Following a challenging H2 22, major headwinds are expected in the near-term for the Saudi petrochemicals sector. The expected global recession, high inflation levels and the commissioning of new capacities will test the sector’s dynamics, exerting pressure on product margins. However, we believe the full removal of COVID-19 restrictions in China by H2 23f is a key positive and will drive demand over the medium term. Valuations are generally attractive over the LT, but given the major headwinds we currently prefer companies with 1) favourable product mix, 2) feedstock advantage and 3) strong balance sheets. Accordingly, we upgrade SABIC to OW while we downgrade Yansab to Neutral. We have maintained our OW rating on Sipchem and SABIC-AN.
China: a bright spot
The global economy is heading towards a recession in 2023f as the multi-decade high inflation is forcing central banks across the world to aggressively increase interest rates. The IMF projects the global GDP growth to slow-down to 2.7% in 2023f vs 3.2% in 2022f (vs 6.1% in 2021). This signals a challenging 2023f for the petrochemical sector, given the high correlation of petrochemical product demand with GDP. However, we believe the full removal of COVID-19 restrictions in China by H2 23f could improve the sector’s dynamics.
2023f earnings: weak earnings ahead!
The year 2022f was a year of two distinct halves for the sector. A strong H1 was followed by a sharp decline in petrochemical prices in H2. Feedstock prices remained high, leading to significant weakness in margins and profitability in Q3, and potentially Q4 22f. In 2023f, we expect prices to improve from the lows recorded in Q4 22, but will still record a decline on yoy basis. Accordingly, we expect our petrochemical universe’s earnings to decline by 45.5% yoy to SAR18.4bn in 2023f, before recovering to SAR30.4bn in 2024f. The recovery is driven by the normalization of product prices towards their LT average.
Sector positioning during the challenging year
Although the LT prospect of Saudi petrochemical remains attractive, we believe the near term headwinds makes 2023f challenging for the sector. We prefer companies with 1) favourable product mix, 2) feedstock advantage and 3) strong balance sheet and sustainable dividends. Accordingly, we upgrade SABIC to OW while we downgrade Yansab to Neutral. We maintained our OW rating on Sipchem and SABIC-AN. SABIC’s resilience, market leadership, synergies with Saudi Aramco and strong balance sheet are the key positives. Sipchem’s unique product mix and feedstock advantage are the main strengths. For SABIC AN, key advantages include strong urea fundamentals and favourable feedstock. We downgrade Yansab to Neutral as MEG outlook is negative over the mid-term.