Al Rajhi Capital sees limited upside for petchems on higher feedstock prices

Al Rajhi Capital sees limited upside in the near term for Saudi petrochemical stocks as an increase in feedstock prices could reduce product spreads for firms in the sector, the brokerage said in a report on Sunday.

“While spreads have increased for most coverage companies in December, we are a bit cautious on companies using natural gas liquids (NGLs) as feedstock like Advanced Petrochemical Co. and Yansab, as rising propane and butane prices for January could lower the product spread,” analysts at Al Rajhi Capital said.

The brokerage said it sees limited upside for the stocks in coming weeks unless petrochemical product spreads increase significantly from current levels.

“Based on our tracker model, we expect Sipchem to move trade higher in the short-term on improving pricing spread trend, while Advanced could continue moving downward due to declining spread,” the report added.

State-owned Saudi Aramco hiked propane and butane prices for January to $435 per metric ton (MT) and $495/MT, respectively. This represents an increase of 14.5 percent month-on-month (MoM) for propane, and 17.9 percent for butane.  

Al Rajhi Capital reiterated its ratings for all petrochemical companies under coverage, given that most stocks have already reached the price target.

“Saudi petchem stocks have gained ~22 percent in the last six months as compared to 10 percent increase in global petchem sector, indicating further upside may be limited,” the brokerage said.

Petrochemical product prices rose in December, with polymer products such as high-density polyethylene (HDPE), low-density polyethylene (LDPE), and polypropylene rising, primarily due to supply outages in Asia.

Other basic petrochemical products such as methanol, benzene, and styrene also continued to advance in December, while urea prices surged, driven by the closure of a few fertilizer plants in China.

On the cost front, naphtha prices saw a steep gain of 12 percent in December, after remaining almost unchanged in November.