HAZY PICTURE – COUPLED WITH A FLOOD OF CAPACITIES
The petrochemical industry still lacks visibility owing to the hazy picture surrounding global demand and the excess supplies to enter the over-supplied markets in the near-term. As petrochemical demand is highly a function of GDP growth and as the extent or shape of the recovery on a global macro-economic level is still debatable, we believe that the increase of the oversupplies will draw an unprecedented picture of the petrochemical industry.

ENERGY COSTS – GLIMMER OF LIGHT?
Energy costs have been a strong driver of petrochemical prices in the past, even during times of weak demand and sufficient supplies. However, the aggressive capacity additions in the Middle East and China will challenge the role that energy costs have played historically.

TODAY’S STATE- JUST A CHAPTER IN A BOOK
The petrochemical business is of a cyclical nature, thus downturns are highly expected during its long-term time frame. Projects in this industry are built with 20-30 year life-spans, thus the state of the petrochemical industry today is just one of the many chapters in a book.

CHINA – THE DEMAND DRIVER AND SUPPLY RIVAL
China, a key market for petrochemicals, received last year a fiscal stimulus package of around USD 586 billion, the bulk of which is being used for industrial restructuring. The nation’s infrastructure-led economic growth is expected to spark the demand for petrochemicals and pour back some confidence in the market.

In parallel, China is rising as a major supply rival to the Middle East as the lion share of global capacity additions will be in this East Asian nation, where 20.6 million tons/year of petrochemical capacities will be added during 2008-2011. In turn, a battle for power between the Middle East and Asia is expected to swell.

REGION’S PRODUCERS – WELL POSITIONED TO BENEFIT FROM A RECOVERY
Middle-East producers are in a more competitive position than their global peers owing to their modern world-scale assets, state-of-the-art technology, strong balance sheets, close proximity to end markets, and a leading feedstock cost advantage, the combination of which translates into superior profit margins. Thus, earnings of Mid-east producers will recover faster than those of their global competitors.

A GREEN FIELD PROJECT
Advanced Petrochemical Company (APC) is a green field project at an early stage of production. The company is therefore less exposed than its peers, that are long-standing producers, to the risks generated by the global financial crisis. APC’s book is relatively immune to key risks such as inventory write-downs/offs and restructuring charges, giving the company a competitive edge amid volatile times.

CLEARLY A VALUE STOCK
We believe that APC’s stock price does not reflect the intrinsic value of a company operating in a petrochemical hub and enjoying a major cost advantage. APC’s stock today offers investors an upside potential of 27.0%, given its current price of SAR 25.00 and an estimated fair value of SAR 31.76.