HSBC What Price Is Right

110121_28253 DUB-Saudi Petchems - Sriharsha Pappu_F1:Layout 1 1/22/2011 12:50 AM Page 1
Natural Resources & Energy/Middle East Chemicals - Equity

January 2011
What price is right?

Sriharsha Pappu*
Analyst
HSBC Bank Middle East Limited, Dubai
+971 4423 6924
sriharsha.pappu@hsbc.com
Sriharsha rejoined HSBC's chemical research team in 2009 after spending one and a half years covering the chemical sector on the
buyside at Dubai Group. Prior to that he was a part of HSBC's US chemicals research team from 2005 to 2008 and has been covering
chemicals on the sell side since 2004. Sriharsha holds a Bachelors degree in Electronics Engineering and an MBA from the Indian
Institute of Management. He was ranked No 3 in MENA in the 2010 Pan European Sell side Extel survey.
Re-evaluating the feedstock price environment

Tareq Alarifi*
Analyst
HSBC Saudi Arabia Limited
+966 1299 2105
tareqalarifi@hsbc.com
Tareq is a cross-sector equity analyst based in Riyadh. He joined the research team in 2008, prior to that he worked as a buy-side analyst
with HSBC. Tareq holds a bachelors degree in Biomedical Sciences from the State University of New York, and an MBA-Finance from
Rochester, New York.

Feedstock pricing changes likely to be announced in 2011. We expect this decision to be
influenced by a combination of both economic and policy factors, and we forecast a phased
increase that does not fundamentally alter the competitive position of the industry
The impact on margins from these feedstock price increases is highest for companies with the
biggest cost advantages (eg SAFCO), while those with lower cost advantages and margins
(eg SABIC) are least affected. The increase in HSBC's energy price forecasts however, outweighs
the impact of higher feedstock costs
Yet despite generally raising our target prices, we are cautious on the sector for 2011 given
recent strong performance, elevated expectations and high valuations. Our top picks in the
sector are Tasnee (OW(V), TPSAR44), Yansab (OW(V), TP SAR65) and SABIC (OW(V), TP SAR130).
We downgrade Petrochem (TP SAR25) and Sahara (TP SAR25) to N(V) from OW(V) and
Industries Qatar (TP QAR135) to UW from N
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. By Sriharsha Pappu and Tareq Alarifi
January 2011
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Natural Resources and Energy
Middle East Chemicals abc
January 2011
Summary
We expect to see a change in the feedstock pricing regime in 2011.
We believe this will be influenced by a combination of both
economic and policy factors and we are factoring in a phased
increase in prices that does not fundamentally alter the competitive
position of the industry. The increase in HSBC's energy price
forecasts however, outweighs the impact of higher feedstock costs.
The feedstock pricing question

Pricing revision – topical in 2011
In the wake of constrained gas supply, multiple competing uses and a burgeoning cost advantage, there
are serious questions being raised about the feasibility of continuing with the current gas pricing regime
within Saudi Arabia. The view gaining traction among industry participants is that some form of
modification to the pricing framework is required both as an incentive for companies to provide new gas
supply and to ensure a more efficient distribution of limited gas resources. This discussion is particularly
relevant today as some of the feedstock formulae – particularly for liquids – run only until 2011, which
means a new pricing benchmark, at least for liquids, will need to be approved before the end of the year.
We believe that a new gas pricing framework will be approved at the same time, and therefore that a
change in the feedstock price environment is imminent.
A combination of economics and policy

In our opinion, any change to the feedstock pricing regime will be driven by a combination of economic
and policy factors. The economic argument based on incentives for supply growth, efficient allocation of
scarce resources and demand rationalisation would call for Saudi gas prices to reflect global levels of
USD4-5/mmbtu vs. the current price of USD0.75/mmbtu. However, an increase of this magnitude would
deliver a significant economic blow to the industry which would run counter to the key policy objective
of driving downstream chemical investment and generating employment.
We believe that policymakers will work to ensure that feedstock price increases take place in a manner so
as not to shock the industry or dramatically alter its competitive dynamic. We also believe that policy
makers will be just as conservative with their underlying energy price assumptions while assessing the
competitiveness of the petrochemical industry as they are while setting their annual budgets.
We are raising our estimates for Saudi gas and ethane equivalent prices from the current USD0.75/mmbtu to
USD2.0/mmbtu by 2015. We expect that this increase will take place in a phased manner, with prices rising
first to USD1.25/mmbtu by 2012 and in a staged manner thereafter (see table below). We also assume that the
liquids discount will decline by 1ppt each year from the current 28% before being fixed at 25% by 2014.
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January 2011
In terms of margins, the rule of thumb is that companies with the biggest cost advantages and the highest
margins (eg SAFCO) are impacted more by an increase in feedstock prices than companies with lower
cost advantages and margins (eg SABIC). Our oil and gas team has increased its energy price forecasts
for 2011-15 by around 10% which has resulted in an increase in our product pricing estimates. In most
cases, the impact from higher product pricing outweighs the impact of higher feedstock costs.
Sector investment thesis

Peak conditions to return by 2013/14, market likely to remain balanced in 2011
Rising emerging market demand and limited supply growth will create an environment of higher capacity
utilisation rates. Based on our supply assumptions and HSBC Economics global economic growth
forecasts, we expect to see a return to peak conditions (utilisation rates of over 90%) within the
commodity chemical sector by 2013/14.
However, while we are bullish on the sector in the medium term, we believe that in the near term supply growth in
2011 could potentially come in above expectations. We expect incremental supply from existing plants to match
demand growth for the year as improving macroeconomic conditions ease some of the bottlenecks (in terms of
feedstock supply) that resulted in a tight market in 2010. This should be particularly true for European cracker
operating rates, which are tied to operating rates at refineries in the region. An improving macro environment in
Europe should lead to higher ethylene supply on greater naphtha availability from refineries.
Furthermore, higher oil-product demand and higher oil prices could lead to an increase in OPEC
production quotas which would make more associated gas available, particularly in Saudi Arabia, and
result in an incremental increase in operating rates at newer crackers – which we estimate are currently
running on average at 80% – owing to feedstock supply constraints. In both these cases, incremental
supply would materialise from existing capacity only if demand growth continued to be strong and hence
should not result in a big dip in utilisation rates due to an oversupply situation. However, this incremental
supply would, in the short term, prevent a sharp rise in utilisation rates. We forecast ethylene utilisation
rates to improve by only 70bps in 2011 over 2010 levels.
Cautious on sector performance in 2011

We believe that after two years of exceptional stock market performance from the Middle East chemical
sector with stocks on average up 47% in 2009 and 24% in 2010, it is time to take a more cautious view on
the sector in 2011. Our cautious stance on performance is based on by high valuations and elevated
consensus expectations. Middle East chemical sector valuations are now above mid-cycle levels, with
stocks trading on average on a 15.6x forward PE versus the historical sector median forward multiple of
14x. While fundamentals are healthy, these appear to be already factored into share prices and we think it
it is unlikely that in 2011 the sector will generate the same level of returns seen in 2009/10.
HSBC Saudi feedstock pricing assumptions

2011e 2012e 2013e 2014e 2015e
Gas price (USD/mmbtu), New 0.75 1.25 1.50 2.00 2.00
Gas price (USD/mmbtu), Old 0.75 0.75 0.75 0.75 0.75
% Propane Discount, New 28% 27% 26% 25% 25%
% Propane Discount, Old 28% 28% 28% 28% 28%
Source: HSBC estimates
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January 2011
Consensus expectations for chemical company earnings in 2011 also fully reflect the recovery in
fundamentals in our opinion. Sector outperformance will require reported earnings to beat estimates
significantly, which we believe they will struggle to do given that current 2011 EPS consensus estimates
for the Middle East chemicals sector are on average 45% higher than they were a year ago.
We prefer stocks with structural pricing drivers – Tasnee and Yansab

Our favoured plays within the Middle East petrochemical sector for 2011 are Tasnee, Yansab and
SABIC. Tasnee and Yansab have strong price momentum within important product chains (TiO2 for
Tasnee and MEG for Yansab) which is being driven by structural factors.
SABIC has significant operating leverage to improving fundamentals at its acquired GE Plastics business.
The business at its peak had EBITDA of USD1bn, and we expect a return to close to peak profitability by
the end of 2011from levels of cUSD200m in EBITDA in 2010e. SABIC also has volume leverage from
the expected commercial start up of Kayan towards H2 2011. Kayan is by far the single largest plant
SABIC has ever built and should drive revenue and profit growth y-o-y for SABIC in 2011.
For Tasnee, we believe that the TiO2 market will remain undersupplied well into 2012 given the lead
times for adding new capacity. We therefore predict 12-18 months of strong pricing power within the
TiO2 segment. This segment constitutes 35% of Tasnee’s earnings and will be a key contributor to the
company’s earnings in 2011. For more details, see our 1 November 2010 report on Tasnee, Painting a
stronger picture.
Yansab is a key beneficiary of the record levels of cotton prices – cotton and polyester are both used in
the textile industry and large price differences between the two often provide a catalyst for substitution.
The current price delta between cotton and polyester fibre stands at USD1,780/tonne – over 5.2x the
average of the differential between 2000 and 2009 which should spur greater polyester demand. This
substitution demand drives pricing for the raw materials used to make polyester such as paraxylene and
Mono Ethylene Glycol (MEG). Yansab has the strongest leverage to rising MEG prices among our
coverage and is our preferred play on this theme of strong cotton prices and interfibre substitution.
Downgrading Petrochem and Sahara to N(V) from OW(V); Industries Qatar to UW from N
We downgrade Petrochem to Neutral (V) from Overweight (V) on account of the stock’s strong
performance since the start of 2010 (up 50%) and limited upside from current levels to our target price
(7%), which we maintain at SAR25. The valuation disconnect between SIIG and Petrochem, flagged in
our April 2010 note Shifting into focus, which was the primary driver for our buy case on Petrochem has
also now closed making us less positive on the stock.
We are downgrading Sahara to Neutral (V) from Overweight (V) on disappointing execution of the Al Waha
project, which has resulted in our target price being cut to SAR25 from SAR30. We had initially factored in a
Q2 2010 start-up for the Al Waha polypropylene plant but the company has repeatedly pushed back the
commercial start-up date for the plant, with the most recent date given being the end of Q1 2011. Al Waha now
accounts for c40% of our valuation for Sahara as the repeated delays coupled with continued start up risks have
resulted in an assumption of lower operating rates and value for the asset.
We also downgrade Industries Qatar (IQ) from Neutral (V) to Underweight (V) on valuation grounds, despite
increasing our target price to QAR135 from QAR110. The stock has rallied sharply in the last six months and
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January 2011
is up more than 40% since the start of H2 2010. This rally is partly explained by stronger fundamentals for IQ’s
products – fertilisers and petrochemicals – and partly by a stronger macro environment for Qatar, including the
award of the 2022 Fifa World Cup. We believe that all of these factors are more than adequately priced into the
stock and that the risks to the current share price are to the downside.
In addition to these three ratings changes, we have also made some adjustments to our target prices for
much of the rest of our coverage. These changes have been driven by: changes to our product pricing
estimates and crude price assumptions; changes to our feedstock pricing assumptions; rolling forward our
DCF’s to a 2011 start date; and changes to our cost of equity to reflect the new HSBC Strategy team
assumptions for the risk free rate and country risk premium. The changes to our ratings and target prices
are summarised in the table below.
MENA Petrochemicals valuation table

Company Ticker Rating Target Current Potential Market EV 6M avg. _______P/E _______ ___ EV/EBITDA ____ Dividend
Price Price Return Cap (USD m) traded Yield
(LC) (LC) (USD m) value
(USDm) 2011e 2012e 2011e 2012e 2011e
APC 2330.SE Neutral (V) 30.0 26.70 12% 1,008 1,313 11.4 10.3 10.3 7.4 6.9 5.6%
IQ IQCD.QA Underweight 135.0 153.00 -12% 23,108 22,553 12.3 13.6 12.1 11.4 10.0 3.7%
Chemanol 2001.SE Neutral (V) 17.0 15.15 12% 488 777 9.9 15.1 12.2 7.8 6.9 3.3%
NIC (Tasnee) 2060.SE Overweight (V) 44.0 33.50 31% 4,532 7,709 16.5 9.1 9.3 5.7 5.9 5.5%
Petrochem 2002.SE Neutral (V) 25.0 23.35 7% 2,992 5,829 12.5 18.3 9.6 0.0%
Sahara 2260.SE Neutral (V) 25.0 22.30 12% 1,742 2,247 6.6 12.5 13.2 24.8 11.8 4.0%
SAFCO 2020.SE Neutral (V) 190.0 180.50 5% 12,048 11,049 7.8 14.2 15.1 12.4 13.2 6.4%
SABIC 2010.SE Overweight (V) 130.0 107.25 21% 85,898 85,898 126.0 12.0 10.1 5.9 5.2 4.1%
SIIG 2250.SE Neutral (V) 25.0 22.20 13% 2,667 5,916 5.2 21.6 9.4 32.2 7.0 0.0%
Sipchem 2310.SE Neutral (V) 29.0 25.80 12% 2,296 3,275 8.6 16.1 16.4 7.9 7.6 1.5%
Kayan 2350.SE Neutral (V) 22.0 19.25 14% 7,709 15,674 44.9 36.3 14.0 20.7 9.2 0.8%
Yansab 2290.SE Overweight (V) 65.0 46.30 40% 6,953 10,051 27.9 10.3 8.9 8.9 7.5 2.9%
Average 15.6 12.4 13.2 8.4 3.1%
Median 13.6 12.2 8.9 7.5 3.4%
Note: * IQ in QAR, all else in SAR, Data as of market close on 19 Jan 2011
Source: Thomson Reuters DataStream, HSBC estimates
HSBC Middle East Chemicals: changes to ratings and target prices

Company Ticker _____________ Rating _____________ ________Target Price _______
Old New Old New
Advanced Petrochemical Company 2330.SE Neutral (V) Neutral (V) 30 30
Industries Qatar* IQCD.QA Neutral Underweight 110 135
Methanol Chemicals (Chemanol) 2001.SE Neutral (V) Neutral (V) 14 17
National Industrialisation (Tasnee) 2060.SE Overweight (V) Overweight (V) 40 44
National Petrochemical (Petrochem) 2002.SE Overweight (V) Neutral (V) 25 25
Sahara Petrochemical 2260.SE Overweight (V) Neutral (V) 30 25
Saudi Arabian Fertiliser Co (SAFCO) 2020.SE Neutral (V) Neutral (V) 135 190
SABIC 2010.SE Overweight (V) Overweight (V) 110 130
SIIG 2250.SE Neutral (V) Neutral (V) 19 25
Sipchem 2310.SE Neutral (V) Neutral (V) 30 29
Saudi Kayan 2350.SE Neutral (V) Neutral (V) 18 22
Yansab 2290.SE Overweight (V) Overweight (V) 65 65
*IQ in QAR, all others in SAR
Source: HSBC
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January 2011
Contents
Sector view – 2011 6 Advanced Petrochemical

Company (APC) 49
Feedstock pricing today 10
Chemanol 52
Feedstock pricing tomorrow 18
Sipchem 55
Impact on product pricing and
margins 26 Industries Qatar 58
SABIC 34 Saudi Fertiliser Company

(SAFCO) 61
Yansab 37
SIIG 64
Tasnee 40
Saudi Kayan 67
Sahara Petrochemical Co. 43
Disclosure appendix 73
National Petrochemical
Company (Petrochem) 46 Disclaimer 76
We acknowledge the assistance of Mohit Kapoor in the preparation of this report.
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January 2011
Sector view – 2011

Limited new capacity, robust emerging market demand to drive a
return to peak operating rates by 2013-14
However, market likely to remain balanced in the near term
We forecast a mid-cycle margin environment through 2011
Mid-cycle: trough behind, allow companies to push through any increases in

peak ahead raw material prices. We expect to see this
environment of strong demand and limited supply
The cyclical trough witnessed in late 2008 and
result in an increase in utilisation rates and a
early 2009 is now well behind us with demand
return to a cyclical peak margin environment by
having recovered during 2010, partly led by
2013-14.
restocking. The big question for 2011 and
thereafter is whether the recovery gains Long-term supply outlook favourable
momentum towards cyclical peak conditions or After accounting for over 40% of global supply
whether it stalls, leading to a lower demand additions over 2008-11, the Middle East has very
growth, mid-cycle margin environment. little to contribute in terms of new supply after
The view from chemical company management 2011 (see chart at the top of the next page).
teams, particularly after the Q3 2010 earnings There are no new ethylene crackers planned in
season, was that a robust recovery driven by Saudi Arabia between 2012 and 2015, and the
emerging market demand strength was in place Dow-Aramco project is only tentatively set for
and would continue through 2011. This view was 2016. Abu Dhabi, Qatar and Kuwait, which make
reiterated by SABIC, Tasnee and Industries Qatar up the rest of the GCC petrochemical universe,
on our recent investor trip in December. are contributing one additional cracker between
them in 2014. Iran, which has the potential to add
The key takeaway from the trip for us was that
more supply, faces tremendous challenges from
industry participants seemed to be the most
economic sanctions and is unlikely to add
optimistic they have been for the best part of three
capacity in the medium term.
years. This bullish sentiment was based on robust
current demand, strong order books, expectations The lack of new Middle East supply is based on a
of continued emerging market demand growth combination of factors: the limited availability of
outweighing weak developed market demand and cheap feedstock, the push towards downstream,
limited supply growth on the horizon. employment-generating industries and
Furthermore, the view was that chain inventories diversification.
are still well below pre-crisis levels which should
6
January 2011
Middle East ethylene supply update

Ethylene capacity adds (000 tons) Location Country 2008 2009 2010 2011 2012 2013 2014
Middle East
Arya Sasol Bandar As s aluyeh Iran 940
Gachs aran PC Gachs aran Iran 500 500
Ilam PC Ilam Iran 458
Jam PC Bandar As s aluyeh Iran 990 330
Kavyan PC Bandar As s aluyeh Iran 1000
Morvarid PC Bandar As s aluyeh Iran 500
TKOC Shuaiba Kuwait 106 744
QAPCO Um m Said Qatar 95
QP/Exxon Mobil Ras Laffan Qatar 325
RLOC Ras Laffan Qatar 975 325
Jubail ChevPhill Al Jubail Saudi Arabia 150 150
Kayan Al Jubail Saudi Arabia 325 1000
Petro-Rabigh Rabigh Saudi Arabia 975 325
Saudi Polym ers Al Jubail Saudi Arabia 600 600
SEPC Al Jubail Saudi Arabia 450 550
SHARQ Al Jubail Saudi Arabia 100 1100
Yansab Yanbu Saudi Arabia 867 433
Borouge II Ruwais Abu Dhabi 700 700
Borouge III Ruwais Abu Dhabi 750
Total Middle Eastern Incremental Capacity adds 2731 3716 4358 3083 1100 500 2075
Com pleted and fully operational

Com pleted and ram ping up
Doubtful
Increm ental between now and 2014
Source: CMAI, HSBC estimates
The only other region to add capacity apart from the on our supply assumptions and HSBC Economics'
Middle East over the last decade has been Asia. We global economic growth forecasts, we expect to
do not see significant risks from current capacity see a return to peak conditions within the
additions in Asia, particularly China. Based on the commodity chemical sector by 2013-14 (see chart
latest directive from the National Development and at the top of the next page).
Reform Commission (NDRC) on domestic refining
Talk of ‘supercycle’ premature, in our opinion
and the chemicals sector for China’s 12th five-year
The limited visibility on any new supply in the
plan (2011-15), we believe the country will
medium term has started to prompt talk in
continue to focus on increasing the average
investor circles of a potential “supercycle” in the
production size of local refinery and chemical plants
chemical sector. The idea being touted is that
while shutting outmoded capacity and thus
feedstock availability concerns pose an
preventing overcapacity. For more details on
insurmountable obstacle to any meaningful supply
Chinese capacity addition plans please refer to our
growth while rising emerging market demand
Asian chemical team’s report from September 2010,
growth will continue to increase operating rates,
Asia Refining and Petrochemicals: Refining to hit
resulting in a multiyear period of high margins.
sweet spot in 2011-12.
While we believe in a stronger fundamental
Stronger demand, limited supply to
picture for the sector in the medium term, we are
drive next peak by 2013-14
not quite in the ‘super-cycle’ camp yet, for a
Rising emerging market demand and limited couple of reasons.
supply growth will create an environment of
higher capacity utilisation rates. As utilisation Firstly, we are barely 18 months removed from
rates increase pricing power starts to shift back to one of the worst industry troughs in living
producers; operating rates of over 90% are memory. Developed market demand for
considered peak conditions for the industry. Based commodity chemicals is still well below the levels
7
January 2011
HSBC: Ethylene operating rate outlook

9 1 .0 %
9 0 .0 %
8 9 .0 % 8 8 .9 %
8 8 .0 %
Operating rates (%)
8 7 .0 % 87. 0%
85. 3%
8 5 .0 %
8 4 .1 %
8 3 .4 %
8 3 .0 %
8 1 .0 %
20 08 200 9 2 010 201 1E 2 012 E 20 13E 201 4E
H S B C Eth y le n e o p e r a tin g r a te s
of 2007 with some major end markets, such as US expectations in 2011. We expect incremental
autos and US housing, still at a fraction of their supply from existing plants to match demand
peak activity levels. While emerging market growth for the year as improving macroeconomic
demand remains robust, developed markets still conditions ease some of the feedstock supply
account for 60% of the commodity chemical bottlenecks that resulted in a tight market in 2010.
market by volume, and a sustained multiyear peak
This is particularly true of European cracker
is unlikely as long as developed markets continue
operating rates which are tied to operating rates at
to drag, in our opinion.
refineries in the region. As the chart at the top of
Secondly, for a commodity sector with widely the next page illustrates, ethylene availability
diffused technology, multiyear peaks driven by from European naphtha-based crackers dropped
supply limitations often prove to be a mirage. 20% below 2007 peak levels as a result of reduced
Once margins reach reinvestment levels, the naphtha supply. An improving macro
sector has a way of attracting new investment in environment in Europe would lead to higher
supply that leads to a balancing of operating rates. ethylene supply due to greater naphtha availability
A sustained period of higher margins would make from refining.
naphtha cracking attractive in the Middle East and
Furthermore, higher oil-product demand and
lead to a push for heavy feed crackers in the
higher oil prices could lead to an increase in
region which would balance supply and demand.
OPEC production quotas which would make more
To sum up our medium-term sector view in a associated gas available, particularly in Saudi
sentence: we are bullish on the chemical cycle, Arabia, and result in an incremental increase in
but we are not super-cycle bulls. operating rates at newer crackers – which we
estimate are currently running on average at 80%
Market to remain in balance in 2011
owing to feedstock supply constraints.
as incremental supply likely
While we are bullish on the sector in the medium In both these cases, incremental supply would
term, we believe that in the near term supply materialise from existing capacity only if demand
growth could potentially come in above growth continued to be strong. Therefore it should
8
January 2011
Western European cracker operating rates Saudi: new cracker operating rates in Q3 2010
18,000 95% 95% 93%
90%
16,000 90%
85%
Operating Rate (%)

14,000 80% 85% 81% 81%
75%
12,000 80%
70%
75%
10,000 65%
75%
60%
8,000
55% 70%
6,000 50%
65%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
WE ethylene supply fromnaphtha WE ethylene utilization rates

60%
Yansab Sharq SEPC Petrorabigh
Source: CMAI, HSBC Source: HSBC estimates
not result in a big dip in utilisation rates. Consensus expectations for chemical company
However, this incremental supply would prevent a earnings in 2011 also fully reflect the recovery in
sharp rise in utilisation rates in the short term. We fundamentals, in our opinion. Sector
forecast ethylene utilisation rates to improve by outperformance will require reported earnings to
only 70bps in 2011 over 2010 levels. beat estimates significantly, which we believe
they will struggle to do given that current 2011
Cautious on chemical sector for 2011
EPS consensus estimates for the Middle East
We believe that after two years of exceptional chemicals sector are on average 45% higher than
stock market performance from the Middle East they were a year ago.
chemical sector, with stocks on average up 47% in
2009 and 24% in 2010, it is time to take a more With supply also likely to surprise on the upside -
cautious view on the sector in 2011. as production bottlenecks ease as discussed earlier
- we therefore think it unlikely that 2009-10 sector
Our cautious stance is driven by two main stock performance will be repeated in 2011.
considerations: current market valuations and
consensus forecasts, and the outlook for supply in
2011.
Valuations and expectations

Middle East chemical sector valuations are now
above mid-cycle levels, with stocks trading on
average on a 15.6x forward PE vs. the historical
sector median forward multiple of 14x. While
fundamentals are healthy, these appear to be
already factored into share prices.
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January 2011
Feedstock pricing today

Low opportunity costs and industrialisation objectives shaped the
current pricing regime
Cost advantage spiralled as energy price environment underwent
a secular shift
Increased advantage, competing needs for gas placing upward
pressure on pricing
Current pricing regime establishing an LNG industry would not have

been justified given the level of gas production
Evolution of Saudi feedstock prices
and its link to crude output. The historical capital
The Saudi petrochemical industry was established in
costs for LNG in the mid 1970s were around
an effort to diversify away from oil production by
USD1,500 per tonne of capacity, which on our
taking advantage of associated gas production. The
estimates would have translated into a USD18bn
associated gas was at that time being flared which
investment to liquefy all of Saudi Arabia's
posed a challenge in terms of devising a pricing
associated gas production.
mechanism for the gas. The basic framework used to
determine a gas price for the petrochemical industry Saudi Arabia’s annual gas output in 1975
was to use an opportunity cost based pricing system (including flared gas) was 752 billion scfy which
that accounted for the stranded nature of the gas. Gas would translate into c13 million tonnes of LNG
was stranded for two reasons: the absence of a per annum on our estimates. Under the
pipeline network to export the gas regionally and assumption that gas production remained constant
unviable liquefaction economics at the time that and that all the gas was liquefied, LNG exports
prevented LNG exports would have generated USD1.9bn pa in revenues
A word about Saudi liquefaction economics at 1975 prices. Not only would this constitute a
The major challenge presented by liquefaction at low return on a capital investment of USD18bn,
the time was an unattractive return on capital but it would also have equated to only 6.7% of
profile as the large capital investment required for Saudi oil revenue in 1975.
Current GCC feedstock pricing

Country Pricing regime (USD/mmbtu) Implied cost of ethane (USD/tonne)
Saudi 0.75 47
UAE 2.0 to 2.5 142
Kuwait 2.0 to 3.0 174
Qatar 1.5 to 2.5 126
10
January 2011
Saudi Arabia: oil revenues vs. potential LNG revenues

350 ,00 0 5 0.0 %
4 5.0 %
300 ,00 0
4 0.0 %
250 ,00 0 3 5.0 %
3 0.0 %
200 ,00 0
2 5.0 %
150 ,00 0 2 0.0 %
100 ,00 0 1 5.0 %

1 0.0 %
50 ,00 0
5 .0%
0 0 .0%
19 75 19 77 197 9 1 981 19 83 19 85 198 7 1 989 19 91 19 93 199 5 1 997 19 99 20 01 200 3 2 005 20 07 20 09
Sau di O il r ev e nue (U SDmn) Po tent ial S aud i LNG rev e nu e as % of o il
Source: Saudi Aramco
In reality, gas revenues would have been even lower Petrochemicals

than in our calculation, since in practice not all of the Apart from being a use for stranded natural gas, the
gas could have been channelled to an LNG facility, development of the petrochemical industry was also
given the lack of a gas pipeline network at the time. driven by the need to diversify the local economy
And contrary to the assumption in our estimate, oil away from dependence on crude oil and to provide
production in Saudi Arabia did not remain stable, an industrial base. The first set of petrochemical
falling by more than 50% at one point in the mid products were methane based – ammonia, urea and
1980s (see chart below) which would have methanol – these being the simplest of all
constrained gas supply to any linked LNG facility. commodity chemicals. The next step in utilising the
stranded gas was to exploit the ethane content of the
The lack of a pipeline and unstable supply meant
gas by setting up ethylene production facilities and
that monetising the stranded gas through the
moving into basic plastics.
export route was unviable and that using the gas
for domestic purposes was considered instead – Electricity
principally to fuel electricity generation and to The logic behind using gas for power generation
develop the petrochemicals industry was straightforward. At the time, Saudi Arabia
generated much of its electricity by burning heavy
Trends in Saudi gas and oil production Domestic use of natural gas
450,000 45,000
2007
400,000 40,000
2003
350,000 35,000
1999
300,000 30,000
1995
250,000 25,000
1991
200,000 20,000
1987
150,000 15,000
1983
100,000 10,000
1979
50,000 5,000
1975
0 0
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Saudi Oil Production (Mboe pa) Saudi Gas Production (Mboe pa) Gas consumption- public (Mboe) Pow er Generation Capacity (MW)
Source: SAMA Source: SAMA
11
January 2011
Gas pricing and the MGS

Gas volume processed initially 3,500 mmscfd
Heat content of delivered gas 35,00,000 mmbtu
Gas price 0.5 USD/mmbtu
Annual gas revenues 639 USD mn
Initial investment in the MGS 12,000 USD mn
Gas prices raised to fund expansion
Expanded capacity 2,500 mmscfd
Heat content of delivered gas 25,00,000 mmbtu
Gas price increase 0.25 USD/mmbtu
Incremental revenue from price increase 548 USD mn
Cost of expansion 7,500 USD mn
Source: Saudi Aramco, HSBC
oil, which detracted from the amount of oil (NGL) which were to be used as petrochemical
available for export. Substituting stranded natural feedstock.
gas for some of that oil, which was then exported,
The MGS (see chart below) is one of the largest
was the most appropriate use of both the gas and
of its kind in the world and includes more than 65
the heavy oil.
gas/oil separation plants located at various oil
Master Gas System (MGS) fields. Five gas processing plants separate out
Once the decision was made to utilise the stranded methane gas which is then supplied by a 2,400km
associated natural gas for domestic consumption, pipe network that includes an east-west pipeline
there still remained two open questions: how to running across the breadth of Saudi Arabia to
deliver the gas from the oil fields to the power plants, refineries, fertiliser plants, methanol
consumption centres on the coast, and what price plants, and steel plants in the two industrial cities.
to charge for the gas. The answer to both of these The system also includes two gas fractionation
questions lay in the development of the Saudi plants that separate ethane, propane, butane and
Master Gas System (MGS), a network of natural gas liquids (NGLs) from the raw gas.
pipelines linking gas produced at the oil fields to Ethane is then supplied to petrochemical plants in
various end users across the Kingdom designed to Jubail and Yanbu. LPGs and NGLs are currently
provide Saudi Arabia with natural gas as a used internally by the petrochemicals industry,
commercial resource. however at the time that the MGS was built, these
The MGS was developed in the late 1970s in an feedstocks were mostly exported.
effort by Aramco to recover associated gas In its early stages of implementation, the MGS
produced at the oilfields, process it and supply the was used to power the entire energy requirements
country with dry and liquid gases. The idea was to of the east coast as well as a few desalination
feed the gas to the two main industrial cities that plants along with multiple industrial projects. The
were being developed concurrently: Jubail on the establishment of the MGS also resulted in several
eastern coast and Yanbu on the western coast. international oil & gas companies setting up joint
The system was initially designed to process up to venture projects in Saudi, mainly in the
3.5 billion scfd of gas, of which 2 billion scfd was petrochemical arena, to take advantage of the
methane, primarily used as fuel for utilities and as availability, and relative inexpensiveness, of
a feedstock for methanol and fertilisers. The feedstock at the newly inaugurated industrial
system was also designed to process 370 million cities of Jubail and Yanbu.
scfd of ethane as well as natural gas liquids
12
January 2011
The first MGS phase began operations in 1982 investment cost associated with the project. Based
and was entirely dependent on associated gas on the capital invested and the amount of gas
supply from the oil fields. This coincided with a processed, a price of USD0.5/mmbtu was deemed
peak in Saudi oil production at the time and when appropriate at the time. The link between the MGS
Saudi Arabia’s oil production dropped by over and gas prices is further highlighted when one
50% to a low of 2.5mbpd in 1985 this resulted in considers the fact that the only time that gas prices
lower gas availability within the new system. have been raised in the Kingdom (in 1998 from
Power outages and shortages in feedstock supply USD0.5 to USD0.75/mmbtu) was when Aramco
to the petrochemical sector followed, with decided to spend USD7.5bn on upgrading the MGS
Aramco then deciding on supplementing the and increasing its processing capacity.
system with the little non-associated gas supply it
Surge in petrochemical investment
had at the time.
The availability of feedstock, not so much its pricing
The logic behind existing gas pricing at the time, spurred investment in the basic
The cost associated with setting up the MGS petrochemical industry in the region. The largest
provided the first data points for establishing a gas investments came in Saudi Arabia which, given its
price given the lack of economically viable oil production, obviously had the most amount of
alternate markets for the gas. Aramco needed to associated gas available. Saudi took the first step in
charge end users a rate for the gas that would at jumpstarting the regional sector by establishing the
least provide some return on capital given the large Saudi Basic Industries Corp. (SABIC).
Saudi Master Gas System in 2011
Natural gas pipeline

NGL pipe line
Jubail Industrial City

JU’AYMAH
Yanbu Indus trial City SAUDI ARABIA BE RRI

SHEDGUM
NA Gas
YANBU
UTHMANIYAH
RIYADH NA Ga s
RE
HAWIY AH
DS
Gas Well
EA
NA Gas
HARADH
JEDDAH
Gas We ll
13
January 2011
Growth of ethylene capacity in the Middle East (000 tonnes) Saudi capacity vs. ethane cost advantage
30,000 Iran 16,000 1,200
Iraq 14,000
1,000
25,000 Kuwait 12,000
Qatar 800
KSA 10,000
20,000 UAE 8,000 600
Middle East
15,000 6,000
400
4,000
10,000 200
2,000
0 0
5,000 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
---- LHS: Saudi Ethylene capacity ('000 ton)
2004 2005 2006 2007 2008 2009 2010 2011 2012 US Ethane (USD/Ton)
Saudi Ethane (USD/Ton)
Source: CMAI, HSBC Source: CMAI, HSBC
SABIC’s growth was driven by the successful Gas pricing – the new normal
deployment of the Master Gas System and further
Competing uses for gas, limited supply growth
supported by subsidised electricity costs and soft
The single biggest driver for a change to the
government loans. These incentives, coupled with
existing gas price regime is the number of
the creation of the industrial cities of Jubail and
competing uses for what is now a scarce resource.
Yanbu along with supporting industrial
A return on infrastructure investment model,
infrastructure at the two cities. laid the foundation
which is what the existing USD0.75/mmbtu price
for SABIC’s success.
was based on, was acceptable when the MGS was
Feedstock advantage rising being built and there were limited uses for the
It was not generally expected in the 1990s that the stranded gas. However, with a massive increase in
Middle East would hold the cost advantage that it gas demand within the region and production
currently does as global energy prices remained failing to keep pace, a new pricing mechanism is
low through the 1990s which meant that necessary in order to balance both policy and
petrochemical investment was made in regions economic interests.
with the largest markets – the US, developed
This is particularly relevant in light of limited
Europe – rather than feedstock-rich regions such
production growth. While Saudi proven gas
as the Gulf.
reserves have continued to grow, from 263trn scf
However, the boom in oil and gas prices over the in 2008 to 275trn scf (or 286,200 trn btu) at the
past decade increased the cost advantage enjoyed end of 2009, the amount of gas being delivered
by the fixed-cost ethane based petrochemical has not kept pace with reserve growth. According
producers in the Middle East and also drove a to Aramco data sales gas (methane) deliveries
wave of investment in new capacity (see charts at declined by 0.281 trn btu in 2009 and delivered
the top of the page). The new capacity placed ethane only increased by 0.092 trn btu in 2009
constraints on gas availability at a time when (see chart at the top of the next page).
competing uses for gas started to emerge while
One of the key reasons for limited growth in
the significant increase in the cost advantage
delivered gas is that, as argued in our note of 26
enjoyed by the petrochemical companies started
November 2009, Saudi Infrastructure: Spending for
to raise questions about a revision to the gas
this generation, Aramco’s highest priority has until
pricing framework.
14
January 2011
Saudi gas deliveries (bn scf) Saudi Electricity Company: planned capex (SARm)
8,000 30,000
7,000
25,000
6,000
20,000
5,000
4,000
15,000
3,000 10,000
2,000 5,000
1,000
0
0 2010e 2011e 2012e 2013e 2014e
2005 2006 2007 2008 2009
Delivered sales gas Delivered ethane gas

Generation Transmission and Distribution Replacement Total
Source: Saudi Aramco Source: Corporate reports, HSBC
recently been oil-related exploration projects. Given 2028. To put this in context, Saudi Arabia’s
the lead time between exploration and production current production capacity is 13.75 million bpd
within the oil and gas sector, the lack of focus on gas of oil equivalent. To rephrase, if demand were to
in the last decade or so is constraining current increase as projected without a concurrent
supply. However, this has now changed, with increase in supply, within two decades over 60%
Aramco increasingly aware of the requirement to of Saudi Arabian energy production would go
increase gas supply. Aramco has set itself a goal of towards meeting domestic consumption. This
discovering 3 to 7 trillion scf of additional non- would not only result in a significant revenue loss
associated gas reserves annually. for Saudi Arabia, but would also be very bullish
for global energy prices given Saudi Arabia’s
Another supply constraint is that much of the gas
position as a swing producer of crude.
extracted is a by-product of oil production, despite
the fact that non-associated gas accounts for 75% We outline the various calls on Saudi gas
of total gas reserves versus 48% in 1990; i.e. production from the various sectors below.
while non-associated gas reserves have grown,
Power demand
production from those fields has not. Aramco has
The Saudi Electricity and Cogeneration
again refocused on developing its non-associated
Regulatory Authority has said about 0.9 million
gas production, which is evident from the fact that
barrels of oil are currently used to generate power
currently 50% of all offshore rigs are deployed for
every year and, as the authority plans to raise
gas production, as opposed to between 20% and
power capacity from 44.6GW at the end of 2009
40% in the past.
to 121GW by 2032, the requirement will increase
Moreover there are several sources of competing to 2.4 million barrels of fuel oil per day – this
demand for this gas, mainly from electricity excludes the current amount of natural gas used.
generation - which currently uses about 1 billion
Saudi Electricity (SEC) expects power
to 1.5 billion scfd of gas and 0.9m bpd of oil in
consumption to increase from 193GWh in 2009 to
Saudi Arabia - and water desalination which
251GWh in 2013, similar to our expectations
currently uses 0.5 billion scfd of gas. Aramco
(please see our note of 9 June Saudi Electricity
expects total domestic fuel demand to rise from
Company – N: New tariff plan priced in, next
3.3 million bpd of oil equivalent in 2009 to
move key to unlock value) which is equivalent to a
approximately 8.3 million bpd of oil equivalent in
15
January 2011
requirement of another 0.3 million boe per day. We estimate that the refineries due to come on
To meet growing consumption, SEC plans to line will consume around 0.3 billion scfd of gas.
increase generation capacity by 7GW between However, until the non-associated gas fields come
2009 and 2013, with a further 4.5GW coming on online, the majority of non-integrated
line over 2014 and 2015. We estimate that another petrochemical projects will be delayed
6GW will come on line via Independent Power indefinitely, in our view. The key integrated
Producers (IPPs) and Integrated Independent refining and petrochemical projects that will
Water and Power Projects (IWPPs) by 2015. require gas supply over the next four to five years
are detailed below.
At present half of electricity generation comes
from gas, with consumption of electricity set to Saudi Aramco Total refining & petrochemical
increase by c30% by 2013, according to SEC. It is company (SATORP): Aramco (62.5% share of
expected that this will lead to a significant the JV) and Total are building a joint venture
increase in gas requirement in the kingdom. 400,0000 bpd refinery at Jubail which could
potentially add an world-scale integrated cracker
Water
complex. Financing for the refinery part of the
Water is a critical issue for the Saudi government.
project is complete and parts of the project are
Domestic water consumption is equivalent to 230
under construction.
litres per day per person, compared with Europe’s
100-200 litres per day, but is not covered fully by Yanbu refinery: The proposed Yanbu export
desalinated water. Production of desalinated water refinery, a 400,000 bpd full-conversion refinery on
in 2008 was 1.1bn cubic metres, up 3.4% y-o-y. the Red Sea coast, is designed to produce refined
The government estimates that demand for products and petrochemicals. ConocoPhillips pulled
drinking water will increase to about 10m cubic out of the venture in April 2010 and Aramco has
metres per day over the next 20 years, if the since said that it will go it alone if it cannot find a
increase in the daily per capita consumption rate partner. The refinery is a priority as it is needed to
continues at its current level. A significant process the additional heavy crude that is due to
increase in desalination capacity is planned to come out of the Manifa oil field.
meet the higher demand. We estimate that
Aramco/Dow petrochemical project: Aramco and
desalination capacity needs to double over the
Dow Chemical were originally planning to build an
next 20 years to cover drinking water needs alone,
integrated petrochemicals complex alongside a
and calculate that this would lead to a requirement
400,000 bpd expansion to the existing 500,000 bpd
for an additional c0.5 billion scfd of gas.
Ras Tanura refinery. This was modified in April
Refining and petrochemicals 2010 when the two companies announced that they
Integrated refining projects are a priority for the would move the project to Jubail. The cost of the
government in order to both meet fuel demand and complex has been reduced from USD20bn initially
introduce a more complex set of petrochemical to less than USD15bn. It is most likely that the
products that would help create a downstream project will now be fed largely by ethane gas
chemical industry and spur employment. Introducing provided by Aramco and, to a lesser extent, liquid
natural gas into the feedstock mix for integrated feedstocks provided by the Jubail refinery.
refining projects will enhance margins thereby
improving the initial payback and encouraging more
complex petrochemical projects.
16
January 2011
Gas exploration – the supply The scheme also includes six 12-inch flowlines, a
response 150km pipeline linking the facilities with Wasit, a
State oil companies such as Aramco have started 150km pipeline between Arabiyah and Wasit, and
to respond to the rising demand for gas. For a 91km submarine power cable. However, the
Aramco, increased production of non-associated lead time required for completing such
gas is now a priority and new discoveries have developments, and the constraints on production
been principally made offshore as the exploration of oil due to OPEC quotas, will mean gas
in Rub al-Khali (the Empty Quarter, onshore) has production will be limited for the next three years.
continued to disappoint. As a result, more Pressure on gas pricing
offshore exploration is under way with Aramco
In the wake of constrained gas supply, multiple
increasing the number of active offshore rigs to
competing uses and a burgeoning cost advantage,
about 15 in 2009 from just one in 2000,
there are now serious questions being raised
dedicating USD6bn (or 10% of its capital
regarding the feasibility of continuing with the
investment) to the development of six offshore
current gas pricing regime within Saudi Arabia.
facilities over the next five years.
The view gaining traction among industry
The most significant non-associated gas field to participants is that some form of modification to
come online will be the Karan offshore field. the pricing framework is required both to provide
When completed in 2013, the field will be capable an incentive for new gas supply and to ensure a
of delivering 1.8 billion scfd of raw gas. Under more efficient distribution of limited gas
the USD1bn Shaybah scheme, Aramco wants to resources.
build a plant to separate the equivalent of 228,000
This discussion is particularly relevant at the
bpd of natural gas liquids from crude oil produced
current time given that some of the feedstock
at the field.
contract pricing formulae – particularly for liquids
In addition, under the Wasit scheme, estimated to – run only until 2011, implying that a new pricing
cost USD 6bn, Aramco aims to produce 2.5 benchmark, at least for liquids will need to be
billion scfd of sulphur-rich gas from the newly approved before the end of the year. We believe
discovered offshore Arabiyah and Hasbah fields that a new gas pricing framework will also be
before transporting it to a central processing approved at the same time and so a change in the
facility at Wasit. The plan is to construct seven overall feedstock price environment is imminent.
offshore wellhead production platforms at the However, any such change is unlikely to be driven
Hasbah field, which can produce up to 1.3 billion by economic factors alone, with policy factors
scfd of gas from the field, and six wellhead likely to play just as big a role in the decision. We
platforms at the Arabiyah field, capable of outline our thoughts on the potential framework
producing 1.2 billion scfd. for a change to the feedstock pricing mechanism
in the next section.
17
January 2011
Feedstock pricing tomorrow

Economics would suggest a sharp increase to USD4-5/mmbtu
However, policy more than economics will set future feedstock prices
We expect to see a gradual rise in feedstock prices, with fundamental
industry competitiveness unaltered
The economic argument recent years. The chart at the bottom of the page
illustrates this shift. The Saudi cost advantage for
Rising energy prices have increased
the production of ethylene using pure ethane as
the cost advantage
feed has tripled on average over the 2003-10
When the Saudi petrochemical sector was first period compared to its 1990-2003 average, driven
established in the early 1980s, foreign technology exclusively by changes in global energy prices.
partners for SABIC were attracted to Saudi Arabia
by low cost gas feedstock at a price of The dramatic increase in the cost advantage enjoyed
USD0.50/mmbtu. With US natural gas prices in by Saudi petrochemical producers is at odds with the
the USD1-2/mmbtu range at the time the Saudi lack of changes to the domestic feedstock pricing
gas price, while attractive, was not dramatically regime over the last twelve years. The economic
lower than prevailing international prices. argument for an increase in domestic feedstock
prices is therefore twofold: that the current cost
The Saudi gas price was raised once to advantage is well in excess of what was implicitly
USD0.75/mmbtu in 1998 and has since remained guaranteed when the industry was established; and
at that level despite there having been a secular that with rising energy prices having allowed the
shift in the global energy price environment in
Saudi ethylene cost advantage vs. Naphtha based producers (1990-2010)
2000
1800
1600
1400
USD/ton
1200
1000 2003 to 2010 average USD760/ton
800
600
1990 to 2003 average USD240/ton
400
200
0
1990 1993 1996 1999 2002 2005 2008 2011
Saudi ethane cost advantage

18
January 2011
Saudi petrochemical industry to generate exceptional As non-associated gas production grows, the
profits over the last seven years, some of those question of gas pricing starts to gain greater
profits now need to be shared with the government attention. It is one thing to price associated gas at
through an increase in feedstock costs. very low levels because the costs of production –
Higher prices needed to incentivise since it is a by-product – are minimal and this gas
production growth and limit demand would have been flared if it were not used by the
petrochemical industry. However, when gas is
New sources of gas, higher production costs
produced from non-associated fields, the costs of
With the exception of Qatar, which has large
production and extraction are dramatically higher
resources of non-associated gas, the Gulf
than those for associated gas. In addition, there
Cooperation Council (GCC) countries have
are now competing uses for gas from the power,
traditionally been reliant on associated gas (a by-
fertiliser, metal and petrochemicals sectors which
product of crude production) for their gas needs.
render the traditional argument of a lack of
The amount of associated gas available, though, is
alternative uses void.
limited by the amount of crude production, which
in turn is limited by OPEC quotas. Furthermore, there is a strong case to be made that
if this growth in non-associated gas production is
In recent years, as demand for gas from the power,
to be maintained, then exploration companies,
infrastructure and petrochemical sectors has grown,
particularly the international ones, need sufficient
oil companies in the region have started to focus
incentives to invest in exploring for offshore gas
heavily on exploring for non-associated gas. Their fields. These companies need to see the potential
efforts have borne fruit to a certain extent as the to generate an adequate return on capital that
chart at the bottom of the page shows. Gas compensates them for both discovery, as well as
production has increased by 50% since the start of production, costs. As almost all of this new gas
the last decade while crude production has grown by production will be consumed domestically,
only 2% over the same period, highlighting that the capping domestic gas prices at the current low
bulk of the gas production growth has come from levels limits the attractiveness of gas exploration
non-associated gas fields. in the region and therefore constrains potential
supply. The economic argument for raising
GCC ex Qatar: Oil vs. gas production
18,000 19.0
18.0
17,000
17.0
16,000 16.0
(000 bbl/d)
15.0
(bcf/d)
15,000
14.0
14,000 13.0
12.0
13,000
11.0
12,000 10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GCC ex Qatar (oil production) GCC ex Qatar (gas production)
Source: BP World Energy Statistical Review 2010
19
January 2011
GCC ex Qatar: Gas consumption Projected growth in power demand (Saudi and Kuwait)
20.0 90 85
80
18.0
70
16.0 60
GW
14.0 50 40
40
12.0 30 21
10.0 20 10.8
10
8.0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Saudi Arabia Kuwait
Gas consumption (bcf/d) 2010 2020e
Source: BP World Energy Statistical Review 2010 Source: MEED, HSBC
domestic gas prices therefore is that higher prices The low gas prices also create the potential for using
would incentivise new production and allow ethane for fuel rather than converting it into higher
supply to keep pace with growing demand. value added petrochemicals. Ethane can be burnt for
fuel use and at the current delta between Saudi
Lower prices result in uneconomic
ethane prices and global fuel oil prices (see table at
resource allocation
the bottom of the page), ethane is being sold at
The other economic argument for higher domestic roughly one tenth of its heating value equivalent.
gas pricing comes from the demand side. Low gas
Ethane has so far not been used for fuel, given its
prices and consequently low retail electricity
value as a petrochemical feedstock. However, if
prices mean that there is little incentive for users
power generation demand continues to grow at the
to ration their consumption, driving rapid demand
projected rate and results in a large fall in revenue
growth as shown in the charts at the top of the
due to lost fuel oil sales, the argument for
page. Power demand in both Saudi Arabia and
replacing some of the heating oil that is consumed
Qatar is expected by MEED to double from
with ethane at a tenth of its price will likely start
current levels over the next decade.
to take hold. Raising domestic prices would not
In the absence of supply growth from non- only incentivise new gas supply, freeing up
associated gas, the incremental increase in power heating oil for export, it would also make ethane
generation will have to come from burning less attractive as a heating oil substitute resulting
heavy/fuel oil to generate electricity. On our in a more economic resource allocation.
estimates, this would imply an increase in fuel oil To sum up, the economic rationale would be to
consumption to 2.4m bpd from the current levels raise feedstock prices to levels in line with global
of 0.9m bpd, an incremental loss of 1.5m bpd that natural gas prices (USD4-5/mmbtu). This would,
could potentially have been exported and a in theory, still provide a degree of cost advantage
potential revenue loss of USD110m per day at to the petrochemical producers relative to crude-
current international market prices. based producers while incentivising new supply
and curtailing runaway demand growth.
Heating value comparison

Btu/lb Price Units USD/lb price on heating value
Methane 23811 0.75 USD/mmbtu 0.02
Ethane 22198 0.75 USD/mmbtu 0.02
Bunker fuel oil 18000 80.0 USD/bbl 0.24
Source: EIA, HSBC
20
January 2011
The policy response Methanol, admittedly, is an extreme example as

the cost curve is not linked to crude and the
There appears to be widespread agreement
margin impact on other crude based
between companies that we cover – SABIC,
petrochemicals such as ethylene would be much
Tasnee, Sahara – and Saudi Aramco that
lower. However, the basic principle still holds – a
feedstock prices for the chemical sector need to
sudden increase in gas prices to international
rise from the current levels. The areas of
levels would severely impact the profitability of
disagreement pertain to the quantum and timing of
the industry without giving it time to adjust to the
any potential price increases.
realities of a new feedstock price regime.
The energy producers such as Aramco argue for
The financial stresses that such a change would
an early increase to levels in line with US gas
place on industry balance sheets would not be
prices based on the economic rationale stated
welcomed by banks and project finance institutions,
earlier. Chemical industry participants on the
which as capital providers and enablers of industry
other hand argue in favour of a phased approach
development had factored a certain degree of
to any pricing increase which would allow the
profitability into their forecasts. Furthermore, such a
industry to focus on cost management and raise its
move would run against the precedent of policy
competitiveness over time.
changes in the region which generally occur in a
In general, we believe that regional policy makers gradual manner following a consultative process and
are sympathetic to calls for a phased approach to keeping a long-term outlook in mind.
feedstock price increases for the reasons outlined
below. Diversification still essential for job
creation
Shock treatment not the answer
Policy makers in the region have employment
The table below illustrates the impact on methanol generation as their key long-term objective and
cash margins of a sudden increase in gas prices have not lost sight of the fact that industrial
from the current levels of USD0.75/mmbtu to US growth is essential to meet that objective.
gas price levels of USD4.5/mmbtu. As can be
The challenge of job creation is most acute in Saudi
seen, the financial impact is substantial, with cash
Arabia. Home of the largest population base in the
margins for methanol being cut almost in half
GCC, over half of Saudi Arabia’s population of 18.5
from over 75% to under 40%. While from a
million is under 20 years old and only 3 million, or
global chemical industry standpoint cash margins
16% of the population, are in the workforce. Around
of roughly 40% are very attractive, the impact of a
2 million Saudis are between the ages of 20 and 24,
halving of margins on the domestic petrochemical
and in this age range only 0.5 million are employed,
sector would be severe.
including expats. Of the 1.8 million Saudis between
the ages of 15 and 19, few have jobs. All this
Cash margin impact of a change in gas prices

Gas prices (USD/mmbtu) 0.75 4.50
Methanol production cash costs incl freight (USD/tonne) 91 230
Methanol prices (USD/tonne) 380 380
Cash margins (USD/tonne) 289 150
Cash margins (%) 76% 39%
Change in cash margins -37ppt
21
January 2011
suggests that around 1.7 million jobs must be found Supply incentives need not revolve
in the next 10 years – more if women are to play a around price alone
greater role in the workforce (see charts at the The question of whether to provide incentives for
bottom of the page). non-associated gas exploration in order to boost
As the region’s primary non-oil industry, the supply is the most challenging one facing policy
petrochemical sector is the logical first stop for makers. With extraction costs likely to be
employment generation. Commodity chemicals substantially higher than current sale prices of
are primarily export orientated and do not create USD0.75/mmbtu, there is no incentive for
enough jobs to make a dent in the region’s companies to explore for gas. As discussed above,
employment statistics. Job intensity rises the it is unlikely that prices will be raised to levels
further one moves down the petrochemical chain that would make gas exploration lucrative,
and, in order to meet the policy objective, the particularly if one were to factor in exploration
regional petrochemical industry needs to make the costs as well as development and extraction costs.
move towards downstream chemical businesses.
However, in our opinion policy makers do have
It would be hard to incentivise chemical some tools that allow them to provide supply
companies to make the move downstream while incentives without needing to resort to a fully
simultaneously hurting their competitiveness with market-based gas pricing model.
a shock increase in feedstock prices. Saudi
chemical companies have strong balance sheets Gas sale terms to National Oil companies
and have capital available to invest in emerging (NOCs) could be on a minimum guaranteed
markets such as China and India. return on capital basis which would allow
foreign joint venture partners to meet their
The investment decision for new chemical
hurdle rates while transferring the subsidy
capacity invariably boils down to whether to
burden to the state.
invest where feedstock competitiveness is secure
(such as the Middle East) or where the market is There could be differential pricing terms and
secure (China/India). If regional feedstock rights for gas and condensate. The gas could
competitiveness were greatly reduced by policy be sold to the NOC on a fixed price basis
action, chemical companies would likely see no while the foreign JV partner could be given
reason to invest in downstream sectors within the rights to any condensate that is produced
Middle East, dealing a blow to the key policy alongside the gas which could be sold in the
objective of job creation. international market. This would effectively
Population growth – CAGR (2002-09) Labour force growth pa (%)

9.0% 8.0% 9
8.0% 7.2% 8
7.0% 7
6.0% 6
5.0% 4.4% 5
4.0% 3.7% 4
2.7% 3
3.0%
2
2.0%
1
1.0%
0
0.0% GCC Bahrain Kuwait Oman Qatar Saudi UAE
UAE Kuwait Qatar Saudi Arabia Average 1980-1990 1990-2000 2000-2010 Arabia
Source: Arab Labour Force, HSBC Source: World Bank, HSBC
22
January 2011
give the JV partner the lion’s share of market- While liquid feedstock prices have increased by
priced condensate while the NOC gets the an average of 700bps between 2002 and 2011, the
rights to fixed-priced gas. increase has been anything but sudden, with the
average annual increase being less than 80bps.
Another incentive could be potential
This gradual increase in feedstock prices allows
collaboration on downstream petrochemical the industry to wean itself off cheap feedstock
projects which allows the E&P partner to benefit over time while developing operational
directly from domestic use of the gas found. experience and competitiveness.
Consideration for future exploration acreage, Given the experience with liquid feedstock
if other upstream oil opportunities were to pricing, we believe that policy makers will adopt a
open up, is another potential incentive for similar stance to the pricing of natural gas and
foreign JV partners. ethane as well.
A combination of one or more of these incentives Industry to remain highly competitive

was offered to the four exploration JVs that vs. prevailing global gas and crude
Aramco approved in 2004, with the aim of prices
increasing domestic natural gas output by We started this section by highlighting the sharp
exploring in the Rub al-Khali. While the success increase in the cost advantage enjoyed by Saudi
of this exploration effort has been mixed, it does petrochemical companies driven by the increase
illustrate that supply incentives do not need to in global energy prices. It is worth mentioning
come from price increases alone. that just as the cost advantage increased in line
with rising energy prices, there exists a risk of the
The compromise solution
advantage shrinking if there were to be a sharp
Phased increase in feedstock prices decline in energy prices.
over several years
We believe that policy makers would want to
We believe that the template for feedstock pricing
insulate the cost advantage enjoyed by the
increases in the Middle East will be based on the
regional petrochemicals sector from any wild
precedent set with liquid feedstock pricing starting in fluctuations in energy prices. Feedstock prices,
2002. The table at the bottom of the page shows the even when raised, would likely only be raised to a
discount factors applied to liquid feedstocks, such as level at which the local industry would remain in
propane, butane and light naphtha, and how that the first quartile of the cost curve even in a worst-
discount has evolved over the last decade. case scenario for global energy prices.
Saudi liquids pricing factors

Year beginning Propane factor Butane factor A 180 factor naphtha
01-Jan-02 0.621 0.655 0.658
01-Jan-03 0.632 0.660 0.666
01-Jan-04 0.643 0.665 0.674
01-Jan-05 0.654 0.670 0.682
01-Jan-06 0.665 0.675 0.690
01-Jan-07 0.676 0.680 0.698
01-Jan-08 0.687 0.685 0.706
01-Jan-09 0.698 0.690 0.714
01-Jan-10 0.709 0.695 0.722
01-Jan-11 0.720 0.700 0.730
23
January 2011
A hint as to what policy makers consider a floor for Adjusting for the allowed cost advantage would
energy prices is available in the oil price assumption imply Saudi ethane costs of USD101/tonne which,
used while setting annual budgets. Saudi Arabia, for given the ethane requirements for a tonne of
example, used an average crude price of USD55/bbl ethylene, translates to an implied gas price of
while setting its budget for 2011. It would be USD2.1/mmbtu.
unlikely that the very same policy makers would
then move to considering the current oil price of Liquids discount unlikely to drop
USD90/bbl when examining the issue of feedstock below 25%
costs for the petrochemical industry. Both gas and liquid feedstocks are priced on an
opportunity cost basis. For stranded gas, that
The table at the bottom of the page outlines our
opportunity cost is very low allowing gas to be
approach to calculating potential feedstock price
priced at a substantial discount to international
increases for the petrochemical sector. We believe
prices. For liquids such as propane and butane
that the base oil price used to derive industry
which have liquid international markets, the
competitiveness will be similar to that used by the
discount provided to the domestic industry is not a
Saudi government to set its budget – USD55/bbl.
subsidy, but is in fact a ‘netback’ equivalent price.
At that level of crude prices, the marginal cost of
producing a tonne of ethylene is around In Saudi, for example, if Aramco were to sell
USD700/tonne. propane in the international market rather than
supplying it to the domestic sector, its effective
Working back from that marginal cost of ethylene
net realised price would be significantly lower
and backing out variable and other operating costs
than observed market prices on account of supply
for the Middle East we get an implied equivalent raw
chain costs (such as liquefaction, storage,
material cost for the Middle East of USD500/tonne.
shipping, distribution and tariffs).
At this stage we assume that in order to keep the
competitiveness of the Middle Eastern industry These chain costs are the justification for the
intact and its cost position firmly within the first current c30% discount on liquid feedstock prices.
quartile, policy makers would allow a cost advantage The current schedule for liquids pricing (see table
equivalent to the historical average over the 1990- on page 25) runs up to 2011. We expect to see a
2010 period of USD375/tonne. further decrease in the discount, to 25% over the
Potential Saudi feedstock cost framework

Naphtha consumption 3.46 tonne/tonne
Floor Crude price assumption 55 USD/bbl
Naphtha costs 495 USD/tonne
Raw material costs 1,716 USD/tonne
Co product credits 1390 USD/tonne
Variable operating costs 300 USD/tonne
Incremental costs 80 USD/tonne
Marginal cost of ethylene production at crude price of USD55/bbl 706 USD/tonne
Working back to derive a Middle East feedstock price in this context
Marginal cost of ethylene production at crude price of USD55/bbl 706 USD/tonne
less Middle East variable and incremental costs 200 USD/tonne
Implied raw material costs 506 USD/tonne
less average cost advantage over 1990-2010 period 375 USD/tonne
Implied Saudi ethane costs 131 USD/tonne
Ethane requirement for a tonne of ethylene 1.29 tonne/tonne
Implied ethane costs per tonne 101.3 USD/tonne
Implied ethane [gas?] costs 2.1 USD/mmbtu
24
January 2011
next five years, but believe that given the netback We also believe that policy makers will be just as
argument and the fact that the bulk of new Saudi conservative with their underlying energy price
ethylene capacity has a large proportion of liquids assumptions when assessing the competitiveness
cracking it is unlikely that the liquids discount of the petrochemical industry as they are when
will drop below 25%. setting the annual budgets. We assess the range of
possible feedstock prices under these constraints
Feedstock pricing forecasts
and derive our feedstock pricing framework as
As discussed earlier in the section, we believe that detailed on the previous page.
while there is broad consensus that feedstock
We raise our forecasts for Saudi gas and ethane
prices in Saudi need to be raised, the decision on
equivalent prices, now factoring in a gradual
the quantum and timing of the increase will
increase to USD2.0/mmbtu by 2015, vs a flat
balance economic considerations with policy
USD0.75/mmbtu previously (see table at the bottom
objectives.
of the page). We also assume that the liquids
While the Saudi government is keen to incentivise discount will decline by 1ppt each year from the
new gas exploration and supply and to ensure current 28% before being fixed at 25% in 2014.
economic resource allocation, it is also cognisant
of the role the Saudi petrochemical industry needs
to play in employment generation. This will likely
be a key consideration driving policymakers to
ensure that feedstock price increases take place in
a phased fashion without shocking the industry or
dramatically altering its competitive dynamic.
HSBC Saudi feedstock pricing assumptions

2011e 2012e 2013e 2014e 2015e
Gas price (USD/mmbtu), New 0.75 1.25 1.50 2.00 2.00
Gas price (USD/mmbtu), Old 0.75 0.75 0.75 0.75 0.75
% Propane Discount, New 28% 27% 26% 25% 25%
% Propane Discount, Old 28% 28% 28% 28% 28%
25
January 2011
Impact on product pricing

and margins
HSBC crude oil price forecast raised to USD82/bbl for 2011, rising a
dollar a year thereafter
We modify our chemical product price and margin estimates to reflect
higher energy prices as well as changes in feedstock pricing
On average the impact of higher crude prices outweighs higher
feedstock costs
Feedstock price impact driven gas prices also affects the price of ethane, as ethane
by product and feedstock mix prices are quoted on a gas equivalent basis, the drop
in ethane-based product margins is far lower due to
The increases to our feedstock pricing estimates,
the higher degree of value added in ethane-based
taken in isolation, result in a drop in product
products versus methane-based products (see table at
margins for the companies within our coverage.
the bottom of the page).
The extent of the drop in margins, though,
depends on the product portfolio of each company For liquids based products, the margin impact is
as well as their feedstock mix. easier to forecast as the product margins are
directly linked to the discount (c30%) to global
The biggest increases in our feedstock price
feedstock prices. As the discount is reduced in our
estimates are those for natural gas, which impact
estimates by 1ppt each year through 2015, the
products that are methane based – methanol,
margin impact would be similar (ie a drop of 1ppt
ammonia and urea – the most. While the increase in
each year for liquids based products).
Impact of gas feedstock price increases (methane vs. ethane-based products)

Natural gas price (USD/mmbtu) 0.75 2.00
Methane price (USD/mmbtu) 0.75 2.00
Raw material costs for 1 tonne of methanol 26.25 70.00
Change in raw material costs 43.75
Current methanol price (USD/tonne) 380
Margin impact from cost increase -12%
Implied ethane price (USD/tonne) 36.7 97.8
Raw material costs for 1 tonne of ethylene 47.3 126.2
Change in raw material costs for PE (polyethylene) production 78.85
Current LDPE (low density PE) prices (USD/tonne) 1450
Margin impact from cost increase -5%
26
January 2011
Very few companies have either a purely liquid or rationale behind the change in their oil price forecasts.
purely gas-based product portfolio and therefore Please see the full note for greater detail.
there are multiple moving parts when trying to
Oil price assumptions
assess the impact of a change in feedstock prices
on company profitability. We list the impact of Our Brent assumption for 2011 rises from USD76
our feedstock pricing changes on each company to USD82, rising a dollar a year thereafter. We
under our coverage assuming constant product assume a USD1 premium for WTI.
prices below. The rule of thumb is that companies Oversupply remains
with the biggest cost advantages and the highest We estimate that OPEC has spare capacity of up
margins (eg SAFCO) are impacted more on a to 6MMbbl/d, or nearly 7% of world demand.
percentage basis than companies with the lowest Even assuming not all of this capacity is palatable
advantage and margins (eg SABIC). to the world’s refining system due to quality,
Of course, one cannot look at product margins on spare capacity is still probably in the 5MMbbl/d
a feedstock basis alone. Product prices are an area. Unlike many other commodities, therefore,
important factor within our margin outlook and the crude market is not tight; it is potentially in
are influenced by both energy costs and supply/ oversupply.
demand. Our bullish long-term supply/demand It is only OPEC’s discipline in keeping crude off the
outlook (as detailed earlier in the note), coupled market since the price collapse in late 2008 that
with increases in our oil and gas team’s energy enabled crude prices to recover to current levels.
price forecasts, have resulted in an increase in our
product pricing estimates. In most cases, the What has perhaps been surprising is how stable
impact from higher product pricing outweighs the crude prices have been during much of 2010, at
impact of higher feedstock costs. least until recently. With hindsight, we suspect
that OPEC was helped by the strong recovery in
Changes to HSBC’s oil price its efforts to help oil prices recover from around
forecasts USD40 in early 2009.
Our global oil and gas team have raised their forecasts This meant that it was rarely called upon to
for crude oil prices. The extract below is from the note defend the oil price on the downside. So, OPEC
“Oil sector outlook” published on 23 January 2011 was normally faced with the relatively simple
(Paul Spedding, +44 207 991 6787) highlighting the
Impact of feedstock price changes on EBITDA margins *

Company ________ 2012e__________ _________2013e _________ _________ 2014e _________ ________ 2015e _________
New Old New Old New Old New Old
APPC 35.4% 36.7% 33.2% 35.5% 36.3% 39.5% 37.5% 40.6%
IQ 47.1% 47.1% 47.3% 47.3% 48.5% 48.5% 48.3% 48.3%
Chemanol 47.3% 49.2% 46.4% 49.2% 44.1% 48.8% 43.7% 48.4%
NIC 29.2% 29.7% 29.3% 30.2% 31.5% 33.0% 31.7% 33.1%
Petrochem 43.8% 43.8% 42.9% 42.9% 46.3% 46.3% 46.4% 46.4%
Sahara 37.4% 38.2% 37.7% 39.1% 40.3% 42.4% 41.0% 43.0%
Safco 72.4% 76.0% 70.8% 75.8% 67.6% 75.5% 67.6% 75.5%
SABIC 32.8% 33.6% 31.6% 32.9% 33.3% 35.3% 33.1% 35.1%
SIIG 35.9% 36.1% 36.3% 36.6% 39.5% 39.9% 39.9% 40.3%
Sipchem 53.2% 55.9% 52.5% 56.5% 49.0% 55.5% 49.1% 55.6%
Kayan 54.4% 54.7% 53.0% 53.7% 54.8% 55.8% 54.3% 55.3%
Yansab 51.0% 52.2% 48.9% 50.9% 51.1% 54.1% 51.0% 54.0%
Source: HSBC estimates, * assuming constant product prices
27
January 2011
Oil price assumptions (USD/bbl)

Brent 2010a 2011e 2012e 2013e
New 79.1 82 83 84
Old 79.1 76 77 78
Futures 92.6 92.4 92.1
WTI
New 79.7 83 84 85
Old 79.7 77.2 77 78
Futures 91.1 91 90.2
Source: Bloomberg, HSBC estimates
decision of how much additional crude to let on to Low enough not to derail what appeared to be
the market. Some short-term cuts in OPEC a fragile economic recovery; and
production did prove necessary during 2010 but
Low enough not to encourage a rebound in
they were small and normally only involved Saudi
investment in non-OPEC projects or
Arabia taking an active role. At no stage was a
efficiency measures that could take market
collaborative cut necessary.
share from OPEC.
With OPEC seemingly in control of the market, it
Move to USD70-90?
is in theory in a position to set the price. (In
However, comments from Saudi Oil Minister Ali
reality, we believe it is more that its largest
al-Naimi in November implied that the target
producer, Saudi Arabia, is in a position to do so.)
band may have widened. On November 1, he
What price does OPEC want? commented at a speech in Singapore that
At present therefore, the key question is what oil “consumers are looking for oil prices around
price does OPEC (or Saudi Arabia) want? USD70 but hopefully below USD90”.
Although there are a range of views (doves and Comments from the Kuwait Oil Minister echoed a
hawks) within OPEC as to what constitutes an similar theme when Sheikh al-Abdullah al-Sabah
acceptable oil price, we believe that it is Saudi said after the December OPEC meeting that “we
Arabia that carries the most weight. It is the would rather see it [the oil price] between USD75
largest producer in OPEC by a factor of two and and USD90.”
accounts for around 60% of spare capacity. Although Naimi has subsequently reiterated that
The hawks, including Venezuela, Iran and Saudi Arabia still favours a USD70-80 price range
Ecuador, seem to regard USD100-120/bbl as an (13 December 2010), the lack of any comment
“adequate” price judging by their comments at the about action to lower prices has meant crude
recent OPEC meeting (14 December 2010). prices have remained comfortably above the ‘old’
Saudi target range since early November.
However, it is Saudi Arabia that matters most, and
for the past 18 months its official policy has been Several members of OPEC, including Saudi
that oil prices in the USD70-80 range are Arabia, commented since the OPEC meeting that
“acceptable”. We believe that the Kingdom the crude market was balanced, the implication
believed that this price range was: presumably being that the move into a new range
was due to speculative activity.
Sufficient to fund the financial needs of most
OPEC members, including itself;
28
January 2011
But another theme that has been articulated by perspective, another reason for deterring tar sands
some OPEC members is that although nominal projects is that they have extremely long profiles
prices are acceptable, real prices are not. We (40 years potentially). In addition, they do not
believe this is a reference to the rise in soft decline like conventional oil fields and so could
commodity prices, which OPEC members tend to be considered a ‘perennial’ problem once
import. Having kept the oil price in a range that production starts.
many consumers and producers see as acceptable,
We would also argue that it would make sense for
it is perhaps not surprising that some OPEC
OPEC to set an upper limit to the oil price that did
members might feel aggrieved at such an upward
not lead to major energy-efficiency initiatives or
move in the price of their import bill.
substitution of oil by other energy sources.
Long-term competitive position?
We believe that USD90/bbl is probably an
Unlike some in OPEC, Saudi Arabia policy on oil
important level in all these respects. In our view,
prices appears to take into account its long-term
with prices below USD90/bbl, investment in new
competitive position (in addition to its short-term
tar sands projects will be constrained. In addition,
funding requirements). In order to ensure that
unless mandated by governments, we doubt the
future generations can benefit from its oil
trend to more efficient energy usage will
reserves, it considers the impact its pricing
accelerate materially.
decisions might have on supply and demand in the
long term. The marginal costs of non-OPEC It may be that the trigger price is lower than
production vary, but we believe the following are USD90/bbl. Total’s CEO commented in early
reasonable guidelines. December that:
Canadian tar sands (Greenfield): USD80-90/bbl. “USD70-80 starts to be a little bit low to invest in
these more difficult environments.”
US Gulf, Ultra Deepwater/Deep reservoir (eg
Paleogene): USD60-70/bbl. (He was referring to Canadian tar sands and
deepwater, high-pressure, high-temperature
US Gulf, Deepwater (eg Miocene): USD30-
projects in the US Gulf of Mexico.)
40/bbl.
We think therefore that there are very good
Brazil Presalt, Ultra Deepwater/Deep
reasons for Saudi Arabia to try and limit any
reservoir: USD35-40/bbl.
increase in oil prices over USD90.
We estimate that in aggregate, OPEC members
Supply demand balance
need around USD60-70/bbl to balance their
Demand reverting to trend?
budgets. This means that OPEC is unlikely to be
able to back conventional deep-water projects out Demand for crude products looks to us to have
of the market without some members suffering increased by around 2MMbbl/d in 2010, the
short-term financial pressures. fastest annual rate of growth since 2004. Unlike
2004, however, much of this increase seems due
However, tar sands projects could be deterred at to the ‘recapture’ of 2009’s ‘lost’ demand. We
prices below USD90. It was noticeable during expect 2011 to see lower growth of around
2009 and early 2010 that few of these projects 1.4MMbbl/d as the 2010 base benefited from
made much progress towards taking a unusually cold winter weather. For 2012 and
development approval. From an OPEC beyond, we expect annual demand growth to
29
January 2011
average around 1.7MMbbl/d. We see modest that may not be able to be produced at short notice or
growth within the OECD, with the main drivers of may not be suitable for many of the world’s lower
growth being non-OECD Asia (especially China), quality refineries. According to the IEA, additional
the Middle East and Latin America. OPEC capacity of around 1.5MMbbl/d is due on
stream by 2015, around two-thirds of that coming
Supply growth rate to slow?
from Iraq. However, the level of production from
Non-OPEC supply (including bio-fuels), which
Iraq is hard to predict as it depends on:
accounts for around 60% of global output, has
risen on average by around 0.5MMbbl/d since Investment in water injection facilities, crude
2003. This is well below the 1.2MMbbl/d rise in pipelines, storage and export terminals.
global demand. Although we believe 2010 is
The pace of investment by the oil companies
likely to see non-OPEC output rise by around
that have signed production agreements with
1.3MMbbl/d, we believe the rate of growth will
the Iraqi government.
slow in 2011 and beyond as decline rates
accelerate. Some new large projects in Brazil and The sanctity of contracts (in the past, the
Kazakhstan should provide growth, but these are opposition has said it will revoke some
needed to offset the underlying decline rate of the contracts).
non-OPEC base, which we believe is at least 5%
Preventing insurgents from damaging
or 2.5MMbbl/d.
infrastructure or disrupting development work.
We therefore expect the amount of oil that the
In theory, the contracts that Iraq has signed with
market needs from OPEC will rise over the next
the oil industry have the potential to deliver peak
several years. Some of this growth is likely to be
production of 12MMbbl/d some time around
met by natural gas liquids (NGLs) from OPEC
2016-17. But the IEA estimate of 1.1MMbbl/d
and biofuels, but the call for conventional crude
added by 2015 suggests that the peak is unlikely
oil is still likely to rise in our view.
to be reached this decade, in our view.
The call on OPEC crude rises steadily until 2015,
However, the IEA estimate is likely to be too low,
suggesting a tightening market.
in our opinion, as two of the projects, BP’s
OPEC capacity Rumaila and ENI’s Zubair are making good
At present, we believe that OPEC has spare capacity progress. These two projects are ahead of the
of around 6MMbbl/d, although around 1MMbbl/d of others and could reach their interim target of
OPEC production capacity (MMbbl/d) OPEC spare capacity (MMbbl/d)
38 8
36
6
34
32 4
30
28 2
2009 20 10 201 1 2 012 201 3 2014 2015

0
OPE C 10 Iraq 200 8 2009 2 010 e 20 11e 2012 e 2013 e 20 14e 2 015 e
Source: IEA, HSBC estimates Source: IEA, HSBC estimates
30
January 2011
producing 2.8MMbbl/d by the end of 2014, an We believe that there will be a gradual increase in
increase of 1.5MMbbl/d. We see Iraqi production Saudi output if prices stay above USD90. But we
rising from 2.5MMbbl/d to 4MMb/d in 2015 with also believe that it makes sense for the Kingdom
new projects offsetting a natural decline rate of to manoeuvre prices so that they sit in the top half
around 500Mbbl/d over the period. (The level of of its acceptable range. We would also note that
Iraqi output remains a key uncertainty for the the two most common benchmark crudes, Brent
direction of the oil price in the longer term.) and WTI, are extra light crudes which trade at a
premium to the OPEC basket. The basket, which
We estimate that this would take OPEC’s overall
is made up of a mix of crude with a range of
capacity from around 35MMbbl/d currently to
different gravities (densities), tends to trade at a
around 37MMbbl/d by 2015. This increase will
USD2-3/bbl discount to Brent.
help meet some of the increase in demand that we
anticipate. However, there will still be a reduction Our USD82 assumption is therefore close to the
in OPEC’s spare capacity under our estimates. top end of the ‘official’ Saudi price target of
USD70-80 for the OPEC basket and the middle of
Under this forecast, the amount of spare capacity
the ‘unofficial’ range of USD70-90.
in OPEC falls close to that seen during the 2008
oil price spike. That does not necessarily mean Product price forecasts
that we will see a repeat of USD150 oil prices as a
Our chemical product price forecasts are driven
key factor in 2008 was a shortage of middle
by our ethylene supply/demand model and our
distillate due to temporary issues. These included
proprietary ethylene cost curve, which are used to
the China Olympics, the cut-off of Argentine gas
forecast ethylene prices. Our ethylene cost curve
supplies to Chile, and an explosion at a gas
is in turn driven by our oil and gas team's revised
processing plant in Western Australia. These
crude price forecasts for 2011-15.
caused increased demand for diesel to fuel
portable power generators at a time of the year Given the importance of ethylene as a key
when the refining system is geared up to produce intermediate chemical, once we have our ethylene
gasoline. Nevertheless, it seems to us that as we price model and a few other raw material price
progress towards mid-decade, the risks of a tighter estimates, we can forecast prices for a suite of
crude market developing increase. downstream petrochemicals – polyethylenes,
polyesters, glycols and the styrene chains.
Why USD82?
We believe that it is risky to assume that the Saudi These products constitute the bulk of the product
target of USD70-80 has definitely moved portfolio for the MENA petrochemical universe
upwards. The Kingdom’s response to price spikes and the pricing table at the bottom of the next
in the past has been subtle, a gradual increase in page is the starting point for our financial models
production combined with quiet comments as these prices, along with the installed capacity
regarding the level of oil prices it views as base for each company, drive our top-line
acceptable. forecasts.
31
January 2011
Margins are unique to each company as they vary We also move to using stock specific betas vs. an
according to the price paid for feedstock, the product earlier sector beta assumption of 1. These stock
portfolio and the location of capacity (SABIC has a specific betas are based on a two year historical
substantial non-Saudi capacity base). The net impact correlation between the individual stock prices
of changes in both our product and feedstock pricing and the Saudi Tadawul index and are listed on the
forecasts are discussed individually in the company table at the top of the next page, along with our
sections that follow. new costs of equity for each company and the
changes to our WACC estimates.
Changes to our valuation
framework For Industries Qatar, our updated assumptions for
Qatari cost of equity include a 3.5% risk free rate
We use a DCF methodology to value the chemical
and an 8% country risk premium, which gives us
companies under our coverage and have updated
a pre-beta adjusted cost of equity of 11.5% vs. our
our risk free rate and country risk premium to
earlier estimate of 11%. The beta calculation for
reflect the new HSBC Strategy team assumptions
IQ is based on a two year historical correlation of
(for more details see the note of 20 December
the stock price with the Qatari DSM Index.
2010, Cost of Equity). Our updated assumptions
for Saudi include a 3.5% risk free rate and a 6% We are also rolling forward all our DCF’s to 2011
country risk premium, which gives us a pre-beta start dates from 2010.
adjusted cost of equity of 9.5% vs. our earlier
estimate of 11%.
HSBC chemical product pricing assumptions

Product (USD/tonne) 2011e 2012e 2013e 2014e 2015e
ABS 2,656 2,666 2,733 2,816 2,790
Ammonia 375 375 375 375 375
Ammonium Phosphates 345 345 345 345 345
Benzene 872 838 873 933 998
Cumene 1,055 1,021 1,056 1,124 1,177
Cyclohexane 981 976 1,015 1,076 1,151
Ethylene 1,050 1,108 1,108 1,246 1,246
Ethylene Dichloride 613 636 633 671 669
Ethylene Glycol 717 750 752 829 831
HDPE 1,352 1,415 1,420 1,563 1,569
LDPE 1,373 1,437 1,443 1,588 1,594
LLDPE 1,377 1,436 1,440 1,573 1,578
Methanol 328 332 336 340 344
Mixed Xylenes 823 776 782 813 837
PET 1,232 1,180 1,277 1,404 1,631
Phenol 1,172 1,219 1,259 1,337 1,406
Polycarbonate 2,529 2,539 2,603 2,682 2,657
Polyester Fiber 1,215 1,294 1,408 1,514 1,547
Propylene 1,194 1,159 1,187 1,265 1,289
Polypropylene 1,400 1,417 1,434 1,451 1,468
Polystyrene 1,200 1,281 1,314 1,406 1,461
PVC 973 1,086 1,081 1,155 1,192
Urea 350 350 350 350 350
MTBE 777 769 789 814 830
Acrylic acid 1,613 1,571 1,605 1,698 1,727
VCM 779 869 865 924 953
Butanediol 2,084 2,126 2,147 2,169 2,190
Acetic acid 605 607 609 612 614
VAM 912 936 937 991 992
32
January 2011
Changes to our cost of equity and WACC

RfR ERP Adjusted Beta New CoE Old WACC New WACC
SABIC 3.50% 6.00% 1.47 12.32% 9.43% 9.78%
SAFCO 3.50% 6.00% 0.8 8.30% 9.95% 7.24%
Yansab 3.50% 6.00% 1.39 11.84% 7.86% 8.66%
Kayan 3.50% 6.00% 1.19 10.64% 7.80% 7.71%
IQ 3.50% 8.00% 1.11 12.38% 10.00% 11.10%
Sipchem 3.50% 6.00% 1.09 10.04% 9.10% 8.47%
Sahara 3.50% 6.00% 1.35 11.60% 8.90% 9.27%
APC 3.50% 6.00% 1.22 10.82% 8.90% 8.73%
Tasnee 3.50% 6.00% 1.25 11.00% 9.10% 9.14%
SIIG 3.50% 6.00% 1.17 10.52% 8.90% 8.52%
Petrochem 3.50% 6.00% 1.19 10.64% 8.90% 8.60%
Chemanol 3.50% 6.00% 1.08 9.98% 9.10% 8.14%
Source: Bloomberg, HSBC estimates
33
January 2011
SABIC
Operating leverage in 2011 from improving fundamentals at the
Innovative Plastics unit
Volume growth from commercial production at Saudi Kayan
Reiterate Overweight (V) rating, raising target price to SAR130
from SAR110
Why is SABIC different 2011 from an improving fundamental environment

SABIC has three key differentiators, which set it within developed markets.
apart from the rest of the Middle Eastern chemical 2011: What to expect
industry: a diverse product portfolio, a fully-
Volume Growth: SABIC should be one of the
owned supply chain and marketing platform and
few chemical companies in the region to see
direct exposure to developed markets.
volume growth in 2011, as its affiliate Saudi
SABIC’s product portfolio spans the entire range Kayan (35% stake) is expected to start
from basic commodity chemicals to ‘differentiated commercial production by H2 2011. Kayan is by
commodities’, unlike other companies in the region far the biggest plant that SABIC has ever built,
which are mostly focussed on one or two product and should be a key contributor to the company’s
chains. This broad range allows SABIC revenue and earnings growth in 2011.
opportunities to integrate downstream that are not
Heading back to normality at SIP: SABIC’s
available to other companies with the sector. SABIC
Innovative Plastics business (SIP) which was
also has a fully developed in-house supply chain and acquired from GE Plastics in 2007 has been a drag
distribution system, and a global distribution on the company’s results for the last couple of years.
footprint, which allows the company to maximise At its peak though, the unit had EBITDA of
netbacks on its production. Furthermore, as the only cUSD1bn on an annual basis and we estimate that
regional company with significant asset exposure to the business could return towards those levels of
the US and Europe, SABIC should benefit through earnings by the end of the year from current levels of
SABIC: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
New Old New Old New Old
Revenue 184,404 164,399 196,223 168,480 198,439 170,492
EBITDA 57,240 52,978 62,651 57,753 62,815 58,342
Net Income 26,845 23,700 31,805 27,300 32,237 27,900
EPS 8.95 7.90 10.60 9.10 10.75 9.30
EBITDA Margin 31.0% 32.2% 31.9% 34.3% 31.7% 34.2%
Net Margin 14.6% 14.4% 16.2% 16.2% 16.2% 16.4%
34
January 2011
cUSD200m. Bayer has a MaterialScience business 3.8%. This cost of debt assumption and a 30% debt
which is similar in assets and geographic spread to weighting (unchanged) lead to our WACC estimate
SIP and in its Q3 2010 earnings release, Bayer stated of 9.78% (up from 9.43%). Under our research
that it expected its unit to be back to pre-crisis model, for stocks with a volatility indicator, the
earnings levels by the end of 2011, much earlier than Neutral band is 10 percentage points above and
previous expectations. We would expect to see a below the hurdle rate for Saudi stocks of 9.5%.
similar improvement in earnings at SIP which would
Our new DCF-derived target price for SABIC is
be a key driver of SABIC’s y-o-y earnings growth in
SAR130 (vs SAR110 previously) and implies a
2011.
21% potential return from current levels. This is
Changes to our estimates and above the Neutral band of our ratings model, so we
valuation maintain our Overweight (V) rating on the stock.
There are three major moving parts impacting our Risks
estimates: changes in our feedstock pricing
Cyclicality: All of SABIC’s products are
assumptions as highlighted in the first part of this
commodity products, whose earnings are inherently
report, changes to product price estimates in line
cyclical and driven by industry operating rates and
with the increase in the HSBC oil and gas team's oil
supply/demand fundamentals. Although we would
price forecasts, and the update to our cost of equity
argue that the cycle for each product is different and
assumptions as explained earlier. The changes to our
so provides a degree of offset, there is no denying
financial forecasts are detailed in the table at the
that earnings are linked to global GDP growth as
bottom of the previous page.
well as being affected by supply cycles for the
Valuation and risks products themselves.
Valuation Operating risks: In addition to normal business

Our preferred methodology for valuing commodity risk in the petrochemicals market, we see other
chemical companies is DCF. In our DCF valuation potential risks that are more difficult to assess, both
we model cash flows and EBITDA explicitly up to in terms of probability and effect. Such risks
2015, after which we build in semi-explicit cash include interruption to production from operating
flow forecasts running off a sales growth assumption problems or explosions. As the bulk of SABIC’s
and a profitability metric through to 2018. production is based in Saudi Arabia, some
Thereafter, we move to a terminal valuation phase. investors may associate it with increased risk of
political strife. However, the more practical,
For our WACC calculation, we have updated our everyday issue is the normal risk attached to a
assumptions for the risk free rate and country risk production process involving potentially explosive
premium to reflect the new HSBC Strategy team hydrocarbons – an area in which global standards
assumptions. These changes have been detailed of health and safety are rigorously applied.
earlier in the note. Our new cost of equity for
SABIC is 12.3% (vs. 11% earlier) and includes a Kayan start-up: Saudi Kayan is expected to start
risk free rate of 3.5%, a market risk premium of 6% commercial operations in 2011 and should
and a beta of 1.47. generate a key part of SABIC’s earnings growth
this year. There are typically some teething
We are lowering our cost of debt to 4% from 6% problems during the start-up phase of a greenfield
earlier to reflect the most recent SABIC bond project. Any such operational issues at Kayan
issuance in October 2010 which was priced at would represent a downside risk to our
165bps over benchmark mid-swaps of 2.17% i.e. at Overweight (V) rating on SABIC.
35
January 2011
Financials & valuation: Saudi Basic Industries Co Overweight (V)

Financial statements Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (SARm) EV/sales 3.5 2.3 1.8 1.6
EV/EBITDA 12.8 7.3 5.9 5.2
Revenue 103,092 152,529 184,404 196,223 EV/IC 1.9 1.8 1.8 1.7
EBITDA 28,536 47,669 57,240 62,651 PE* 35.5 14.9 12.0 10.1
Depreciation & amortisation -9,933 -10,120 -11,728 -12,255 P/Book value 3.0 2.7 2.4 2.2
Operating profit/EBIT 18,603 37,550 45,512 50,396 FCF yield (%) -0.1 12.6 11.5 14.1
Net interest -3,076 -3,635 -3,057 -2,532 Dividend yield (%) 1.6 3.4 4.1 4.9
PBT 17,085 35,001 43,455 48,864
HSBC PBT 17,085 35,001 43,455 48,864 Note: * = Based on HSBC EPS (fully diluted)
Taxation -800 -2,163 -1,738 -1,955
Net profit 9,062 21,577 26,845 31,805
HSBC net profit 9,062 21,577 26,845 31,805 Issuer information
Cash flow summary (SARm) Share price (SAR) 107.25 Target price (SAR) 130.00 Potent'l return (%) 21.2
Cash flow from operations 25,876 51,997 48,891 57,477 Reuters (Equity) 2010.SE Bloomberg (Equity) SABIC AB
Capex -24,158 -11,154 -11,656 -12,181 Market cap (USDm) 85,904 Market cap (SARm) 321,750
Cash flow from investment -22,884 -11,154 -11,656 -12,181 Free float (%) 30 Enterprise value (SARm) 346382
Dividends -3,750 -10,800 -13,350 -15,900 Country Saudi Arabia Sector Chemicals
Change in net debt 7,211 -18,781 -9,013 -14,291 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -263 39,756 36,235 44,296
Balance sheet summary (SARm) Price relative
Intangible fixed assets 21,734 21,734 21,734 21,734 114 114
Tangible fixed assets 159,988 161,023 160,951 160,876 104 104
Current assets 108,030 115,317 122,479 129,646 94 94
Cash & others 57,122 65,903 64,916 69,207 84 84
Total assets 296,232 304,553 311,644 318,736 74 74
Operating liabilities 36,961 44,506 48,101 49,289 64 64
Gross debt 107,015 97,015 87,015 77,015 54 54
44 44
Net debt 49,892 31,112 22,099 7,808
34 34
Shareholders funds 108,243 119,020 132,514 148,419
24 24
Invested capital 195,669 187,665 192,147 193,761
2009 2010 2011 2012
Saudi Basic Industries Co Rel to TADAWUL ALL SHARE INDEX
Ratio, growth and per share analysis Source: HSBC
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Note: price at close of 19 Jan 2011
Y-o-y % change
Revenue -31.6 48.0 20.9 6.4

EBITDA -38.8 67.1 20.1 9.5
Operating profit -49.2 101.8 21.2 10.7
PBT -54.2 104.9 24.2 12.4
HSBC EPS -58.9 138.1 24.4 18.5
Ratios (%)
Revenue/IC (x) 0.5 0.8 1.0 1.0
ROIC 9.4 18.4 23.0 25.1
ROE 8.6 19.0 21.3 22.6
ROA 6.8 12.1 14.5 15.7
EBITDA margin 27.7 31.3 31.0 31.9
Operating profit margin 18.0 24.6 24.7 25.7
EBITDA/net interest (x) 9.3 13.1 18.7 24.7
Net debt/equity 32.9 19.2 12.6 4.1
Net debt/EBITDA (x) 1.7 0.7 0.4 0.1
CF from operations/net debt 51.9 167.1 221.2 736.1
Per share data (SAR)
EPS Rep (fully diluted) 3.02 7.19 8.95 10.60
HSBC EPS (fully diluted) 3.02 7.19 8.95 10.60
DPS 1.70 3.60 4.45 5.30
Book value 36.08 39.67 44.17 49.47
36
January 2011
Yansab
MEG prices expected to remain robust in the medium term
Focus to shift to cash returns
Reiterate Overweight (V) rating, maintain target price of SAR65
Earnings power demonstrated 2011: What to expect

Yansab is a single-project company, with no Robust MEG pricing: We expect MEG prices to
exposure to capacity growth beyond the ramp-up of continue to benefit from the current record levels
existing production facilities. Given limited growth of price delta between cotton and polyester fibre.
opportunities and minimal maintenance capex – the The current price delta between cotton and
plant is less than a year old – we believe Yansab is polyester fibre stands at USD1,780/tonne – over
an exceptional cash generation story. 5.2x the average of the differential between 2000
and 2009, which should spur greater polyester
The company started commercial operations in
demand. This substitution demand drives pricing
March 2010 and had EBITDA margins of 51% for
for the raw materials used to make polyester such
the first three quarters of 2010. We estimate that
as paraxylene MEG. For details see our 5 January
the company will generate EBITDA of SAR4.4bn
2011 note, 2011: Year of the rabbit. Yansab has
in 2011, with free cash flow net of interest
the greatest exposure to rising MEG prices within
expense and maintenance capex of SAR3.3bn.
our coverage. A USD100/tonne change in MEG
This, compared to the current market
prices has a SAR0.44 impact on Yansab’s EPS.
capitalisation of SAR27.2bn, represents a free
cash flow yield of c12%. Cash returns: 2011 will be the first full year of
operations for Yansab. We believe that since
We believe that with the earnings power of the
Yansab will not have further avenues of growth
company demonstrated, the start-up discount on
through expansion, the focus will shift to cash
the stock should be eliminated as execution and
returns, as the company’s earning power is fully
project start-up risks start are reduced.
demonstrated. The firm’s cash generation ability
Yansab: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 7,808 7,756 8,819 8,185 8,926 8,232
EBITDA 3,987 3,687 4,397 4,103 4,372 4,114
Net Income 2,526 1,918 2,911 2,405 2,869 2,492
EPS 4.49 3.41 5.18 4.28 5.10 4.43
EBITDA Margin 51.1% 47.5% 49.9% 50.1% 49.0% 50.0%
Net Margin 32.3% 24.7% 33.0% 29.4% 32.1% 30.3%
37
January 2011
should allow ample room for substantial cash We are lowering our cost of debt for Yansab to 4%
returns to shareholders along with debt from 6% earlier to reflect the current annualised
repayment. interest rate that Yansab currently pays (3.6%). This
cost of debt assumption and a 40% debt weighting
Changes to our estimates and
(unchanged) lead to our WACC estimate of 8.66%
valuation
(up from 7.86%).
There are three major moving parts impacting our
estimates: changes in our feedstock pricing Under our research model, for stocks with a
assumptions as highlighted in the first part of this volatility indicator, the Neutral band is 10
report, changes to product price estimates in line percentage points above and below the hurdle rate
with the increase in the HSBC oil and gas team's for Saudi stocks of 9.5%. Our DCF-derived target
oil price forecasts, and the update to our cost of price for the company of SAR65 implies a 40%
equity assumptions as explained earlier. The potential return from current levels, which is
changes to our financial forecasts are detailed in above the Neutral band of our model, so we
the table at the bottom of the previous page. maintain our Overweight (V) rating on the stock.
Valuation and risks Risks

Plant shutdown: Yansab began commercial
Valuation
operations in Q1 2010, and any design or equipment
Our preferred methodology for valuing
issues tend to manifest themselves during the first
commodity chemical companies is DCF. In our
year of operations. Though there were no major
DCF valuation we model cash flows and EBITDA
problems in 2010, the company had a two-week
explicitly up to 2015, after which we build in
shutdown due to technical issues in Q3 2010. Any
semi-explicit cash flow forecasts running off a
further production problems would hurt Yansab’s
sales growth assumption and a profitability metric
earnings in 2011 and would represent a downside
through to 2018. Thereafter, we move to a
risk to our Overweight (V) rating on the stock.
terminal valuation phase.
MEG pricing: MEG prices were up 41% y-o-y in
Our new cost of equity for Yansab is 11.8% (vs.
2010, as the interfibre substitution between cotton
11% earlier) and includes a risk free rate of 3.5%,
and polyester, due to high cotton prices, helped
a market risk premium of 6% and a beta of 1.39.
propel MEG prices upwards. Though we believe
MEG prices will remain strong in the medium
term, they represent a downside risk to our
Overweight (V) rating on the stock, due to the
high sensitivity of Yansab’s bottom-line to these
prices.
38
January 2011
Financials & valuation: Yanbu Petrochemical Overweight (V)

Profit & loss summary (SARm) EV/sales 6.4 4.5 3.7
EV/EBITDA 12.6 8.9 7.5
Revenue 0 5,910 7,808 8,819 EV/IC 2.0 2.0 2.0 1.9
EBITDA -29 2,998 3,987 4,397 PE* 15.8 10.3 8.9
Depreciation & amortisation 0 -938 -947 -961 P/Book value 4.6 3.8 3.0 2.5
Operating profit/EBIT -29 2,060 3,040 3,436 FCF yield (%) -12.5 11.1 11.6 13.2
Net interest 0 -373 -450 -450 Dividend yield (%) 0.0 1.9 2.9 3.4
PBT -29 1,687 2,590 2,986
HSBC PBT -29 1,687 2,590 2,986 Note: * = Based on HSBC EPS (fully diluted)
Taxation 0 -42 -65 -75
Net profit -29 1,645 2,526 2,911
HSBC net profit -29 1,645 2,526 2,911 Issuer information
Cash flow from operations -1,787 3,065 3,201 3,728 Reuters (Equity) 2290.SE Bloomberg (Equity) YANSAB AB
Capex -1,471 -174 -188 -284 Market cap (USDm) 6,953 Market cap (SARm) 26,044
Cash flow from investment -1,455 -174 -188 -284 Free float (%) 40 Enterprise value (SARm) 37648
Dividends 0 -489 -759 -878 Country Saudi Arabia Sector CHEMICALS
FCF equity -3,258 2,891 3,014 3,444
Intangible fixed assets 0 0 0 0 55 55
Current assets 2,208 2,333 3,775 5,376 45 45
Cash & others 606 932 1,966 3,311 40 40
Total assets 21,124 20,485 21,168 22,092 35 35
Operating liabilities 845 1,126 1,263 1,374 30 30
Gross debt 14,611 12,536 11,315 10,094 25 25
20 20
Net debt 14,006 11,604 9,349 6,783
15 15
10 10
2009 2010 2011 2012
Yanbu Petrochemical Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue 32.1 12.9

EBITDA 33.0 10.3
Operating profit 47.6 13.0
PBT 53.5 15.3
HSBC EPS 53.5 15.3
Ratios (%)
Revenue/IC (x) 0.0 0.3 0.4 0.5
ROIC -0.2 10.5 16.3 19.0
ROE -0.5 26.3 32.8 30.3
ROA -0.1 9.7 14.2 15.5
EBITDA margin 0.0 50.7 51.1 49.9
EBITDA/net interest (x) 8.0 8.9 9.8
Net debt/equity 247.1 170.1 108.8 63.9
Net debt/EBITDA (x) -479.5 3.9 2.3 1.5
CF from operations/net debt 26.4 34.2 55.0
EPS Rep (fully diluted) -0.05 2.92 4.49 5.18
HSBC EPS (fully diluted) -0.05 2.92 4.49 5.18
DPS 0.00 0.87 1.35 1.56
Book value 10.08 12.13 15.27 18.89
39
January 2011
Tasnee
We see strong pricing power within the TiO2 segment for the next
12-18 months
Leverage to TiO2 pricing to drive earnings growth in 2011
Reiterate Overweight (V) rating and raise target price form SAR40
to SAR44
Diversified portfolio undersupplied well into 2012, given the lead times
for adding new capacity. This segment constitutes
Tasnee is a holding company with interests in
35% of Tasnee’s earnings and will be a key
petrochemicals and manufacturing. The
contributor to the company’s earnings in 2011.
petrochemicals business, which accounts for over
For more details, see our 1 November 2010 note,
85% of the company’s revenues, is made up of
Tasnee: Painting a stronger picture.
investments in Cristal (66% stake, TiO2), Saudi
Polyolefins (75% stake, polypropylene plant), SEPC Changes to our estimates and
(45.3% stake, 1mtpa integrated ethylene cracker), valuation
and SAMC (44.5%, integrated acrylics plant, There are three major moving parts impacting our
scheduled to come onstream in Q3 2012). The estimates: changes in our feedstock pricing
manufacturing business consists of a number of assumptions as highlighted in the first part of this
small scale battery, packaging and services report, changes to product price estimates in line
businesses and accounts for c15% of Tasnee’s with the increase in the HSBC oil and gas team's oil
revenue. price forecasts, and the update to our cost of equity
2011: What to expect assumptions as explained earlier. The changes to our
Strong TiO2 market: We expect strong pricing
bottom of the page.
power within the TiO2 segment for the next 12-18
months, as the TiO2 market should remain
Tasnee: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 17,051 18,614 16,304 17,695 17,697 18,853
EBITDA 4,903 4,785 4,503 4,278 5,123 4,806
Net Income 1,865 1,761 1,833 1,636 2,325 2,045
EPS 3.68 3.47 3.62 3.23 4.59 4.03
EBITDA Margin 28.8% 25.7% 27.6% 24.2% 29.0% 25.5%
Net Margin 10.9% 9.5% 11.2% 9.2% 13.1% 10.8%
40
January 2011

Valuation Project delays: SAMC is currently in the
construction phase and is scheduled for
Our cost of equity for Tasnee is unchanged at
commissioning in Q3 2012. We are, however,
11% and includes a risk free rate of 3.5%, a
assuming a 2013 start-up. Any delays would have
market risk premium of 6% and a beta of 1.25.
a negative impact on our valuation for Tasnee.
We use a 5% cost of debt assumption and a 30%
debt weighting (both unchanged) which yields a
WACC estimate of 9.14%.
Under our research model, for stocks with a

volatility indicator, the Neutral band is 10
percentage points above and below the hurdle rate
for Saudi stocks of 9.5%. Our new DCF-derived
target price for the company of SAR44 (vs
SAR40 previously) implies a 31% potential return
from current levels, which is above the Neutral
band of our model, so we maintain our
Overweight (V) rating on the stock.
41
January 2011
Financials & valuation: National Industrialization Overweight (V)

EV/EBITDA 13.2 6.2 5.7 5.9
Revenue 10,863 16,676 17,051 16,304 EV/IC 1.4 1.4 1.4 1.4
EBITDA 2,477 4,677 4,903 4,503 PE* 29.7 11.2 9.1 9.3
Depreciation & amortisation -983 -1,392 -1,249 -1,268 P/Book value 2.0 2.0 1.8 1.6
Net interest -625 -706 -513 -388 Dividend yield (%) 1.7 4.5 5.5 5.4
PBT 1,064 2,730 3,320 3,033
Taxation -92 -31 -133 -121
Net profit 519 1,509 1,865 1,833
HSBC net profit 519 1,509 1,865 1,833 Issuer information
Cash flow from operations 491 6,605 4,386 4,279 Reuters (Equity) 2060.SE Bloomberg (Equity) NIC AB
Capex -2,616 -941 -1,021 -1,023 Market cap (USDm) 4,532 Market cap (SARm) 16,976
Cash flow from investment -1,790 -862 -1,021 -1,023 Free float (%) 80 Enterprise value (SARm) 28876
Dividends -461 -760 -937 -912 Country Saudi Arabia Sector CHEMICALS
FCF equity -2,192 5,512 3,186 3,071
Intangible fixed assets 3,697 3,697 3,697 3,697 38 38
Tangible fixed assets 18,505 18,200 17,972 17,727
33 33
Current assets 9,867 12,076 11,822 11,084
Cash & others 3,585 6,333 5,935 5,378 28 28
Total assets 33,168 34,993 34,511 33,528 23 23
Operating liabilities 5,581 7,557 7,651 7,569
Gross debt 16,015 13,779 10,954 8,053 18 18
Net debt 12,429 7,447 5,019 2,674 13 13
8 8
2009 2010 2011 2012
National Industrializatio Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue 8.2 53.5 2.2 -4.4

EBITDA 41.0 88.8 4.8 -8.1
Operating profit 53.2 119.9 11.2 -11.5
PBT 51.3 156.6 21.6 -8.6
HSBC EPS -13.6 164.1 23.6 -1.7
Ratios (%)
Revenue/IC (x) 0.5 0.8 0.9 0.8
ROIC 6.4 15.1 17.5 15.7
ROE 6.9 18.5 20.7 18.5
ROA 4.7 9.9 10.6 9.7
EBITDA margin 22.8 28.0 28.8 27.6
Net debt/equity 108.5 55.6 32.1 15.2
DPS 0.56 1.50 1.85 1.80
Book value 16.91 16.85 18.68 20.50
42
January 2011
Sahara Petrochemical Co.

Execution on Al Waha disappointing with multiple start-up delays
Cutting operating rate assumptions for Al Waha due to continued
execution risks
Downgrade to Neutral (V), reducing target price from SAR30 to
SAR25
Downgrading on disappointing 2011: What to expect

execution, continued delays Al-Waha start-up: Commercial operations at Al-
We are downgrading Sahara to Neutral (V) from Waha are now scheduled to begin at the end of Q1
Overweight (V) due to the disappointing 2011. A successful start-up would help reduce
execution on the Al Waha project, which has some of the execution risk associated with the
resulted in a reduction in our target price. The trial project as well as drive earnings and revenue
run at Al Waha began in April 2009 with growth for the company.
commercial operations scheduled to start from Q4 Changes to our estimates and
2009. However the commercial start-up has been valuation
delayed several times, and is now scheduled for
the end of Q1 2011. Al Waha now accounts for
c40% of our valuation for Sahara and the repeated
delays coupled with continued start up risks has
resulted in an assumption of lower operating rates
with the increase in the HSBC oil and gas team's oil
and value for the asset. We reduce our target price
price forecasts, and the update to our cost of equity
for Sahara from SAR30 per share to SAR25.
bottom of the page.
Sahara: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 1,122 2,071 2,397 2,188 2,975 2,842
EBITDA 359 587 764 635 994 980
Net Income 524 546 493 469 647 654
EPS 1.79 1.87 1.68 1.60 2.21 2.23
EBITDA Margin 32.0% 28.4% 31.9% 29.0% 33.4% 34.5%
Net Margin 46.7% 26.4% 20.6% 21.4% 21.7% 23.0%
43
January 2011

Valuation Plant start-up delays: Sahara has yet to start
commercial production at its Al Waha
We use a DCF to value Sahara. Our new cost of
polypropylene unit. Initially expected to start in
equity for Sahara is 11.6% (vs. 11% previously)
Q4 2009, the plant has faced delays on technical
and includes a risk free rate of 3.5%, a market risk
issues. Management expects the plant to finally
premium of 6% and a beta of 1.35. We use a 4%
commence commercial production at the end of
Q1 2011. Any further delay to the start-up of the
(both unchanged) which yields a WACC estimate
facility represents a downside risk to our rating
of 9.27% (vs. 8.9% previously).
while a sooner-than-expected or more successful
Under our research model, for stocks with a start-up would represent upside risks to our
volatility indicator, the Neutral band is 10 Neutral (V) rating.
target price for the company of SAR25 (SAR30
previously) implies a 12% potential return from
current levels, which is within the Neutral band of
our model. We therefore downgrade our rating on
the stock to Neutral (V) from Overweight (V)
44
January 2011
Financials & valuation: Sahara Petrochemical Co. Neutral (V)

Profit & loss summary (SARm) EV/sales 7.9 3.8
EV/EBITDA 24.8 11.8
Revenue 0 0 1,122 2,397 EV/IC 1.9 1.7 1.5 1.5
EBITDA -83 -7 359 764 PE* 85.0 16.8 12.5 13.2
Depreciation & amortisation 0 0 -144 -213
P/Book value 2.2 2.1 1.9 1.8
Operating profit/EBIT -83 -7 215 551
FCF yield (%) -10.6 -15.7 -11.1 -0.2
Net interest 0 0 -107 -162 Dividend yield (%) 0.6 2.9 4.0 3.8
PBT 78 394 614 758
HSBC PBT 78 394 614 758 Note: * = Based on HSBC EPS (fully diluted)
Taxation -1 -5 -25 -30
Net profit 77 389 524 493
HSBC net profit 77 389 524 493 Issuer information
Cash flow from operations -238 200 583 771 Reuters (Equity) 2260.SE Bloomberg (Equity) SPC AB
Capex -634 -722 -741 -411 Market cap (USDm) 1,742 Market cap (SARm) 6,523
Cash flow from investment -815 -722 -741 -411 Free float (%) 33 Enterprise value (SARm) 8415
Change in net debt 627 797 421 -112 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -622 -923 -664 -9
Current assets 791 644 919 1,675 27 27
Cash & others 555 484 409 767
22 22
Total assets 5,980 6,554 7,427 8,380
Operating liabilities 351 0 201 429 17 17
Gross debt 2,276 3,002 3,348 3,594
Net debt 1,721 2,518 2,939 2,827 12 12
7 7
2009 2010 2011 2012
Sahara Petrochemical Co. Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue -100.0 113.6

EBITDA 113.2
Operating profit 156.3
PBT 405.1 55.6 23.6
HSBC EPS 406.9 34.6 -5.9
Ratios (%)
Revenue/IC (x) 0.0 0.0 0.2 0.4
ROIC -2.4 -0.2 3.8 8.8
ROE 3.3 12.8 16.0 14.0
ROA 1.4 6.2 9.9 11.2
EBITDA margin 0.0 0.0 32.0 31.9
EBITDA/net interest (x) 3.4 4.7
Net debt/equity 51.5 71.2 76.1 65.1
Net debt/EBITDA (x) -20.8 -343.3 8.2 3.7
DPS 0.13 0.65 0.90 0.85
Book value 10.07 10.75 11.64 12.47
45
January 2011
National Petrochemical
Company (Petrochem)
Strong recent performance and catch-up in valuation versus SIIG
limits Petrochem’s upside from current levels
Start-up of Saudi Polymers should be the next catalyst
Downgrade to Neutral (V), maintain target price of SAR25
Strong recent performance 2011: What to expect

limits upside Start of commercial operations: Petrochem
Petrochem shares are up 48% since the start of expects Saudi Polymers to begin commercial
2010, while SIIG has been flat over the same operations in Q3 2011. We are, however,
period. This has closed the valuation disconnect assuming a 2012 start-up in our estimates. The
between the two companies flagged in our April beginning of commercial operations will be the
2010 note, Shifting into focus, which was the driving factor for Petrochem in the medium term.
primary driver for our buy case on Petrochem. As revenues and earnings start to flow through,
Given recent gains we believe that there is limited the earnings power of the company should be
upside from current levels, particularly as the start demonstrated and help reduce the execution risk
of commercial operations, which could be the typically associated with a greenfield project.
next catalyst for the stock, is at least six to nine Changes to our estimates and
months away. We maintain our target price of valuation
SAR25 and downgrade the stock to Neutral (V)
from Overweight (V).
Petrochem: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 0 0 6,924 6,960 8,884 8,872
EBITDA -10 -10 2,794 2,952 3,604 3,766
Net Income -29 -9 611 707 1,130 1,228
EPS -0.06 -0.02 1.27 1.47 2.35 2.56
EBITDA Margin NA NA 40.4% 42.4% 40.6% 42.4%
Net Margin NA NA 8.8% 10.2% 12.7% 13.8%
46
January 2011
with the increase in the HSBC oil and gas team's Risks
oil price forecasts, and the update to our cost of Saudi Polymers start-up: There are typically
equity assumptions as explained earlier. The some teething problems during the start-up phase
changes to our financial forecasts are detailed in of a greenfield project. As Saudi Polymers is
the table at the bottom of the previous page. Petrochem’s only asset, any operational delay in
Valuation and risks the Saudi Polymers project would have a
significant negative impact on our earnings
Valuation estimates and valuation for the company, and
We use a DCF to value Petrochem. Our new cost represents a downside risk. Conversely a faster
of equity for Petrochem is 10.6% (vs. 11% than expected start-up represents an upside risk to
previously) and includes a risk free rate of 3.5%, a our Neutral (V) rating.
WACC estimate of 8.6% (vs. 8.9% previously).

for Saudi stocks of 9.5%. Our DCF-derived target
price for the company of SAR25 implies a 7%
potential return from current levels, which is
within the Neutral band of our model. We
therefore downgrade our rating on the stock to
Neutral (V) from Overweight (V)
47
January 2011
Financials & valuation: National Petrochemical Co Neutral (V)

Profit & loss summary (SARm) EV/sales 3.9
EV/EBITDA 9.6
Revenue 0 0 0 6,924 EV/IC 1.6 1.4 1.3 1.3
EBITDA -9 -9 -10 2,794 PE* 18.3
Depreciation & amortisation -14 0 0 -1,084 P/Book value 2.4 2.4 2.4 2.2
Operating profit/EBIT -23 -9 -10 1,710 FCF yield (%) -74.6 -45.1 -49.0 7.8
PBT -9 -11 -11 1,002
HSBC PBT -9 -11 -11 1,002 Note: * = Based on HSBC EPS (fully diluted)
Taxation -53 -90 -20 -40
Net profit -60 -99 -29 611
HSBC net profit -60 -99 -29 611 Issuer information
Cash flow from operations 655 -97 -31 1,122 Reuters (Equity) 2002.SE Bloomberg (Equity) 3569689Z AB
Capex -9,012 -5,000 -5,500 -217 Market cap (USDm) 2,992 Market cap (SARm) 11,208
Cash flow from investment -9,092 -5,000 -5,500 -217 Free float (%) 17 Enterprise value (SARm) 21834
Dividends 0 0 0 -153 Country Saudi Arabia Sector CHEMICALS
Change in net debt 5,097 5,531 -753 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -8,426 -5,097 -5,531 905
Current assets 3,276 2,676 1,645 3,861
21 21
Cash & others 3,272 2,675 1,645 2,397
Total assets 14,581 18,980 23,449 24,799 19 19
Operating liabilities 967 967 967 1,508 17 17
Gross debt 8,712 13,212 17,712 17,712 15 15
Net debt 5,440 10,536 16,067 15,314 13 13
11 11
2009 2010 2011 2012
National Petrochemical Co Rel to TADAWUL ALL SHARE INDEX
Ratio (%) Source: HSBC
Revenue/IC (x) 0.0 0.0 0.0 0.3

ROIC -3.1 -0.7 -0.2 7.9 Note: price at close of 19 Jan 2011
ROE -2.5 -2.1 -0.6 12.6
ROA -0.7 -0.5 -0.1 6.8
EBITDA margin 0.0 0.0 0.0 40.4
EBITDA/net interest (x) 3.9
Net debt/equity 112.2 221.9 340.6 277.1
Net debt/EBITDA (x) -627.4 -1157.4 -1680.9 5.5
CF from operations/net debt 12.0 7.3
EPS Rep (fully diluted) -0.13 -0.21 -0.06 1.27
HSBC EPS (fully diluted) -0.13 -0.21 -0.06 1.27
DPS 0.00 0.00 0.00 0.32
Book value 9.91 9.71 9.64 10.60
48
January 2011
Advanced Petrochemical
Company (APC)
Significant leverage to higher polypropylene prices and a strong
dividend yield play
Firm fundamentals mostly priced in at current levels
Maintain Neutral (V) rating and target price of SAR30
Pure-play polypropylene naphtha, prices (as a rule of thumb, a USD1/bbl

producer change in the crude oil prices translates into a
USD9/tonne change in the naphtha price and a
APC is a pure-play polypropylene (PP) producer.
USD20/tonne change in the polypropylene price),
It has the highest leverage to polypropylene prices
leading to margin expansion/contraction for APC
within our coverage universe as it is one of the
depending on the direction of the change. We
few Saudi companies whose feedstock is entirely
expect APC to benefit from rising crude prices in
linked to crude prices and therefore its margins
the near term.
vary depending upon the change in polypropylene
and crude prices. Dividend policy: APC has paid out close to 100%
of its earnings as dividends for 2009 and H1 2010.
As a single plant entity the growth options for APC
As a single plant entity, APC has limited options
are fairly limited. The company has paid out c98%
for expansion. If no expansion takes place, we
of its earnings as dividends for 2009- H1 2010.
believe the company will continue to maintain its
2011: What to expect high dividend payout ratio.
Price leverage: APC has a high structural
leverage to PP prices. A rising crude oil price
scenario typically implies rising PP, as well as
APC: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 2,053 2,131 2,100 2,144 2,149 2,155
EBITDA 620 665 624 677 633 689
Net Income 365 395 367 419 384 439
EPS 2.58 2.79 2.60 2.97 2.72 3.10
EBITDA Margin 30.2% 31.2% 29.7% 31.6% 29.4% 31.9%
Net Margin 17.8% 18.5% 17.5% 19.6% 17.9% 20.4%
49
January 2011
Changes to our estimates and Risk

valuation Commodity Prices: APC has high leverage to PP
There are three major moving parts impacting our prices. Any significant changes to the correlation
estimates: changes in our feedstock pricing between PP and naphtha price movements would
assumptions as highlighted in the first part of this constitute a risk to our earning estimates and
report, changes to product price estimates in line valuation for the company, either to the downside
with the increase in the HSBC oil and gas team's or the upside.
oil price forecasts, and the update to our cost of
Operating rates: As a single plant entity, APC’s
equity assumptions as explained earlier. The
earnings have a high degree of sensitivity to its
changes to our financial forecasts are detailed in
operating rates. Any significant outages remain a
the table at the bottom of the previous page.
key downside risk to our earning estimates and
Valuation and risks valuation of the company.
Valuation
We use a DCF to value APC. Our new cost of
equity for APC is 10.82% (vs. 11% previously)

for Saudi stocks of 9.5%. Our DCF-derived target
price for the company of SAR30 implies a 12%
potential return from current levels, which is
within the Neutral band of our model, so we
maintain our Neutral (V) rating on the stock.
50
January 2011
Financials & valuation: Advanced Petro Chemical C Neutral (V)

EV/EBITDA 13.8 8.4 7.4 6.9
Revenue 1,467 2,017 2,053 2,100 EV/IC 1.7 1.7 1.7 1.6
EBITDA 358 586 620 624 PE* 29.8 11.2 10.3 10.3
Depreciation & amortisation -184 -212 -208 -207
P/Book value 2.3 2.1 1.9 1.8
Operating profit/EBIT 174 374 413 417
FCF yield (%) 11.1 6.5 14.2 13.8
PBT 127 341 380 383
Taxation 0 -4 -15 -15
Net profit 127 337 365 367
Cash flow from operations 435 271 564 562 Reuters (Equity) 2330.SE Bloomberg (Equity) APPC AB
Capex -11 -25 -25 -38 Market cap (USDm) 1,008 Market cap (SARm) 3,775
Change in net debt -331 -23 -327 -312 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity 419 245 537 523
Current assets 833 1,022 1,203 1,348 26 26
Cash & others 309 257 428 554 24 24
Total assets 3,414 3,426 3,425 3,400 22 22
Gross debt 1,474 1,400 1,244 1,058 18 18
Net debt 1,165 1,143 816 504 16 16
Shareholders funds 1,670 1,796 1,949 2,104 14 14
12 12
2009 2010 2011 2012
Advanced Petro Chemical C Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue 0.5 37.5 1.8 2.3

EBITDA -2.2 63.8 5.9 0.6
PBT -39.7 169.4 11.4 0.6
HSBC EPS -39.7 166.2 8.3 0.6
Ratios (%)
Revenue/IC (x) 0.5 0.7 0.7 0.8
ROIC 5.8 12.8 13.9 14.9
ROE 7.7 19.5 19.5 18.1
ROA 5.0 10.8 11.6 11.8
EBITDA margin 24.4 29.0 30.2 29.7
Net debt/equity 69.8 63.6 41.9 23.9
DPS 0.50 1.50 1.50 1.50
Book value 11.81 12.70 13.78 14.88
51
January 2011
Chemanol
Margin expansion yet to materialise
Potential rights issue remains an overhang
Maintain Neutral (V) rating, raising target price from SAR14 to
SAR17
Margin expansion yet to of the range for regional petrochemical multiples

materialise at 15.1x 2011e.
Chemanol started commercial operation of its 2011: What to expect

expansion project towards the end of Q2 2010. Integration impact: 2011 will be the first full
The project includes a 231ktpa methanol plant year of operations for Chemanol’s methanol
which is part of the company’s backward- integration project. Despite capital expenditure of
integration plan. The plant was intended to cSAR1bn, the new project has not delivered any
eliminate the company's dependency on market- increase in margins yet and we believe that
priced methanol by allowing it to produce its own delivery on margin expansion will be the key
methanol at cash costs of below USD80/tonne driver of Chemanol’s share price in the near term.
(based on a gas price of 0.75 USD/mmbtu). Potential rights issue overhang: Chemanol took on
Chemanol’s Q3 2010 net income was, however, an additional USD85m of short-term debt, beyond
disappointing at a net loss of SAR15.6m, versus the initial project financing, due to cost overruns at
SAR8.8m in Q2 2010. Reported financials show the methanol expansion project. The conditions of
no impact yet from the integration project on the this new loan stipulate repayment by the end of 2011
margin front and we believe that the company will by means of either excess operating cash or a rights
issuance. On our estimates Chemanol will find it
need to deliver on the promised margin expansion
difficult to generate that amount of cash flow
from the integration project over the next few
through operating activities alone by the end of
quarters or run the risk of seeing the shares
2011. We therefore believe that a rights issue before
derated. The stock currently trades at the high end
Chemanol: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 762 788 810 805 816 808
EBITDA 355 387 377 397 370 395
Net Income 121 152 150 169 150 174
Eps 1.00 1.26 1.24 1.40 1.24 1.44
EBITDA Margin 46.6% 49.1% 46.6% 49.3% 45.3% 48.9%
Net Margin 15.9% 19.3% 18.5% 20.9% 18.3% 21.6%
52
January 2011
the end of 2011 is quite likely and constitutes a Risks

potential overhang for the stock. Potential rights issue overhang: As mentioned
Changes to our estimates and earlier Chemanol had to take on an additional
valuation USD85m in short-term debt due to cost overruns
at the methanol expansion project. The loan must
be repaid by the end of 2011 by means of either
excess operating cash or a rights issuance. We
believe a rights issue before the end of 2011 is
quite likely and could be a potential overhang for
with the increase in the HSBC oil and gas team's
the stock, creating a downside risk.
equity assumptions as explained earlier. The Operating rates: In our estimates, we build in
changes to our financial forecasts are detailed in operating rates of 90% for the company in 2011
the table at the bottom of the previous page. and 95% thereafter. Any significant variation in
the operating rates would constitute a key risk,
Valuation and risks
either on the upside or downside, to our Neutral
Valuation (V) rating on the stock.
We use a DCF to value Chemanol. Our new cost
of equity for Chemanol is 9.98% (vs. 11%
previously) and includes a risk free rate of 3.5%, a

target price for the company of SAR17 (SAR14
previously) implies a 12% potential return from
current levels, which is within the Neutral band of
our model, so we maintain our Neutral (V) rating
on the stock.
53
January 2011
Financials & valuation: Methanol Chemicals Co. Neutral (V)

EV/EBITDA 50.5 21.4 7.8 6.9
Revenue 402 606 762 810 EV/IC 1.2 1.1 1.1 1.1
EBITDA 59 136 355 377 PE* 82.8 123.0 15.1 12.2
Depreciation & amortisation -27 -87 -163 -163 P/Book value 1.3 1.3 1.2 1.2
Operating profit/EBIT 32 50 192 214 FCF yield (%) -27.3 3.2 11.2 14.4
PBT 24 19 126 156
Taxation -2 -4 -5 -6
Net profit 22 15 121 150
Cash flow from operations 67 84 242 300 Reuters (Equity) 2001.SE Bloomberg (Equity) CHEMANOL AB
Capex -551 -27 -41 -41 Market cap (USDm) 488 Market cap (SARm) 1,827
Dividends 0 0 -61 -75 Country Saudi Arabia Sector CHEMICALS
Change in net debt 408 -57 -141 -184 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -488 57 201 259
Current assets 486 543 677 727 17 17
Cash & others 271 289 392 425 16 16
15 15
Total assets 3,032 3,056 3,068 2,996 14 14
Gross debt 1,448 1,409 1,371 1,221 12 12
Net debt 1,177 1,120 979 795 11 11
9 9
2009 2010 2011 2012
Methanol Chemicals Co. Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue -29.5 50.7 25.6 6.3

EBITDA -19.4 131.7 161.0 6.2
PBT -38.1 -23.7 579.6 23.5
HSBC EPS -42.3 -32.7 715.7 23.5
Ratios (%)
Revenue/IC (x) 0.2 0.2 0.3 0.3
ROIC 1.2 1.6 7.4 8.6
ROE 1.6 1.0 8.3 9.8
ROA 1.1 1.3 6.0 6.8
EBITDA margin 14.6 22.4 46.6 46.6
Net debt/equity 83.4 78.6 65.9 51.0
Net debt/EBITDA (x) 20.0 8.2 2.8 2.1
DPS 0.00 0.00 0.50 0.62
Book value 11.70 11.82 12.32 12.94
54
January 2011
Sipchem
Phase III of acetyls project to be the medium-term catalyst
Stock looking fully valued at current levels
Maintain Neutral (V) rating, cutting target price from SAR30 to
SAR29
Returns from acetyls project 2011: What to expect

have been disappointing Phase II operations: 2011 will be the first full year
Sipchem started commercial operations at its Phase of operations of the Phase II plants. The near-term
II plants in 2010. The acetic acid and carbon driver for Sipchem will be the ramping up of
monoxide plants commenced commercial operations operations at the Phase II plants, particularly as the
in June 2010, while the acetyls plant started in results from H2 2010 have not been very impressive.
August 2010. While Sipchem’s revenue was up 22% Phase III projects: Sipchem recently announced
and 37% q-o-q in Q2 2010 and Q3 2010, the award of Engineering Procurement and
respectively, the net income changes were +8% and Construction (EP&C) contracts for it Phase III
-4% for the same periods. And although Sipchem projects. In December 2010 the company awarded
reported strong revenue growth in Q4 2010, due to the EPC contract for a 200ktpa ethylene vinyl
the strength in methanol prices which were up 26% acetate (EVA)/LDPE project and another contract
q-o-q, the company missed consensus estimates. We for a 100ktpa ethyl acetate (EA)/butyl acetate
think it is therefore fair to say that, to date, returns (BA) plant in January 2011. The company expects
from the acetyls start-up have been well below both the plants to be operational in Q2 2013.
expectations and that better execution at the new unit Sipchem is planning to raise SAR1.5-2.0bn in Q1
will be key to meeting estimates in 2011. 2011 to finance the investments in these new
projects.
Sipchem: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 2,727 2,780 2,781 2,905 2,808 2,912
EBITDA 1,458 1,552 1,429 1,646 1,408 1,653
Net Income 533 600 524 674 521 690
EPS 1.60 1.80 1.57 2.02 1.56 2.07
EBITDA Margin 53.5% 55.8% 51.4% 56.7% 50.1% 56.8%
Net Margin 19.5% 21.6% 18.8% 23.2% 18.5% 23.7%
55
January 2011
Changes to our estimates and Risk

valuation Operating risk: Sipchem’s carbon monoxide unit
There are three major moving parts impacting our had a technical outage in Q3 2010, which led to a
estimates: changes in our feedstock pricing two-week shutdown at its acetic acid unit. Given
assumptions as highlighted in the first part of this the interdependence between the various units of
report, changes to product price estimates in line Sipchem, we believe that any problems the
with the increase in the HSBC oil and gas team's company faces when ramping up production from
oil price forecasts, and the update to our cost of its new plants would represent a downside risk to
equity assumptions as explained earlier. The our estimates, while a faster-than-expected ramp
changes to our financial forecasts are detailed in up represents an upside risk.
the table at the bottom of the previous page.
Valuation and risks

Valuation
We use a DCF to value Sipchem. Our new cost of
equity for Sipchem is 10.04% (vs. 11%

from current levels, which is within the Neutral
band of our model, so we maintain our Neutral
(V) rating on the stock.
56
January 2011
Financials & valuation: Saudi International Petro Neutral (V)

EV/EBITDA 35.1 11.5 7.9 7.6
Revenue 830 1,903 2,727 2,781 EV/IC 1.4 1.4 1.3 1.3
EBITDA 347 1,064 1,458 1,429 PE* 61.0 21.1 16.1 16.4
P/Book value 1.7 1.6 1.5 1.4
Operating profit/EBIT 168 742 938 908
FCF yield (%) -17.4 3.7 10.6 10.8
Net interest 27 -93 -154 -138 Dividend yield (%) 0.0 1.2 1.5 1.5
PBT 210 658 793 779
Taxation -40 -23 -32 -31
Net profit 141 408 533 524
Cash flow from operations -114 576 1,348 1,421 Reuters (Equity) 2310.SE Bloomberg (Equity) SIPCHEM AB
Capex -1,532 -104 -104 -156 Market cap (USDm) 2,296 Market cap (SARm) 8,600
Cash flow from investment -1,532 -104 -104 -156 Free float (%) 66 Enterprise value (SARm) 12267
Change in net debt 1,991 -119 -934 -974 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -1,659 356 1,059 1,096
Current assets 2,218 2,197 2,948 3,552 27 27
Cash & others 1,831 1,730 2,264 2,839 25 25
Total assets 11,818 11,580 11,914 12,154 23 23
Operating liabilities 1,465 915 1,021 1,044 21 21
Gross debt 4,481 4,260 3,860 3,460 19 19
Net debt 2,650 2,530 1,596 622 17 17
13 13
2009 2010 2011 2012
Saudi International Petro Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue -51.4 129.1 43.3 2.0

EBITDA -70.1 206.7 37.1 -2.0
Operating profit -82.2 340.7 26.4 -3.2
PBT -75.3 212.5 20.6 -1.7
HSBC EPS -73.8 189.9 30.5 -1.7
Ratios (%)
Revenue/IC (x) 0.1 0.2 0.3 0.3
ROIC 1.8 8.2 10.3 10.3
ROE 2.8 8.0 9.8 9.0
ROA 1.8 6.2 7.7 7.3
EBITDA margin 41.8 55.9 53.5 51.4
EBITDA/net interest (x) 11.4 9.5 10.4
Net debt/equity 45.4 39.8 22.8 8.2
DPS 0.00 0.31 0.40 0.39
Book value 14.77 15.69 16.88 18.06
57
January 2011
Industries Qatar
Pricing and volume gains fully priced in at current levels
Timely start up of fertiliser plant a key risk in 2011
Downgrade to Underweight from Neutral, raise target price from
QAR110 to QAR135
Running ahead of 2011: What to expect

fundamentals Volume growth in fertilisers: QAFCO V is
Industries Qatar (IQ) stock has rallied sharply in scheduled to come online in Q2 2011, while
the last six months and is up more than 40% since QAFCO VI is now delayed, with start-up scheduled
the start of H2 2010. This rally is explained by for H2 2012. QAFCO V has a design capacity of
two factors: stronger fundamentals for IQ’s 1300ktpa of urea and 1500ktpa of ammonia, while
products -fertilisers and petrochemicals - and a QAFCO VI has a 1300ktpa urea capacity. We
stronger macroeconomic environment for Qatar, expect fertiliser volumes for IQ to increase by c32%
including the award of the 2022 Fifa World Cup. and c24% in 2011 and 2012, respectively.
We believe that both of these factors are more Changes to our estimates and
than adequately priced into the stock and that the valuation
risks to the current share price are to the There are two major moving parts impacting our
downside, particularly if there are any delays to estimates: changes to product price estimates in line
the commercialisation of the QAFCO V plant with the increase in the HSBC oil and gas team's oil
which is expected in Q2 2011. price forecasts; and the update to our cost of equity
assumptions as explained earlier. For Qatar, there are
We have raised our target price for IQ from
no changes to our feedstock pricing assumptions.
QAR110 to QAR135, but still downgrade the
stock from Neutral to Underweight based on The changes to our financial forecasts are detailed
valuation. in the table at the bottom of the page.
IQ: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 14,881 14,138 16,995 16,429 17,453 17,009
EBITDA 7,156 6,328 8,033 7,376 8,315 7,790
Net Income 6,179 5,347 6,938 6,272 7,110 6,571
EPS 11.23 9.72 12.61 11.40 12.93 11.95
EBITDA Margin 48.1% 44.8% 47.3% 44.9% 47.6% 45.8%
Net Margin 41.5% 37.8% 40.8% 38.2% 40.7% 38.6%
58
January 2011

Valuation Plant start-up timelines: A faster-than-expected
start-up to IQ’s capacity expansion projects under
We use a DCF to value Industries Qatar. Our new
construction would have a positive impact on
cost of equity for IQ is 12.4% (vs. 11%
earnings and constitute an upside risk to our
Underweight rating.
We use a 6% cost of debt assumption and a 20% Energy price movements: The prices of most of
debt weighting (both unchanged) which yields a IQ’s products - be they fertilisers or
WACC estimate of 11.1% (vs. 10% previously). petrochemicals, are tightly correlated with crude
oil prices. A sharp increase in global energy prices
Under our research model, for stocks without a
– particularly the price of crude oil – represents an
upside risk to our Underweight rating on
Industries Qatar shares.
for Qatari stocks of 11.5%. Our new DCF-derived
target price for the company is QAR135 (vs
QAR110 previously). Our target price for IQ has
increased despite the increase in our cost of equity
as there are no changes to our feedstock price
assumptions for Qatar to offset the effect of the
increase in product prices. Our new target price of
QAR135 implies a -12% potential return from
current levels, which is below the Neutral band of
our model. We therefore downgrade our rating on
the stock to Underweight from Neutral.
59
January 2011
Financials & valuation: Industries Qatar QSC Underweight

Profit & loss summary (QARm) EV/sales 8.5 6.8 5.5 4.7
EV/EBITDA 21.4 14.3 11.4 10.0
Revenue 9,656 12,071 14,881 16,995 EV/IC 8.5 6.7 5.5 4.7
EBITDA 3,846 5,723 7,156 8,033 PE* 17.1 14.8 13.6 12.1
Depreciation & amortisation -525 -578 -808 -928 P/Book value 4.4 3.8 3.4 3.0
PBT 5,037 5,687 6,337 7,115
Taxation -125 0 -158 -178
Net profit 4,909 5,687 6,179 6,938
Cash flow summary (QARm) Share price (QAR) 153.00 Target price (QAR) 135.00 Potent'l return (%) -11.8
Cash flow from operations 4,301 6,182 6,612 7,583 Reuters (Equity) IQCD.QA Bloomberg (Equity) IQCD QD
Capex -4,829 -3,000 -3,000 -3,000 Market cap (USDm) 23,108 Market cap (QARm) 84,150
Cash flow from investment -872 -3,000 -3,000 -3,000 Free float (%) 30 Enterprise value (QARm) 82067
Dividends -4,400 -2,833 -3,080 -3,465 Country Qatar Sector CHEMICALS
Change in net debt 3,573 -350 -532 -1,118 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -487 2,757 3,423 4,374
Balance sheet summary (QARm) Price relative
149 149
Current assets 9,358 10,021 11,272 12,989
Cash & others 5,834 6,183 6,715 7,834 129 129
Total assets 27,117 30,202 33,645 37,435 109 109
Gross debt 5,998 5,998 5,998 5,998 89 89
Net debt 165 -185 -717 -1,835 69 69
49 49
2009 2010 2011 2012
Industries Qatar QSC Rel to DSM 20 INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue -34.5 25.0 23.3 14.2

EBITDA -46.6 48.8 25.0 12.3
PBT -30.8 12.9 11.4 12.3
HSBC EPS -32.5 15.9 8.7 12.3
Ratios (%)
Revenue/IC (x) 1.1 1.1 1.1 1.1
ROIC 37.3 47.1 46.0 43.5
ROE 26.3 27.8 26.3 25.9
ROA 18.4 20.3 20.0 20.1
EBITDA margin 39.8 47.4 48.1 47.3
Net debt/equity 0.9 -0.8 -2.9 -6.4
Net debt/EBITDA (x) 0.0 0.0 -0.1 -0.2
CF from operations/net debt 2611.0
Per share data (QAR)
DPS 5.00 5.15 5.60 6.30
Book value 34.63 39.82 45.45 51.77
60
January 2011
Saudi Fertiliser Company

(SAFCO)
Pure play nitrogenous fertiliser company with leverage to rising
fertiliser prices
Yield play with limited growth potential
Maintain Neutral (V) rating, raise target price from SAR135 to
SAR190
Pure play on nitrogen fertiliser believe is likely to stay strong in 2011),

production cutbacks in China, and China's early
SAFCO is a pure play on nitrogen fertilisers.
urea export tax application.
Further expansion options are limited as any new
gas allocation for expansion is unlikely. Given the We believe that further nitrogen fertiliser price
limited room for new capacity expansions, appreciation will be limited going into 2011, due to
SAFCO has been a cash cow for SABIC (which supply from new projects coming on stream, mainly
owns a 43% stake) and has paid out c90% of its from Algeria, Qatar and Pakistan. Two of these
earnings as dividends since 2007. projects, Sorfert in Algeria, and QAFCO V in Qatar,
will be almost entirely directed into the export
2011: What to expect market, together selling 1.25m tonnes in 2011e,
Nitrogen market outlook: Nitrogen market 2.65m tonnes in 2012e and 3.54m tonnes in 2013e.
fundamentals recovered over Q3 2010, with urea These capacity increases represent c50% of
prices up from lows of USD220/t in mid-June to additional global supply and should add 3.5% to the
USD400/t, based on spot Middle East prices (fob global urea traded volume in 2011. However, we
basis). The recovery was primarily driven by think rising Russian, Ukrainian and Chinese
greater demand from India and Brazil (which we production costs will more than offset the effect of
SAFCO: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 4,394 3,961 4,399 4,186 4,644 4,186
EBITDA 3,345 2,948 3,196 3,132 3,293 3,075
Net Income 3,188 2,625 2,984 2,804 3,073 2,772
EPS 12.75 10.50 11.94 11.22 12.29 11.09
EBITDA Margin 76.1% 74.4% 72.6% 74.8% 70.9% 73.5%
Net Margin 72.6% 66.3% 67.8% 67.0% 66.2% 66.2%
61
January 2011
low-cost exports from Qatar and Algeria on the Valuation and risks
general level of prices.
Valuation
Our cost curve suggests a weighted average cost for We use a DCF to value SAFCO. Our new cost of
urea trade of USD144/t in 2011, almost 11% higher equity for SAFCO is 8.3% (vs. 11% previously)
y-o-y in spite of the Algerian and Qatari projects. and includes a risk free rate of 3.5%, a market risk
That said, upside from spot urea prices of USD400/t premium of 6% and a beta of 0.8. We use a 4%
is limited, in our view, given that cash margins are cost of debt assumption and a 20% debt weighting
healthy for high-cost marginal producers. For more (both unchanged) which yields a WACC estimate
details see our December 2010 report, The Fertile of 7.24% (vs. 9.95% previously).
Crescent - Countdown to the rebound.
Dividend policy: SAFCO is essentially a yield volatility indicator, the Neutral band is 10
play given its limited growth profile and high percentage points above and below the hurdle rate
dividend payout ratio. We expect the company to for Saudi stocks of 9.5%. Our new DCF-derived
continue with its high dividend policy as capacity target price for the company of SAR190 (SAR135
growth for the company is constrained by new gas previously) implies a 5% potential return from
allocations, which are unlikely in our opinion. current levels, which is within the Neutral band of
Changes to our estimates and our model, so we maintain our Neutral (V) rating
valuation on the stock.
There are three major moving parts impacting our Risks

estimates: changes in our feedstock pricing Nitrogen fertiliser prices: Lower gas prices to
assumptions as highlighted in the first part of this Ukraine (a marginal cost producer) and poor
report, changes to product price estimates in line weather in India and Latin America (the two
with the increase in the HSBC oil and gas team's oil largest growing import markets), which could
price forecasts, and the update to our cost of equity pressure urea pricing, are key downside risks to
assumptions as explained earlier. The changes to our our Neutral (V) rating on SAFCO.
bottom of the previous page. Operating rates: Any changes from the expected
operating rates constitute a key risk, to the
downside or the upside, to both our earnings
estimates and valuation of the company.
62
January 2011
Financials & valuation: Saudi Arabian Fertilizer Neutral (V)

EV/EBITDA 21.9 15.2 12.4 13.2
Revenue 2,741 3,609 4,394 4,399 EV/IC 10.9 11.6 10.3 8.7
EBITDA 1,916 2,727 3,345 3,196 PE* 25.0 14.8 14.2 15.1
P/Book value 6.4 6.2 5.9 5.7
Operating profit/EBIT 1,658 2,477 2,989 2,773
FCF yield (%) 4.2 6.2 5.7 4.4
Net interest 0 63 58 63 Dividend yield (%) 2.6 6.1 6.4 5.9
PBT 1,900 3,114 3,287 3,076
Taxation -96 -72 -99 -92
Net profit 1,804 3,042 3,188 2,984
Cash flow from operations 2,108 3,315 3,374 3,425 Reuters (Equity) 2020.SE Bloomberg (Equity) SAFCO AB
Capex -202 -64 -694 -1,331 Market cap (USDm) 12,048 Market cap (SARm) 45,125
Cash flow from investment 98 -64 -694 -1,331 Free float (%) 42 Enterprise value (SARm) 41386
Dividends -1,250 -2,745 -2,880 -2,678 Country Saudi Arabia Sector CHEMICALS
Change in net debt 1,032 -570 142 520 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity 1,870 2,741 2,498 1,917
Current assets 4,056 4,476 4,551 4,089 167 167
Cash & others 2,650 3,220 3,077 2,557 147 147
Total assets 8,808 9,041 9,454 9,900 127 127
Gross debt 590 590 590 590 107 107
Net debt -2,060 -2,630 -2,488 -1,968 87 87
67 67
2009 2010 2011 2012
Saudi Arabian Fertilizer Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue -47.7 31.7 21.8 0.1

EBITDA -56.0 42.3 22.7 -4.5
Operating profit -58.5 49.4 20.7 -7.2
PBT -56.7 63.9 5.5 -6.4
HSBC EPS -60.1 68.6 4.8 -6.4
Ratios (%)
Revenue/IC (x) 0.7 1.0 1.2 1.0
ROIC 41.2 65.2 76.3 60.6
ROE 24.0 42.5 42.7 38.4
ROA 19.3 33.4 33.9 30.2
EBITDA margin 69.9 75.6 76.1 72.6
EBITDA/net interest (x)
Net debt/equity -29.4 -36.0 -32.7 -24.8
Net debt/EBITDA (x) -1.1 -1.0 -0.7 -0.6
CF from operations/net debt
DPS 4.69 10.98 11.52 10.71
Book value 28.06 29.25 30.48 31.70
63
January 2011
SIIG
Saudi Polymers start-up to be the key short-term catalyst
Limited upside from current levels
Maintain Neutral (V) rating, raising target price from SAR19 to
SAR25
Integrated basic 2011 according to management. We are, however,

petrochemicals play assuming a 2012 start-up in our estimates.
SIIG is a combination of three separate basic SIIG, which owns a 47.4% stake in Petrochem,
chemical projects, two of which are already has an effective 30.8% stake in the Saudi
operating (SCP and JCP), while Saudi Polymers is Polymers project. The start of commercial
under construction and is expected be on stream operations at Saudi Polymers is the key near-term
by Q3 2011 according to management. The catalyst for SIIG, in our opinion.
projects have a high degree of integration, which
Changes to our estimates and
allows for significant cost savings – benzene
valuation
produced at SCP is supplied to JCP to make
styrene and that styrene will be further converted There are three major moving parts impacting our
into polystyrene within the Saudi Polymers unit. estimates: changes in our feedstock pricing
The key driver for SIIG’s earnings in the near assumptions as highlighted in the first part of this
term is the completion of the Saudi Polymers report, changes to product price estimates in line
project, which we expect will contribute over 65% with the increase in the HSBC oil and gas team's oil
of SIIG’s earnings after 2012. price forecasts, and the update to our cost of equity
2011: What to expect financial forecasts are detailed in the table at the
Saudi Polymers start-up: Saudi Polymers is bottom of the page.
expected to begin commercial operations in Q3
SIIG: Changes in estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 3,788 7,025 10,872 14,126 12,829 16,042
EBITDA 834 927 3,651 3,985 4,439 4,867
Net Income 463 293 1,059 846 1,584 1,275
Eps 1.03 0.65 2.35 1.88 3.52 2.83
EBITDA Margin 22.0% 13.2% 33.6% 28.2% 34.6% 30.3%
Net Margin 12.2% 4.2% 9.7% 6.0% 12.3% 7.9%
64
January 2011
Valuation and risks Risk

Valuation Saudi Polymers start-up: There are typically
some teething problems that occur in the start-up
We use a DCF to value SIIG. Our new cost of
phase of a greenfield project. Any such
equity for SIIG is 10.52% (vs. 11% previously)
operational delay in the Saudi Polymers project
would have a negative impact on our earnings
estimates and valuation for the company, while a
faster-than-expected start-up represents an upside
risk to our Neutral (V) rating.

65
January 2011
Financials & valuation: Saudi Industrial Investment Neutral (V)

EV/EBITDA 24.6 27.9 32.2 7.0
Revenue 3,760 4,512 3,788 10,872 EV/IC 1.4 1.2 1.2 1.1
EBITDA 690 795 834 3,651 PE* 25.5 26.4 21.6 9.4
Depreciation & amortisation -203 -273 -304 -1,501 P/Book value 1.8 1.7 1.6 1.4
Operating profit/EBIT 487 522 530 2,150 FCF yield (%) -65.2 -41.9 -37.8 13.3
PBT 472 499 510 1,421
HSBC PBT 472 499 510 1,421 Note: * = Based on HSBC EPS (fully diluted)
Taxation -111 -164 -61 -57
Net profit 391 378 463 1,059
HSBC net profit 391 378 463 1,059 Issuer information
Cash flow from operations 1,100 330 849 1,921 Reuters (Equity) 2250.SE Bloomberg (Equity) SIIG AB
Capex -9,091 -5,528 -5,528 -234 Market cap (USDm) 2,667 Market cap (SARm) 9,990
Cash flow from investment -8,934 -5,528 -5,528 -234 Free float (%) 80 Enterprise value (SARm) 22158
Dividends 0 0 0 -270 Country Saudi Arabia Sector CHEMICALS
Change in net debt 4,524 5,198 4,679 -1,417 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -8,115 -5,198 -4,679 1,687
Current assets 5,524 7,097 7,603 10,408 22 22
Cash & others 4,586 5,773 6,480 7,782
Total assets 19,675 26,503 32,233 33,773 17 17
Gross debt 9,138 15,523 20,909 20,794 12 12
Net debt 4,552 9,750 14,429 13,012
7 7
2009 2010 2011 2012
Saudi Industrial Investme Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue 75.8 20.0 -16.1 187.0

EBITDA 212.1 15.1 4.9 337.9
Operating profit 1035.6 7.1 1.5 305.7
PBT 710.6 5.6 2.2 178.8
HSBC EPS 702.8 -3.5 22.6 128.6
Ratios (%)
Revenue/IC (x) 0.4 0.3 0.2 0.5
ROIC 4.2 2.3 2.3 9.0
ROE 7.3 6.7 7.6 15.8
ROA 2.7 1.5 1.6 6.3
EBITDA margin 18.4 17.6 22.0 33.6
Net debt/equity 57.3 117.8 165.3 132.5
Net debt/EBITDA (x) 6.6 12.3 17.3 3.6
DPS 0.00 0.00 0.00 0.60
Book value 12.18 13.02 14.05 15.80
66
January 2011
Saudi Kayan
2011 is key as the company’s first plant is expected to start
commercial operations by H2
Execution risks high in start-up phase
Reiterate Neutral (V) rating, raising target price to SAR22 from
SAR18
Cost overruns to outweigh Execution risk: There is a certain amount of

earlier start-up execution risk involved with any large scale
greenfield project. Kayan started test production
Saudi Kayan started test production at the olefins
at the olefins complex ahead of time, however it
complex in July 2010, a quarter ahead of our
faced cost overruns. The start of commercial
estimate of an end Q3 2010 date; however the
operations as per schedule will help reduce
project cost exceeded the initial estimate of
execution risk, as the earnings power of the
SAR37.5bn by SAR9bn, and was ahead of our
company is demonstrated.
estimate by SAR6bn. These cost overruns will
inevitably weigh on company profitability. The Changes to our estimates and
resulting interest costs and higher depreciation valuation
expense amount to a cSAR0.30 drop in annual EPS. There are three major moving parts impacting our
2011: What to expect estimates: changes in our feedstock pricing
Start of commercial operations: Saudi Kayan is
expected to start commercial operations in
with the increase in the HSBC oil and gas team's
2011.We are assuming a Q3 2011 start-up in our
estimates. This will make Kayan one of the few
equity assumptions as explained earlier. The
companies in our coverage with significant
changes to our financial forecasts are detailed in
volume leverage in 2011.
the table at the bottom of the page.
Kayan: Changes to estimates

____________ 2011e _____________ _____________2012e _____________ ____________ 2013e _____________
Revenue 5,222 5,986 11,228 11,837 12,705 11,953
EBITDA 2,830 3,088 6,049 6,285 6,783 6,337
Net Income 795 -336 2,055 2,283 2,858 2,430
Eps 0.53 -0.22 1.37 1.52 1.91 1.62
EBITDA Margin 54.2% 51.6% 53.9% 53.1% 53.4% 53.0%
Net Margin 15.2% -5.6% 18.3% 19.3% 22.5% 20.3%
67
January 2011

Valuation Start-up: We expect Saudi Kayan to start
commercial operations in Q3 2011. There are
We use a DCF to value Saudi Kayan. Our new
typically some teething problems that occur in the
cost of equity for Kayan is 10.64% (vs. 11%
start-up phase of a greenfield project. Any such
operational delay would have a negative impact
on our earnings estimates and valuation for the
We use a 4% cost of debt assumption and a
company, while a faster-than-expected start-up
60%debt weighting (both unchanged) which
represents an upside risk to our Neutral (V) rating.
yields a WACC estimate of 7.71% (vs. 7.8%
previously).

previously SAR18) implies a 14% potential return
68
January 2011
Financials & valuation: Saudi Kayan Petrochemical Neutral (V)

Profit & loss summary (SARm) EV/sales 11.2 5.0
EV/EBITDA 20.7 9.2
Revenue 0 0 5,222 11,228 EV/IC 1.4 1.3 1.3 1.3
EBITDA -17 -8 2,830 6,049 PE* 36.3 14.0
Depreciation & amortisation 0 0 -1,163 -2,325 P/Book value 1.9 1.9 1.8 1.7
Operating profit/EBIT -17 -8 1,668 3,724 FCF yield (%) -49.7 -45.7 1.6 11.1
Net interest 0 0 -840 -1,583 Dividend yield (%) 0.0 0.0 0.8 2.2
PBT -17 -8 828 2,141
HSBC PBT -17 -8 828 2,141 Note: * = Based on HSBC EPS (fully diluted)
Taxation 0 0 -33 -86
Net profit -17 -8 795 2,055
HSBC net profit -17 -8 795 2,055 Issuer information
Cash flow from operations -939 160 926 3,893 Reuters (Equity) 2350.SE Bloomberg (Equity) KAYAN AB
Capex -13,410 -13,353 -465 -687 Market cap (USDm) 7,709 Market cap (SARm) 28,875
Cash flow from investment -13,410 -13,353 -465 -687 Free float (%) 25 Enterprise value (SARm) 58710
Dividends 0 0 -225 -630 Country Saudi Arabia Sector CHEMICALS
Change in net debt 14,349 13,193 -236 -2,576 Analyst Sriharsha Pappu Contact 971 4 4236924
FCF equity -14,349 -13,193 461 3,206
Current assets 2,639 6,077 5,497 6,978 21 21
Cash & others 2,472 6,077 4,198 4,562 19 19
Total assets 35,808 52,598 51,321 51,164 17 17
Operating liabilities 1,217 1,217 1,484 2,114 15 15
Gross debt 19,113 35,912 33,797 31,585 13 13
11 11
Net debt 16,642 29,835 29,599 27,023
9 9
7 7
2009 2010 2011 2012
Saudi Kayan Petrochemical Rel to TADAWUL ALL SHARE INDEX
Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change
Revenue 115.0
EBITDA 113.7
Operating profit 123.2
PBT -109.5 158.6
HSBC EPS -109.9 158.6
Ratios (%)
Revenue/IC (x) 0.0 0.0 0.1 0.2
ROIC -0.1 0.0 3.5 7.9
ROE -0.1 -0.1 5.0 12.3
ROA -0.1 0.0 3.1 7.0
EBITDA margin 0.0 0.0 54.2 53.9
EBITDA/net interest (x) 3.4 3.8
Net debt/equity 107.5 192.9 184.5 154.7
Net debt/EBITDA (x) -987.9 -3729.4 10.5 4.5
EPS Rep (fully diluted) -0.01 -0.01 0.53 1.37
HSBC EPS (fully diluted) -0.01 -0.01 0.53 1.37
DPS 0.00 0.00 0.15 0.42
Book value 10.32 10.31 10.69 11.64
69
January 2011
Notes
70
January 2011
Notes
71
January 2011
Notes
72
January 2011
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Sriharsha Pappu and Tareq Alarifi
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
73
January 2011
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 23 January 2011, the distribution of all ratings published is as follows:
Overweight (Buy) 48% (23% of these provided with Investment Banking Services)
Neutral (Hold) 37% (20% of these provided with Investment Banking Services)
Underweight (Sell) 15% (22% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
NATIONAL INDUSTRIALIZATIO 2060.SE 33.50 21-Jan-2011 2, 7
NATIONAL PETROCHEMICAL CO PETR 2002.SE 23.35 21-Jan-2011 2, 5
SAHARA PETROCHEMICAL CO. 2260.SE 22.30 21-Jan-2011 2, 5
SAUDI BASIC INDUSTRIES CO 2010.SE 107.25 21-Jan-2011 1, 2, 5, 7, 11
SAUDI INDUSTRIAL INVESTME 2250.SE 22.20 21-Jan-2011 7
SAUDI INTERNATIONAL PETRO 2310.SE 25.80 21-Jan-2011 5, 7
SAUDI KAYAN PETROCHEMICAL 2350.SE 19.25 21-Jan-2011 1, 2, 5
YANBU PETROCHEMICAL 2290.SE 46.30 21-Jan-2011 1, 2, 5
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 December 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 November 2010, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services.
of and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
of and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
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detailed below.
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Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
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74
January 2011
Additional disclosures
1 This report is dated as at 24 January 2011.
2 All market data included in this report are dated as at close 19 January 2011, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
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4 As of 31 December 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities
managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,
1% or more of the total capital of the subject companies securities in the market for the following Company(ies) :
ADVANCED PETRO CHEMICAL C
5 As of 07 January 2011, HSBC owned a significant interest in the debt securities of the following company(ies) : SAUDI
BASIC INDUSTRIES CO
75
January 2011
Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
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Middle East Ltd. MICA (P) 142/06/2010 and MICA (P) 193/04/2010
288581
76
abc
Global Natural Resources & Energy

Research Team
Metals and Mining Alternative Energy
EMEA Robert Clover
Andrew Keen Global Sector Head, Alternative Energy
+44 20 7991 6764 andrew.keen@hsbcib.com +44 20 7991 6741 robert.clover@hsbcib.com
Thorsten Zimmermann, CFA James Magness
+44 20 7991 6835 thorsten.zimmermann@hsbcib.com +44 20 7991 3464 james.magness@hsbcib.com
North America & Latin America Charanjit Singh

Jonathan Brandt +91 80 3001 3776 charanjit2singh@hsbc.co.in
+1 212 525 4499 jonathan.l.brandt@us.hsbc.com
Lucia Marquez Chemicals
+1 212 525 7669 lucia.x.marquez@us.hsbc.com Sriharsha Pappu
+971 4 423 6924 sriharsha.pappu@hsbc.com
James Steel
+1 212 525 6515 james.steel@us.hsbc.com Sonia Song, CFA
+852 2996 6557 soniasong@hsbc.com.hk
Sabrina M Grandchamps
+1 212 525 5150 sabrina.m.grandchamps@us.hsbc.com
Utilities
Patrick Chidley Europe
+1 212 525 4915 patrick.t.chidley@us.hsbc.com Adam Dickens
Asia +44 20 7991 6798 adam.dickens@hsbcib.com
Daniel Kang José A López
+852 2996 6669 danielkang@hsbc.com.hk +44 20 7991 6710 jose1.lopez@hsbcib.com
Sarah Mak Verity Mitchell
+852 2822 4551 sarahmak@hsbc.com.hk +44 20 7991 6840 verity.mitchell@hsbcib.com
Lun Zhang Asia
+852 2996 6569 lunzhang@hsbc.com.hk Suman Guliani
Jigar Mistry, CFA +91 80 3001 3747 sumanguliani@hsbc.co.in
+91 22 2268 1079 jigarmistry@hsbc.co.in Latin America
Reginaldo Pereira
Energy +55 11 3371 8203 reginaldo.l.pereira@hsbc.com.br
Europe Eduardo J Gomide
Paul Spedding +55 11 3371 9502 eduardo.j.gomide@hsbc.com.br
Global Sector Co-head, Oil and Gas
+44 20 7991 6787 paul.spedding@hsbcib.com CEEMEA
Levent Bayar
David Phillips Analyst
Global Sector Co-head, Oil and Gas +90 212 376 46 17 leventbayar@hsbc.com.tr
+44 20 7991 2344 david1.phillips@hsbcib.com
Omprakash Vaswani Credit
+91 80 3001 3786 omprakashvaswani@hsbc.co.in Europe
CEEMEA, Latam Rodolphe Ranouil, CFA
Anisa Redman +44 20 7991 6855 rodolphe.ranouil@hsbcgroup.com
+1 212 525 4917 anisa.redman@us.hsbc.com North America
Bülent Yurdagül Keith Kitagawa
+90 212 376 46 12 bulentyurdagul@hsbc.com.tr +1 212 525 5160 keith.m.kitagawa@us.hsbc.com
Asia
Sonia Song, CFA
+852 2996 6557 soniasong@hsbc.com.hk
Kumar Manish Specialist Sales
+91 22 2268 1238 kmanish@hsbc.co.in
Jacques Vaillancourt
Kirtan Mehta, CFA +44 20 7991 5210 jacques.vaillancourt@hsbcib.com
+91 80 3001 3779 kirtanmehta@hsbc.co.in
Mark van Lonkhuyzen
Puneet Gulati +44 20 7991 1329 mark.van.lonkhuyzen@hsbcib.com
+91 22 681235 puneetgulati@hsbc.co.in
Billal Ismail
+44 20 7991 5362 billal.ismail@hsbcib.com
Annabelle O'Connor
+44 20 7991 5040 annabelle.oconnor@hsbcib.com
110121_28253 DUB-Saudi Petchems - Sriharsha Pappu_F1:Layout 1 1/22/2011 12:50 AM Page 1

January 2011

Sriharsha Pappu*
Analyst
HSBC Bank Middle East Limited, Dubai
+971 4423 6924
sriharsha.pappu@hsbc.com
Sriharsha rejoined HSBC's chemical research team in 2009 after spending one and a half years covering the chemical sector on the
buyside at Dubai Group. Prior to that he was a part of HSBC's US chemicals research team from 2005 to 2008 and has been covering
chemicals on the sell side since 2004. Sriharsha holds a Bachelors degree in Electronics Engineering and an MBA from the Indian
Institute of Management. He was ranked No 3 in MENA in the 2010 Pan European Sell side Extel survey.
Re-evaluating the feedstock price environment

Tareq Alarifi*
Analyst
HSBC Saudi Arabia Limited
+966 1299 2105
tareqalarifi@hsbc.com
Tareq is a cross-sector equity analyst based in Riyadh. He joined the research team in 2008, prior to that he worked as a buy-side analyst
with HSBC. Tareq holds a bachelors degree in Biomedical Sciences from the State University of New York, and an MBA-Finance from
Rochester, New York.

Feedstock pricing changes likely to be announced in 2011. We expect this decision to be
influenced by a combination of both economic and policy factors, and we forecast a phased
increase that does not fundamentally alter the competitive position of the industry
The impact on margins from these feedstock price increases is highest for companies with the
biggest cost advantages (eg SAFCO), while those with lower cost advantages and margins
(eg SABIC) are least affected. The increase in HSBC's energy price forecasts however, outweighs
the impact of higher feedstock costs
Yet despite generally raising our target prices, we are cautious on the sector for 2011 given
recent strong performance, elevated expectations and high valuations. Our top picks in the
sector are Tasnee (OW(V), TPSAR44), Yansab (OW(V), TP SAR65) and SABIC (OW(V), TP SAR130).
We downgrade Petrochem (TP SAR25) and Sahara (TP SAR25) to N(V) from OW(V) and
Industries Qatar (TP QAR135) to UW from N
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. By Sriharsha Pappu and Tareq Alarifi
January 2011
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

HSBC What Price Is Right

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110121_28253 DUB-Saudi Petchems - Sriharsha Pappu_F1:Layout 1 1/22/2011 12:50 AM Page 1

Natural Resources & Energy/Middle East Chemicals - Equity

What price is right?

What price is right?

Re-evaluating the feedstock price environment

Natural Resources & Energy/Middle East Chemicals - Equity

The feedstock pricing question

A combination of economics and policy

Sector investment thesis

Cautious on sector performance in 2011

HSBC Saudi feedstock pricing assumptions

We prefer stocks with structural pricing drivers – Tasnee and Yansab

MENA Petrochemicals valuation table

HSBC Middle East Chemicals: changes to ratings and target prices

Sector view – 2011 6 Advanced Petrochemical

SABIC 34 Saudi Fertiliser Company

We acknowledge the assistance of Mohit Kapoor in the preparation of this report.

Sector view – 2011

Mid-cycle: trough behind, allow companies to push through any increases in

Middle East ethylene supply update

Com pleted and fully operational

Source: CMAI, HSBC estimates

HSBC: Ethylene operating rate outlook

Source: HSBC estimates

Operating Rate (%)

WE ethylene supply fromnaphtha WE ethylene utilization rates

Valuations and expectations

Feedstock pricing today

Current pricing regime establishing an LNG industry would not have

Current GCC feedstock pricing

Saudi Arabia: oil revenues vs. potential LNG revenues

100 ,00 0 1 5.0 %

Sau di O il r ev e nue (U SDmn) Po tent ial S aud i LNG rev e nu e as % of o il

Source: Saudi Aramco

In reality, gas revenues would have been even lower Petrochemicals

Source: SAMA Source: SAMA

Gas pricing and the MGS

Saudi Master Gas System in 2011

Natural gas pipeline

Jubail Industrial City

Yanbu Indus trial City SAUDI ARABIA BE RRI

Source: Saudi Aramco

Source: CMAI, HSBC Source: CMAI, HSBC

Delivered sales gas Delivered ethane gas

Source: Saudi Aramco Source: Corporate reports, HSBC

Feedstock pricing tomorrow

Saudi ethylene cost advantage vs. Naphtha based producers (1990-2010)

Saudi ethane cost advantage

GCC ex Qatar: Oil vs. gas production

GCC ex Qatar (oil production) GCC ex Qatar (gas production)

Source: BP World Energy Statistical Review 2010

Source: BP World Energy Statistical Review 2010 Source: MEED, HSBC

Heating value comparison

The policy response Methanol, admittedly, is an extreme example as

Cash margin impact of a change in gas prices

Population growth – CAGR (2002-09) Labour force growth pa (%)

Source: Arab Labour Force, HSBC Source: World Bank, HSBC

A combination of one or more of these incentives Industry to remain highly competitive

Saudi liquids pricing factors

Potential Saudi feedstock cost framework

HSBC Saudi feedstock pricing assumptions

Impact on product pricing

Impact of gas feedstock price increases (methane vs. ethane-based products)