Higher oil prices to boost Saudi petchem earnings by 26%: NCBC

The net income of Saudi Arabia's petrochemical sector is expected to increase by 25.7 percent year-on-year (YoY) to SAR 33.3 billion in 2018, driven by strong oil prices, China environmental regulations, and expanding spreads, NCB Capital said in a new report.

"We remain positive on the sector mainly due to higher oil prices which increased 22.5 per year-to-date (YTD), reaching its highest level since 2014 at $75. Therefore, petrochemicals product prices are expected to increase 4 to 28 percent YoY," it noted.

Petrochemical prices are estimated to grow by an average of 16 percent while spreads will expand 9.8 percent YoY this year.

According to NCBC, the polypropylene (PP)-naphtha spread increased 15.8 percent YoY to $638 in Q1 2018, compared to an 8-year average of $571.

The investment arm of National Commercial Bank expects PP-propane and PP-naphtha spreads to expand 9.8 percent and 13.4 percent to $656 and $645 this year, respectively.

However, spreads are expected to gradually normalize, starting 2019, the report added.

Meanwhile, China's imposition of a 25 percent tariff on 44 chemicals imported from the US and strict measures to contain pollution will drive demand for imported petrochemical products leading to higher prices.

The brokerage firm upgraded its rating for Advanced Petrochemical Co. to ‘Overweight,’ setting the target price at SAR 58.9, but downgraded Saudi International Petrochemical Co. (Sipchem) to ‘Neutral’ with the target price at SAR 27.5.

NCBC maintained its overweight rating on Yanbu National Petrochemical Company (Yansab) and Saudi Industrial Investment Group (SIIG).