Saudi petrochemical producers will be in demand when the Tadawul opens its gates to foreign investors.
Strong appetite for Tadawul
Saudi Arabia's petrochemical companies are expected to enjoy a surge in overseas interest if plans to open the kingdom's stock exchange to foreign investors come to fruition.
Market regulators in Jeddah are planning to open the Tadawul stock exchange to direct foreign investment after conducting trials. Selected foreign investors, meanwhile, are expected to be given access by the middle of next year.
"Saudi Arabia is moving towards opening their market for direct foreign ownership," said Aleksandar Stojanovski, an analyst at Deutsche Bank. "This is only a matter of when rather than if."
Petrochemical companies, which form the backbone of the exchange and did a roaring trade this year, will be top of the wish list of outside equity investors.
"In terms of market capitalisation, the petrochemical sector dominates the stock exchange, so there's going to be a lot more exposure for petchem [petrochemical] stocks," said Issa Frangieh, an equity analyst at Blominvest Bank.
Research by the Kuwait company Global Investment House shows that profits of GCC petrochemical companies in the third quarter rose by 62 per cent compared with the same period last year to reach US$3.57 billion (Dh13.11bn).
Saudi companies rode this wave of profitability, with Sabic, Yansab, Safco, Sipchem and Tasneebeating earnings expectations.
Next year will be another bumper year, industry insiders say.
Mohamed Al Mady, the chief executive of Sabic, the world's biggest petrochemical company, expects current global economic uncertainty to give way to moderate growth in Europe and the US, preserving demand for Sabic's products.
"If that growth forecast prevails, it should be a good year for the industry," Mr Al Mady said at the Gulf Petrochemical and Chemicals Association annual conference in Dubai this month.
At the same event, Prince Faisal bin Turki, an adviser to the Saudi oil ministry, spoke of the "golden era of petrochemicals" in his country, predicting that total production of petrochemicals will reach 100 million tonnes by 2016, a growth of 250 per cent in a decade.
Yet petrochemical producers face risks, with a housing bubble threatening to undermine demand in China and some experts predicting a difficult year for the sector.
"Faced with the prospects of overcapacity and low demand, outlook for [the] global petrochemical industry appears challenging for 2012, where Saudi Arabia is going to be no exception," said analysts at Taib Securities.
Nevertheless, Saudi players are well placed to weather the storm thanks to a huge advantage in feedstock prices. The domestic industry is supplied with ethane priced at about75 US cents per 1,000 British thermal units (MBtu), compared with international prices of about $4 per MBtu. In addition, the price outlook for ethane is more favourable than for crude-based naphtha.
The price that Saudi petrochemical companies pay for ethane is forecast to increase to $1.25, a price that will not undermine their competitiveness.