Saudi petchems’ margins may fall in Q1 despite higher spreads

Saudi petrochemical firms are likely to see lower margins in the first quarter of 2017, even as spreads improved in February on higher product prices, Al Rajhi Capital said in a report on Monday.

Petrochemical spreads rose in February, when compared to the previous month, driven by a decline in feedstock costs and higher product prices, but remained marginally below the brokerage’s estimates.

“Going forward, though spreads might improve on lower natural gas liquids (NGLs) prices, Q1 margin for most companies is likely to be lower on a sequential basis,” Al Rajhi Capital said.

In terms of feedstock prices, the firm said it expects propane prices to fall further next month, after state-owned Saudi Aramco cut March prices to $480 a ton, in line with the brokerage’s estimate.

“Unless oil prices increase or NGLs demand remains strong, we expect a further reduction in propane price for April as some Asian and European petchem cracker units could switch their feedstock mix depending on the feedstock prices,” the report said.

Meanwhile, no significant increase is expected for naphtha in the near term, as Brent crude is trading between $55 and $58 a barrel.

Elsewhere, product prices advanced in February with ethylene and polyethylene rising 17.3 percent and 10.7 percent month-on-month (MoM), respectively.

Other polymer products such as high and low-density polyethylene gained 4.3 percent and 3.4 percent, respectively, when compared to January.

Al Rajhi Capital maintained its ratings and price targets for most petrochemical stocks under coverage, noting that it sees “limited upside potential” unless product prices and/or spreads rise further.

The brokerage placed Tasnee under review, following plans to sell its 79 percent-owned titanium dioxide business, Cristal.

Meanwhile, Sipchem was upgraded to ‘overweight’ after the recent drop in the stock price, but target price was unchanged.