GCC Market Review - for the month of July 2008 - All the regional markets declined with the sole exception of UAE. NBAD Index gained 0.4% during the month to reach 13,788.9 points. Saudi market registered largest decline during the month. Tadawul Index declined by 6.5% during the month to reach 8,740.7 points. It is important to note that the Saudi market has been the worst performer among GCC markets in 2008. Since the beginning of 2008, Tadawul market has declined by 20.8% YTD. This was followed by MSM Index (Oman), which declined by 5.2% during the month of July to reach 10,737.1 points. Global General Index (Kuwait) also declined by 2.1% during the month to reach 387.2 points.
During July’2008, the overall trading activity declined in the GCC markets as compared to the previous month and most of markets also declined during the month. Even the declaration of good second quarter corporate earnings were not able to move the markets to a higher level. We believe that the decline in the markets is partly attributable to lower trading activity during summer months as many investors stay out of the market. We expect lower trading activity in the remaining months of the current quarter due to factors like summer break and holy month of Ramadan.
Capital markets in MENA region have shown increased activity on the IPO front. A comparison with the worldwide IPO activity indicates that not only has the number of deals or volumes increased, but the average ticket size per deal has also risen tremendously. We believe that the following reasons are responsible for the recent brisk IPO activity on the bourses.
• The region awash with oil surpluses is attracting more and more investors to invest in the local equity markets. The increased participation is supported by a range of investors from the SWFs to the retail segment.
• Secondly, the capital market authorities in the MENA region have considerably improved the transparency in the operation of these markets resulting in increased investor confidence in the markets, thereby increasing the participation.
• Also, many companies that did not allow foreign equity participation earlier have relaxed the conditions and allowed increased foreign participation.
In comparison with the global IPO market volumes, which plummeted from US$319.2bn in 1H07 to US$201.9bn in 1H08 registering a decline of 36.7%, the MENA IPO market climbed impressively from US$7.7bn in 1H07 to US$18.1bn in 1H08 thereby increasing at a YoY rate of 135.5%.
The MENA IPO activity had shown this tremendous increase when the global IPO markets were suffering the aftermath of the US subprime crisis that led to a liquidity crunch in the US market and the write downs by major European banks on account of loss in the subprime related investments. The combined IPO related activities in the US and European bourses declined considerably from US$205.1bn in 1H07 to US$144.3bn in 1H08 thereby registering a 29.7% YoY decrease.
The average IPO ticket size has also increased considerably during 1H08. While the worldwide average ticket size increased by 27.3% from US$183.8mn in 1H07 US$234.0mn in 1H08, the average IPO ticket size in MENA region increased by 118.7% from US$294.9mn in 1H07 to US$645.0mn in 1H08.
In 1H07, the study of sectoral preferences of IPOs worldwide indicated that Financial sector was the most preferred sector with almost 34.5% of the worldwide IPOs under this category. Following the Financial sector were the Consumer (18.6% share), Industrial (13.3% share), Oil & gas (12.7% share), Tech/Communications (12.7% share) and Basic Materials sector (8.2% share). This composition remained more or less the same worldwide in 1H08.
However, the IPOs in the MENA region displayed a heavy tilt towards the Financial sector in 1H08 compared to 1H07. The Financial sector comprised the lion’s share of the IPOs in 1H08 claiming 61.4% share, while its share in 1H07 was much lower at 47.8% of the aggregate IPOs. The other sector that gained considerably was Tech/Communications which increased its share in the MENA region’s IPOs from 7.2% in 1H07 to 18.5% in 1H08.
The major losers in terms of share of IPOs in 1H08 were Basic Materials and Industrials. While the share of basic materials in the region’s IPOs declined from 25.9% in 1H07 to 10.0% in 1H08, the same for Industrials decreased from 12.1% in 1H07 to 3.4% of the pie in 1H08. We believe that the investment climate in the region is favourable in the medium term and hence expect to see increased activities in coming years on the IPO front.
Saudi Petrochemical Sector....
As of 2007, the MENA region’s combined petrochemical production capacity reached 84.7mn tons, which represents 66% of total world capacity. This depicts that the region is the largest petrochemical producer in world. In 2007, Saudi Arabia occupied 50.3% of the total MENA capacity, through SABIC. SABIC is not only a major player in Saudi Arabia but the company also has vital position in the international market. In 2007, SABIC accounted for 53.9% of the total Saudi Arabia’s capacity, 28.4% of MENA and 18.7% of the world. Next to Saudi Arabia, Iran, through National Petrochemical Company, has claimed 20.2% and Qatar has 11.3% of MENA capacity.
MENA region has planned for a massive expansion of petrochemical capacity of different grades with an estimated cost of US$92.6bn. Based on the given expansion plans, the production capacity in MENA region will increase to 90.9mn tons in 2008 and 104.1mn tons in 2009. Going forward, we expect the production capacity will increase to 114.6mn tons by 2011, at a 4-year CAGR of 7.2%. Major capacity expansion in petrochemicals of different grades is expected in Saudi Arabia, which will account for 65.1% in 2008 followed by Kuwait which is expected to contribute by 22.5%. In addition, after 2011, production capacity in MENA region will further increase by 3.4mn tons in 2012, due to upcoming capacity expansion in Saudi Arabia and Qatar.
Saudi Arabia is a key player in the global petrochemical industry commanding a 34.8% and 50.3% of the World and MENA petrochemical production capacity in 2007, respectively. The major part of Saudi Arabia’s petrochemical production is exported. The Saudi petrochemical industry is mainly concentrated in the industrial cities of Jubail and Yanbu.
The Kingdom’s petrochemical industry enjoys high profit margins, mainly due to a natural competitive advantage of availability of low cost feedstock, on account of vast crude oil and natural gas resources. The cost of natural gas for the Saudi Arabian petrochemical industry is around US$0.75/mmbtu, which is far below than the international prices.
The WTO agreement confirmed Saudi Arabia has the right to retain low feedstock prices on the grounds that its hydrocarbon resources are a natural advantage and low prices are not classed as a subsidy. The agreement also allows a dual pricing system, where domestic users pay less than the export price for feedstock, under the reasoning that domestic customers do not require export infrastructure or export marketing.
During the last 4 years, the growth in Saudi Arabia’s economy was mainly due to the higher crude oil prices. This depicts a threat for the country in case of ease in crude oil prices. In order to minimize this risk the government of Saudi Arabia has promoted non-oil industries. Consequently, a massive expansion in petrochemical has been taken into account, which will increase at a CAGR of 7.8% during the period from 2007 to 2011.
Major new capacities in Saudi Arabia are expected to locate in Jubail industrial area. Major additional petrochemical capacity in Saudi Arabia is expected from Saudi Kayan Petrochemical Company (KAYAN), which will come on line on 3Q2010. KAYAN is expected to contribute by 23% in the total Saudi Arabia expansion of 16.5mn tons. However, the capacity from Eastern Petrochemical (SHARQ) and YANSAB will contribute to 24.3%, with a combine capacity of 4mn tons.
Market activity…..
GCC bourses saw 20.8bn shares being traded in the month of July-08 as compared to 29.9bn shares recorded in the previous month. Similarly, the value of shares traded on the bourses declined to US$70.4bn in July-08 as compared to US$100.2bn reported in the previous month.
