returns

from the acetyls start-up have been well below

expectations and that better execution at the new unit

will be key to meeting estimates in 2011.


Phase II operations: 2011 will be the first full year

of operations of the Phase II plants. The near-term

driver for Sipchem will be the ramping up of

operations at the Phase II plants, particularly as the

results from H2 2010 have not been very impressive.

Phase III projects: Sipchem recently announced

the award of Engineering Procurement and

Construction (EP&C) contracts for it Phase III

projects. In December 2010 the company awarded

the EPC contract for a 200ktpa ethylene vinyl

acetate (EVA)/LDPE project and another contract

for a 100ktpa ethyl acetate (EA)/butyl acetate

(BA) plant in January 2011. The company expects

both the plants to be operational in Q2 2013.

Sipchem is planning to raise SAR1.5-2.0bn in Q1

2011 to finance the investments in these new

projects.

Sipchem

Phase III of acetyls project to be the medium-term catalyst

Stock looking fully valued at current levels

Maintain Neutral (V) rating, cutting target price from SAR30 to

SAR29

Sipchem: Changes to estimates


Revenue 2,727 2,780 2,781 2,905 2,808 2,912 EBITDA 1,458 1,552 1,429 1,646 1,408 1,653 Net Income 533 600 524 674 521 690 EPS 1.60 1.80 1.57 2.02 1.56 2.07 EBITDA Margin 53.5% 55.8% 51.4% 56.7% 50.1% 56.8% Net Margin 19.5% 21.6% 18.8% 23.2% 18.5% 23.7%


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We use a DCF to value Sipchem. Our new cost of

equity for Sipchem is 10.04% (vs. 11%












from current levels, which is within the Neutral

band of our model, so we maintain our Neutral


Risk

Operating risk: Sipchem’s carbon monoxide unit

had a technical outage in Q3 2010, which led to a

two-week shutdown at its acetic acid unit. Given

the interdependence between the various units of

Sipchem, we believe that any problems the

company faces when ramping up production from

its new plants would represent a downside risk to

our estimates, while a faster-than-expected ramp

up represents an upside risk.

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Financials & valuation: Saudi International Petro Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 830 1,903 2,727 2,781EBITDA 347 1,064 1,458 1,429Depreciation & amortisation -179 -322 -520 -520Operating profit/EBIT 168 742 938 908Net interest 27 -93 -154 -138PBT 210 658 793 779HSBC PBT 210 658 793 779Taxation -40 -23 -32 -31Net profit 141 408 533 524HSBC net profit 141 408 533 524


Cash flow from operations -114 576 1,348 1,421Capex -1,532 -104 -104 -156Cash flow from investment -1,532 -104 -104 -156Dividends -333 -102 -133 -131Change in net debt 1,991 -119 -934 -974FCF equity -1,659 356 1,059 1,096


Intangible fixed assets 31 31 31 31Tangible fixed assets 9,569 9,352 8,935 8,571Current assets 2,218 2,197 2,948 3,552Cash & others 1,831 1,730 2,264 2,839Total assets 11,818 11,580 11,914 12,154Operating liabilities 1,465 915 1,021 1,044Gross debt 4,481 4,260 3,860 3,460Net debt 2,650 2,530 1,596 622Shareholders funds 4,922 5,228 5,628 6,021Invested capital 8,522 8,935 8,629 8,272


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -51.4 129.1 43.3 2.0EBITDA -70.1 206.7 37.1 -2.0Operating profit -82.2 340.7 26.4 -3.2PBT -75.3 212.5 20.6 -1.7HSBC EPS -73.8 189.9 30.5 -1.7

Ratios (%)

Revenue/IC (x) 0.1 0.2 0.3 0.3ROIC 1.8 8.2 10.3 10.3ROE 2.8 8.0 9.8 9.0ROA 1.8 6.2 7.7 7.3EBITDA margin 41.8 55.9 53.5 51.4Operating profit margin 20.3 39.0 34.4 32.7EBITDA/net interest (x) 11.4 9.5 10.4Net debt/equity 45.4 39.8 22.8 8.2Net debt/EBITDA (x) 7.6 2.4 1.1 0.4CF from operations/net debt 22.8 84.5 228.6



Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e



Issuer information


Reuters (Equity) 2310.SE Bloomberg (Equity) SIPCHEM ABMarket cap (USDm) 2,296 Market cap (SARm) 8,600Free float (%) 66 Enterprise value (SARm) 12267Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

13151719212325272931

2009 2010 2011 2012

13151719212325272931

Saudi International Petro Rel to TADAWUL ALL SHARE INDEX


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Running ahead of fundamentals Industries Qatar (IQ) stock has rallied sharply in

the last six months and is up more than 40% since

the start of H2 2010. This rally is explained by

two factors: stronger fundamentals for IQ’s

products -fertilisers and petrochemicals - and a

stronger macroeconomic environment for Qatar,

including the award of the 2022 Fifa World Cup.

We believe that both of these factors are more

than adequately priced into the stock and that the

risks to the current share price are to the

downside, particularly if there are any delays to

the commercialisation of the QAFCO V plant

which is expected in Q2 2011.

We have raised our target price for IQ from

QAR110 to QAR135, but still downgrade the

stock from Neutral to Underweight based on

valuation.


Volume growth in fertilisers: QAFCO V is

scheduled to come online in Q2 2011, while

QAFCO VI is now delayed, with start-up scheduled

for H2 2012. QAFCO V has a design capacity of

1300ktpa of urea and 1500ktpa of ammonia, while

QAFCO VI has a 1300ktpa urea capacity. We

expect fertiliser volumes for IQ to increase by c32%

and c24% in 2011 and 2012, respectively.


There are two major moving parts impacting our

estimates: changes to product price estimates in line


price forecasts; and the update to our cost of equity

assumptions as explained earlier. For Qatar, there are

no changes to our feedstock pricing assumptions.

The changes to our financial forecasts are detailed

in the table at the bottom of the page.

Industries Qatar

Pricing and volume gains fully priced in at current levels

Timely start up of fertiliser plant a key risk in 2011

Downgrade to Underweight from Neutral, raise target price from

QAR110 to QAR135

IQ: Changes to estimates




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We use a DCF to value Industries Qatar. Our new

cost of equity for IQ is 12.4% (vs. 11%





WACC estimate of 11.1% (vs. 10% previously).

Under our research model, for stocks without a



for Qatari stocks of 11.5%. Our new DCF-derived

target price for the company is QAR135 (vs

QAR110 previously). Our target price for IQ has

increased despite the increase in our cost of equity

as there are no changes to our feedstock price

assumptions for Qatar to offset the effect of the

increase in product prices. Our new target price of

QAR135 implies a -12% potential return from

current levels, which is below the Neutral band of

our model. We therefore downgrade our rating on

the stock to Underweight from Neutral.

Risks

Plant start-up timelines: A faster-than-expected

start-up to IQ’s capacity expansion projects under

construction would have a positive impact on

earnings and constitute an upside risk to our

Underweight rating.

Energy price movements: The prices of most of

IQ’s products - be they fertilisers or

petrochemicals, are tightly correlated with crude

oil prices. A sharp increase in global energy prices

– particularly the price of crude oil – represents an

upside risk to our Underweight rating on

Industries Qatar shares.

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Financials & valuation: Industries Qatar QSC Underweight Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Profit & loss summary (QARm)

Revenue 9,656 12,071 14,881 16,995EBITDA 3,846 5,723 7,156 8,033Depreciation & amortisation -525 -578 -808 -928Operating profit/EBIT 3,322 5,145 6,348 7,105Net interest -100 -144 -199 -199PBT 5,037 5,687 6,337 7,115HSBC PBT 5,037 5,687 6,337 7,115Taxation -125 0 -158 -178Net profit 4,909 5,687 6,179 6,938HSBC net profit 4,909 5,687 6,179 6,938

Cash flow summary (QARm)

Cash flow from operations 4,301 6,182 6,612 7,583Capex -4,829 -3,000 -3,000 -3,000Cash flow from investment -872 -3,000 -3,000 -3,000Dividends -4,400 -2,833 -3,080 -3,465Change in net debt 3,573 -350 -532 -1,118FCF equity -487 2,757 3,423 4,374

Balance sheet summary (QARm)

Intangible fixed assets 96 96 96 96Tangible fixed assets 8,115 10,537 12,729 14,802Current assets 9,358 10,021 11,272 12,989Cash & others 5,834 6,183 6,715 7,834Total assets 27,117 30,202 33,645 37,435Operating liabilities 2,062 2,293 2,638 2,955Gross debt 5,998 5,998 5,998 5,998Net debt 165 -185 -717 -1,835Shareholders funds 19,047 21,901 25,000 28,473Invested capital 9,673 12,177 14,744 17,098


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -34.5 25.0 23.3 14.2EBITDA -46.6 48.8 25.0 12.3Operating profit -50.7 54.9 23.4 11.9PBT -30.8 12.9 11.4 12.3HSBC EPS -32.5 15.9 8.7 12.3

Ratios (%)

Revenue/IC (x) 1.1 1.1 1.1 1.1ROIC 37.3 47.1 46.0 43.5ROE 26.3 27.8 26.3 25.9ROA 18.4 20.3 20.0 20.1EBITDA margin 39.8 47.4 48.1 47.3Operating profit margin 34.4 42.6 42.7 41.8EBITDA/net interest (x) 38.6 39.8 35.9 40.3Net debt/equity 0.9 -0.8 -2.9 -6.4Net debt/EBITDA (x) 0.0 0.0 -0.1 -0.2CF from operations/net debt 2611.0

Per share data (QAR)


Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e



Issuer information

Share price (QAR) 153.00 Target price (QAR) 135.00 Potent'l return (%) -11.8

Reuters (Equity) IQCD.QA Bloomberg (Equity) IQCD QDMarket cap (USDm) 23,108 Market cap (QARm) 84,150Free float (%) 30 Enterprise value (QARm) 82067Country Qatar Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

49

69

89

109

129

149

169

2009 2010 2011 2012

49

69

89

109

129

149

169

Industries Qatar QSC Rel to DSM 20 INDEX


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Pure play on nitrogen fertiliser SAFCO is a pure play on nitrogen fertilisers.

Further expansion options are limited as any new

gas allocation for expansion is unlikely. Given the

limited room for new capacity expansions,

SAFCO has been a cash cow for SABIC (which

owns a 43% stake) and has paid out c90% of its

earnings as dividends since 2007.


Nitrogen market outlook: Nitrogen market

fundamentals recovered over Q3 2010, with urea

prices up from lows of USD220/t in mid-June to

USD400/t, based on spot Middle East prices (fob

basis). The recovery was primarily driven by

greater demand from India and Brazil (which we

believe is likely to stay strong in 2011),

production cutbacks in China, and China's early

urea export tax application.

We believe that further nitrogen fertiliser price

appreciation will be limited going into 2011, due to

supply from new projects coming on stream, mainly

from Algeria, Qatar and Pakistan. Two of these

projects, Sorfert in Algeria, and QAFCO V in Qatar,

will be almost entirely directed into the export

market, together selling 1.25m tonnes in 2011e,

2.65m tonnes in 2012e and 3.54m tonnes in 2013e.

These capacity increases represent c50% of

additional global supply and should add 3.5% to the

global urea traded volume in 2011. However, we

think rising Russian, Ukrainian and Chinese

production costs will more than offset the effect of

Saudi Fertiliser Company (SAFCO)

Pure play nitrogenous fertiliser company with leverage to rising

fertiliser prices

Yield play with limited growth potential

Maintain Neutral (V) rating, raise target price from SAR135 to

SAR190

SAFCO: Changes to estimates




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low-cost exports from Qatar and Algeria on the

general level of prices.

Our cost curve suggests a weighted average cost for

urea trade of USD144/t in 2011, almost 11% higher

y-o-y in spite of the Algerian and Qatari projects.

That said, upside from spot urea prices of USD400/t

is limited, in our view, given that cash margins are

healthy for high-cost marginal producers. For more

details see our December 2010 report, The Fertile

Crescent - Countdown to the rebound.

Dividend policy: SAFCO is essentially a yield

play given its limited growth profile and high

dividend payout ratio. We expect the company to

continue with its high dividend policy as capacity

growth for the company is constrained by new gas

allocations, which are unlikely in our opinion.










bottom of the previous page.


We use a DCF to value SAFCO. Our new cost of

equity for SAFCO is 8.3% (vs. 11% previously)













our model, so we maintain our Neutral (V) rating

on the stock.

Risks

Nitrogen fertiliser prices: Lower gas prices to

Ukraine (a marginal cost producer) and poor

weather in India and Latin America (the two

largest growing import markets), which could

pressure urea pricing, are key downside risks to

our Neutral (V) rating on SAFCO.

Operating rates: Any changes from the expected

operating rates constitute a key risk, to the

downside or the upside, to both our earnings

estimates and valuation of the company.

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Financials & valuation: Saudi Arabian Fertilizer Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 2,741 3,609 4,394 4,399EBITDA 1,916 2,727 3,345 3,196Depreciation & amortisation -258 -250 -356 -423Operating profit/EBIT 1,658 2,477 2,989 2,773Net interest 0 63 58 63PBT 1,900 3,114 3,287 3,076HSBC PBT 1,900 3,114 3,287 3,076Taxation -96 -72 -99 -92Net profit 1,804 3,042 3,188 2,984HSBC net profit 1,804 3,042 3,188 2,984


Cash flow from operations 2,108 3,315 3,374 3,425Capex -202 -64 -694 -1,331Cash flow from investment 98 -64 -694 -1,331Dividends -1,250 -2,745 -2,880 -2,678Change in net debt 1,032 -570 142 520FCF equity 1,870 2,741 2,498 1,917


Intangible fixed assets 190 190 190 190Tangible fixed assets 3,452 3,266 3,604 4,512Current assets 4,056 4,476 4,551 4,089Cash & others 2,650 3,220 3,077 2,557Total assets 8,808 9,041 9,454 9,900Operating liabilities 1,203 1,140 1,245 1,385Gross debt 590 590 590 590Net debt -2,060 -2,630 -2,488 -1,968Shareholders funds 7,015 7,311 7,620 7,926Invested capital 3,846 3,572 4,023 4,849


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -47.7 31.7 21.8 0.1EBITDA -56.0 42.3 22.7 -4.5Operating profit -58.5 49.4 20.7 -7.2PBT -56.7 63.9 5.5 -6.4HSBC EPS -60.1 68.6 4.8 -6.4

Ratios (%)

Revenue/IC (x) 0.7 1.0 1.2 1.0ROIC 41.2 65.2 76.3 60.6ROE 24.0 42.5 42.7 38.4ROA 19.3 33.4 33.9 30.2EBITDA margin 69.9 75.6 76.1 72.6Operating profit margin 60.5 68.6 68.0 63.0EBITDA/net interest (x) Net debt/equity -29.4 -36.0 -32.7 -24.8Net debt/EBITDA (x) -1.1 -1.0 -0.7 -0.6CF from operations/net debt



Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 15.3 11.5 9.5 9.6EV/EBITDA 21.9 15.2 12.4 13.2EV/IC 10.9 11.6 10.3 8.7PE* 25.0 14.8 14.2 15.1P/Book value 6.4 6.2 5.9 5.7FCF yield (%) 4.2 6.2 5.7 4.4Dividend yield (%) 2.6 6.1 6.4 5.9


Issuer information


Reuters (Equity) 2020.SE Bloomberg (Equity) SAFCO ABMarket cap (USDm) 12,048 Market cap (SARm) 45,125Free float (%) 42 Enterprise value (SARm) 41386Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

67

87

107

127

147

167

187

2009 2010 2011 2012

67

87

107

127

147

167

187

Saudi Arabian Fertilizer Rel to TADAWUL ALL SHARE INDEX


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Integrated basic petrochemicals play SIIG is a combination of three separate basic

chemical projects, two of which are already

operating (SCP and JCP), while Saudi Polymers is

under construction and is expected be on stream

by Q3 2011 according to management. The

projects have a high degree of integration, which

allows for significant cost savings – benzene

produced at SCP is supplied to JCP to make

styrene and that styrene will be further converted

into polystyrene within the Saudi Polymers unit.

The key driver for SIIG’s earnings in the near

term is the completion of the Saudi Polymers

project, which we expect will contribute over 65%

of SIIG’s earnings after 2012.


Saudi Polymers start-up: Saudi Polymers is

expected to begin commercial operations in Q3

2011 according to management. We are, however,

assuming a 2012 start-up in our estimates.

SIIG, which owns a 47.4% stake in Petrochem,

has an effective 30.8% stake in the Saudi

Polymers project. The start of commercial

operations at Saudi Polymers is the key near-term

catalyst for SIIG, in our opinion.










bottom of the page.

SIIG

Saudi Polymers start-up to be the key short-term catalyst

Limited upside from current levels

Maintain Neutral (V) rating, raising target price from SAR19 to

SAR25

SIIG: Changes in estimates


Revenue 3,788 7,025 10,872 14,126 12,829 16,042 EBITDA 834 927 3,651 3,985 4,439 4,867 Net Income 463 293 1,059 846 1,584 1,275 Eps 1.03 0.65 2.35 1.88 3.52 2.83 EBITDA Margin 22.0% 13.2% 33.6% 28.2% 34.6% 30.3% Net Margin 12.2% 4.2% 9.7% 6.0% 12.3% 7.9%


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We use a DCF to value SIIG. Our new cost of

equity for SIIG is 10.52% (vs. 11% previously)















Risk

Saudi Polymers start-up: There are typically

some teething problems that occur in the start-up

phase of a greenfield project. Any such

operational delay in the Saudi Polymers project

would have a negative impact on our earnings

estimates and valuation for the company, while a

faster-than-expected start-up represents an upside

risk to our Neutral (V) rating.

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Financials & valuation: Saudi Industrial Investment Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 3,760 4,512 3,788 10,872EBITDA 690 795 834 3,651Depreciation & amortisation -203 -273 -304 -1,501Operating profit/EBIT 487 522 530 2,150Net interest -15 -23 -20 -728PBT 472 499 510 1,421HSBC PBT 472 499 510 1,421Taxation -111 -164 -61 -57Net profit 391 378 463 1,059HSBC net profit 391 378 463 1,059


Cash flow from operations 1,100 330 849 1,921Capex -9,091 -5,528 -5,528 -234Cash flow from investment -8,934 -5,528 -5,528 -234Dividends 0 0 0 -270Change in net debt 4,524 5,198 4,679 -1,417FCF equity -8,115 -5,198 -4,679 1,687


Intangible fixed assets 0 0 0 0Tangible fixed assets 14,151 19,407 24,631 23,364Current assets 5,524 7,097 7,603 10,408Cash & others 4,586 5,773 6,480 7,782Total assets 19,675 26,503 32,233 33,773Operating liabilities 2,564 2,672 2,567 3,126Gross debt 9,138 15,523 20,909 20,794Net debt 4,552 9,750 14,429 13,012Shareholders funds 5,482 5,860 6,323 7,112Invested capital 12,525 18,058 23,186 22,864


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 75.8 20.0 -16.1 187.0EBITDA 212.1 15.1 4.9 337.9Operating profit 1035.6 7.1 1.5 305.7PBT 710.6 5.6 2.2 178.8HSBC EPS 702.8 -3.5 22.6 128.6

Ratios (%)




Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 4.5 4.9 7.1 2.4EV/EBITDA 24.6 27.9 32.2 7.0EV/IC 1.4 1.2 1.2 1.1PE* 25.5 26.4 21.6 9.4P/Book value 1.8 1.7 1.6 1.4FCF yield (%) -65.2 -41.9 -37.8 13.3Dividend yield (%) 0.0 0.0 0.0 2.7


Issuer information


Reuters (Equity) 2250.SE Bloomberg (Equity) SIIG ABMarket cap (USDm) 2,667 Market cap (SARm) 9,990Free float (%) 80 Enterprise value (SARm) 22158Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

7

12

17

22

27

2009 2010 2011 2012

7

12

17

22

27

Saudi Industrial Investme Rel to TADAWUL ALL SHARE INDEX


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Cost overruns to outweigh earlier start-up Saudi Kayan started test production at the olefins

complex in July 2010, a quarter ahead of our

estimate of an end Q3 2010 date; however the

project cost exceeded the initial estimate of

SAR37.5bn by SAR9bn, and was ahead of our

estimate by SAR6bn. These cost overruns will

inevitably weigh on company profitability. The

resulting interest costs and higher depreciation

expense amount to a cSAR0.30 drop in annual EPS.


Start of commercial operations: Saudi Kayan is

expected to start commercial operations in

2011.We are assuming a Q3 2011 start-up in our

estimates. This will make Kayan one of the few

companies in our coverage with significant

volume leverage in 2011.

Execution risk: There is a certain amount of

execution risk involved with any large scale

greenfield project. Kayan started test production

at the olefins complex ahead of time, however it

faced cost overruns. The start of commercial

operations as per schedule will help reduce

execution risk, as the earnings power of the

company is demonstrated.










the table at the bottom of the page.

Saudi Kayan

2011 is key as the company’s first plant is expected to start

commercial operations by H2

Execution risks high in start-up phase

Reiterate Neutral (V) rating, raising target price to SAR22 from

SAR18

Kayan: Changes to estimates


Revenue 5,222 5,986 11,228 11,837 12,705 11,953 EBITDA 2,830 3,088 6,049 6,285 6,783 6,337 Net Income 795 -336 2,055 2,283 2,858 2,430 Eps 0.53 -0.22 1.37 1.52 1.91 1.62 EBITDA Margin 54.2% 51.6% 53.9% 53.1% 53.4% 53.0% Net Margin 15.2% -5.6% 18.3% 19.3% 22.5% 20.3%


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We use a DCF to value Saudi Kayan. Our new

cost of equity for Kayan is 10.64% (vs. 11%



We use a 4% cost of debt assumption and a

60%debt weighting (both unchanged) which

yields a WACC estimate of 7.71% (vs. 7.8%

previously).






previously SAR18) implies a 14% potential return




Risks

Start-up: We expect Saudi Kayan to start

commercial operations in Q3 2011. There are

typically some teething problems that occur in the

start-up phase of a greenfield project. Any such

operational delay would have a negative impact

on our earnings estimates and valuation for the

company, while a faster-than-expected start-up

represents an upside risk to our Neutral (V) rating.

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Financials & valuation: Saudi Kayan Petrochemical Neutral (V) Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 0 0 5,222 11,228EBITDA -17 -8 2,830 6,049Depreciation & amortisation 0 0 -1,163 -2,325Operating profit/EBIT -17 -8 1,668 3,724Net interest 0 0 -840 -1,583PBT -17 -8 828 2,141HSBC PBT -17 -8 828 2,141Taxation 0 0 -33 -86Net profit -17 -8 795 2,055HSBC net profit -17 -8 795 2,055


Cash flow from operations -939 160 926 3,893Capex -13,410 -13,353 -465 -687Cash flow from investment -13,410 -13,353 -465 -687Dividends 0 0 -225 -630Change in net debt 14,349 13,193 -236 -2,576FCF equity -14,349 -13,193 461 3,206


Intangible fixed assets 0 0 0 0Tangible fixed assets 33,168 46,521 45,824 44,186Current assets 2,639 6,077 5,497 6,978Cash & others 2,472 6,077 4,198 4,562Total assets 35,808 52,598 51,321 51,164Operating liabilities 1,217 1,217 1,484 2,114Gross debt 19,113 35,912 33,797 31,585Net debt 16,642 29,835 29,599 27,023Shareholders funds 15,477 15,469 16,039 17,464Invested capital 32,119 45,304 45,638 44,488


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue 115.0EBITDA 113.7Operating profit 123.2PBT -109.5 158.6HSBC EPS -109.9 158.6

Ratios (%)

Revenue/IC (x) 0.0 0.0 0.1 0.2ROIC -0.1 0.0 3.5 7.9ROE -0.1 -0.1 5.0 12.3ROA -0.1 0.0 3.1 7.0EBITDA margin 0.0 0.0 54.2 53.9Operating profit margin 0.0 0.0 31.9 33.2EBITDA/net interest (x) 3.4 3.8Net debt/equity 107.5 192.9 184.5 154.7Net debt/EBITDA (x) -987.9 -3729.4 10.5 4.5CF from operations/net debt 0.5 3.1 14.4


EPS Rep (fully diluted) -0.01 -0.01 0.53 1.37HSBC EPS (fully diluted) -0.01 -0.01 0.53 1.37DPS 0.00 0.00 0.15 0.42Book value 10.32 10.31 10.69 11.64

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 11.2 5.0EV/EBITDA 20.7 9.2EV/IC 1.4 1.3 1.3 1.3PE* 36.3 14.0P/Book value 1.9 1.9 1.8 1.7FCF yield (%) -49.7 -45.7 1.6 11.1Dividend yield (%) 0.0 0.0 0.8 2.2


Issuer information


Reuters (Equity) 2350.SE Bloomberg (Equity) KAYAN ABMarket cap (USDm) 7,709 Market cap (SARm) 28,875Free float (%) 25 Enterprise value (SARm) 58710Country Saudi Arabia Sector CHEMICALSAnalyst Sriharsha Pappu Contact 971 4 4236924

Price relative

79

1113151719212325

2009 2010 2011 2012

791113151719212325

Saudi Kayan Petrochemical Rel to TADAWUL ALL SHARE INDEX


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Notes

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Notes

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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Sriharsha Pappu and Tareq Alarifi

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate, regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,

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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 23 January 2011, the distribution of all ratings published is as follows: Overweight (Buy) 48% (23% of these provided with Investment Banking Services)

Neutral (Hold) 37% (20% of these provided with Investment Banking Services)

Underweight (Sell) 15% (22% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

NATIONAL INDUSTRIALIZATIO 2060.SE 33.50 21-Jan-2011 2, 7NATIONAL PETROCHEMICAL CO PETR 2002.SE 23.35 21-Jan-2011 2, 5SAHARA PETROCHEMICAL CO. 2260.SE 22.30 21-Jan-2011 2, 5SAUDI BASIC INDUSTRIES CO 2010.SE 107.25 21-Jan-2011 1, 2, 5, 7, 11SAUDI INDUSTRIAL INVESTME 2250.SE 22.20 21-Jan-2011 7SAUDI INTERNATIONAL PETRO 2310.SE 25.80 21-Jan-2011 5, 7SAUDI KAYAN PETROCHEMICAL 2350.SE 19.25 21-Jan-2011 1, 2, 5YANBU PETROCHEMICAL 2290.SE 46.30 21-Jan-2011 1, 2, 5

Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 31 December 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 November 2010, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 November 2010, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 30 November 2010, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

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Additional disclosures 1 This report is dated as at 24 January 2011. 2 All market data included in this report are dated as at close 19 January 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4 As of 31 December 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : ADVANCED PETRO CHEMICAL C

5 As of 07 January 2011, HSBC owned a significant interest in the debt securities of the following company(ies) : SAUDI BASIC INDUSTRIES CO

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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.

Issuer of report HSBC Bank Middle East Ltd PO Box 502601 Dubai UAE Telephone: +97 14 5077333 Fax: +97 14 3535079 Website: www.research.hsbc.com

In the UAE this document has been approved by HSBC Bank Middle East Ltd (“HBME”) for the information of its customers and those of its affiliates only. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. It is not intended for Private Customers in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Bank Middle East Ltd is registered in Jersey, Channel Islands, is authorised and regulated by the Jersey Financial Services Commission. © Copyright. HSBC Bank Middle East Ltd. 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank Middle East Ltd. MICA (P) 142/06/2010 and MICA (P) 193/04/2010

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Metals and Mining EMEA Andrew Keen +44 20 7991 6764 [email protected]

Thorsten Zimmermann, CFA +44 20 7991 6835 [email protected]

North America & Latin America Jonathan Brandt +1 212 525 4499 [email protected]

Lucia Marquez +1 212 525 7669 [email protected]

James Steel +1 212 525 6515 [email protected]

Sabrina M Grandchamps +1 212 525 5150 [email protected]

Patrick Chidley +1 212 525 4915 [email protected]

Asia Daniel Kang +852 2996 6669 [email protected]

Sarah Mak +852 2822 4551 [email protected]

Lun Zhang +852 2996 6569 [email protected]

Jigar Mistry, CFA +91 22 2268 1079 [email protected]

Energy Europe Paul Spedding Global Sector Co-head, Oil and Gas +44 20 7991 6787 [email protected]

David Phillips Global Sector Co-head, Oil and Gas +44 20 7991 2344 [email protected]

Omprakash Vaswani +91 80 3001 3786 [email protected]

CEEMEA, Latam Anisa Redman +1 212 525 4917 [email protected]

Bülent Yurdagül +90 212 376 46 12 [email protected]

Asia Sonia Song, CFA +852 2996 6557 [email protected]

Kumar Manish +91 22 2268 1238 [email protected]

Kirtan Mehta, CFA +91 80 3001 3779 [email protected]

Puneet Gulati +91 22 681235 [email protected]

Alternative Energy Robert Clover Global Sector Head, Alternative Energy +44 20 7991 6741 [email protected]

James Magness +44 20 7991 3464 [email protected]

Charanjit Singh +91 80 3001 3776 [email protected]

Chemicals Sriharsha Pappu +971 4 423 6924 [email protected]

Sonia Song, CFA +852 2996 6557 [email protected]

Utilities Europe Adam Dickens +44 20 7991 6798 [email protected]

José A López +44 20 7991 6710 [email protected]

Verity Mitchell +44 20 7991 6840 [email protected]

Asia Suman Guliani +91 80 3001 3747 [email protected]

Latin America Reginaldo Pereira +55 11 3371 8203 [email protected]

Eduardo J Gomide +55 11 3371 9502 [email protected]

CEEMEA Levent Bayar Analyst +90 212 376 46 17 [email protected]

Credit Europe Rodolphe Ranouil, CFA +44 20 7991 6855 [email protected]

North America Keith Kitagawa +1 212 525 5160 [email protected]

Specialist Sales Jacques Vaillancourt +44 20 7991 5210 [email protected]

Mark van Lonkhuyzen +44 20 7991 1329 [email protected]

Billal Ismail +44 20 7991 5362 [email protected]

Annabelle O'Connor +44 20 7991 5040 [email protected]

Global Natural Resources & Energy Research Team

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Wh

at p

rice is

righ

t?

By Sriharsha Pappu and Tareq Alarifi

Feedstock pricing changes likely to be announced in 2011. We expect this decision to be

influenced by a combination of both economic and policy factors, and we forecast a phased

increase that does not fundamentally alter the competitive position of the industry

The impact on margins from these feedstock price increases is highest for companies with the

biggest cost advantages (eg SAFCO), while those with lower cost advantages and margins

(eg SABIC) are least affected. The increase in HSBC's energy price forecasts however, outweighs

the impact of higher feedstock costs

Yet despite generally raising our target prices, we are cautious on the sector for 2011 given

recent strong performance, elevated expectations and high valuations. Our top picks in the

sector are Tasnee (OW(V), TPSAR44), Yansab (OW(V), TP SAR65) and SABIC (OW(V), TP SAR130).

We downgrade Petrochem (TP SAR25) and Sahara (TP SAR25) to N(V) from OW(V) and

Industries Qatar (TP QAR135) to UW from N

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Natu

ral R

eso

urc

es &

En

erg

y/M

idd

le E

ast C

hem

icals

- Eq

uity

Sriharsha Pappu*

Analyst

HSBC Bank Middle East Limited, Dubai

+971 4423 6924

[email protected]

Sriharsha rejoined HSBC's chemical research team in 2009 after spending one and a half years covering the chemical sector on the

buyside at Dubai Group. Prior to that he was a part of HSBC's US chemicals research team from 2005 to 2008 and has been covering

chemicals on the sell side since 2004. Sriharsha holds a Bachelors degree in Electronics Engineering and an MBA from the Indian

Institute of Management. He was ranked No 3 in MENA in the 2010 Pan European Sell side Extel survey.

Jan

uary

2011

What price is right?Re-evaluating the feedstock price environment

Natural Resources & Energy/Middle East Chemicals - Equity

January 2011

Tareq Alarifi*

Analyst

HSBC Saudi Arabia Limited

+966 1299 2105

[email protected]

Tareq is a cross-sector equity analyst based in Riyadh. He joined the research team in 2008, prior to that he worked as a buy-side analyst

with HSBC. Tareq holds a bachelors degree in Biomedical Sciences from the State University of New York, and an MBA-Finance from

Rochester, New York.

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HSBC What Price is Right

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