Cairo – Mubasher: HC Securities and Bonds Brokerage recently shed light on the Egyptian industrial sector through its evaluation of Sidi Kerir Petrochemical Company (Sidpec), focusing its study on its new strategic projects and their impact on the company’s performance.
Nisreen Mamdouh, Industrial Sector Analyst at HC, said: “The imbalance of supply and demand and uncertainty regarding the current geopolitical tensions and raw material prices may lead to fluctuations in the profitability of polyethylene products globally.”
She continued: “The International Monetary Fund expects global GDP growth to reach 3.1% in 2024, which will cast a shadow – from our point of view – on the volume of demand for petrochemicals, provided that it begins to recover at the beginning of 2025, coinciding with the recovery of GDP growth.” Globally. In addition, increases in polyethylene production capacities, especially in China and the United States of America, could put pressure on prices if global demand does not recover simultaneously, which may prompt producers to reduce operating rates. However, geopolitical tensions in Gaza have led Ukraine and restrictions on the Panama Canal have created tensions in supply chains and increased shipping and insurance costs, putting upward pressure on global polyethylene export prices.”
As for the prices of raw materials for naphtha and ethane crushing units, although oil and naphtha futures contracts show a declining trend, indicating a decline in raw material prices in the future, the conditions of uncertainty due to geopolitical tensions make futures prices subject to an increase. In the United States of America, which is one of the least expensive producers and exporters of polyethylene in the world, natural gas and ethane futures contracts indicate an increase in prices in the coming years, which means a decrease in the oil-to-gas ratio (as an indicator of the relative cost advantage between polyethylene producers) and a gradual shift in The relative production cost advantage of ethane-based polyethylene compared to its naphtha-based counterpart, which leads to a convergence in export prices from those regions to Europe.
Accordingly, and taking these developments into account, we expect global polyethylene prices to reverse their trend and rise in 2024 after taking a corrective path in 2023 down from their peak in 2022. Although higher costs have been largely passed on to final prices so far We believe that if geopolitical tensions persist, supply and demand imbalances will ultimately limit price response to increased costs, which in turn pressures global PE margins.
Nisreen added: “Sidpic’s strong position in the sector and its relative cost advantage support its activity and profitability: The company has a good position in the market thanks to its good local market share, which allowed it to benefit from higher local pricing compared to export prices, especially when the lack of currency availability hampered Foreign imports of polyethylene to Egypt.
Moreover, Sidpec benefited from its positive net foreign exchange exposure and its cost structure based mainly on the Egyptian pound, by importing types of polymers (polypropylene, low-density polyethylene, polyvinyl chloride, and polyethylene 100) and selling them in the market. Local through its commercial unit. in addition to,
She pointed out that the application of the raw materials pricing formula in the fourth quarter of 2022 – which it linked to a price index for polyethylene – helped Sidpec hedge its profit margin against adverse price fluctuations of raw materials and final prices, which led to achieving consistent profits. In our expectations, we assume a gradual decline in domestic price increases in parallel with the gradual solution to the problem of providing foreign exchange in Egypt and the resumption of polyethylene imports.
It is also expected that the raw materials pricing formula will continue to be applied. We expect Sidpec’s revenues to grow at a compound annual growth rate of approximately 7.6% during our study period, i.e. during 2024-2028, driven mainly by higher prices denominated in Egyptian pounds as a result of the depreciation of the currency, despite a gradual decline in the weighted average domestic and export prices of polyethylene denominated in dollars. American.
We expect cost of goods sold to grow at a compound annual growth rate of approximately 7.9%, taking into account higher production costs, resulting in an average EBITDA margin of approximately 24% during our forecast period. We expect net earnings to grow at a CAGR of approximately 10.7% over our forecast period.”
Nisreen concluded her analysis by saying: “Benefiting from new projects and the acquisition of the Egyptian Company for the Production of Ethylene and Its Derivatives (ETHYDCO) may raise our expectations for the company’s performance: According to our opinion, Cidbec’s complete acquisition of its 20%-owned subsidiary ETHYDCO through a share swap entails Operating and cost savings.In July 2023, an independent financial advisor estimated the value of ETHYDCO at US$1.09 billion or US$78.3 per share (divided into 13.9 million shares), calculating an exchange rate of EGP 30.9/US$, resulting in a total value of 33.5 billion Egyptian pounds.
The IFA also valued Sidpic at 23.1 billion Egyptian pounds, or 30.6 Egyptian pounds per share (divided into 756 million shares), indicating a swap ratio of 1.45:1, according to which Sidpic will issue 877 million shares to ETHYDCO shareholders as part of the company’s capital increase process. In exchange for acquiring the remaining 80% of ETHYDCO. The value estimate by the IFA was based on the budget for the fiscal year 2022 for the two companies. However, the completion of the deal was contingent on the acquisition of a 30% stake in ETHYDCO by Alpha Onyx Limited, a subsidiary of Abu Dhabi Holding Company, which delayed the deal, with no clear vision on when to implement it, especially given the instability of the exchange rate.
The company believes that resuming the talks will require re-evaluating the swap ratio to take recent developments and the position of the two companies into account for the fiscal year 2023. At the same time, Sidbeck is considering implementing various projects.
It has allocated an investment budget of US$57 million in 2024, which includes contributing a 7.5% stake in the Egyptian Bioethanol Company (EBIOL), and US$5 million in the Egyptian Gas Cylinders Company (INCO) to export bioethanol and gas cylinders. Moreover, the company is currently submitting a bid to establish a power plant for EBIOL,
This project contributes to enhancing its revenues in foreign currencies. In addition, technology was provided to establish a steam and electricity production unit to produce electricity, which leads to partial savings in electricity. Furthermore, Sidbec signed a memorandum of understanding to establish a methane production unit, using its available carbon dioxide and hydrogen resources and land owned by the company. Producing methane internally will serve as boiler fuel, reducing the cost of obtaining it from an external source.
The company plans to establish a permanent facility to import ethane from the United States by 2026, in partnership with ETHYDCO, GASCO, and a specialized private company with a total amount estimated at 600,000 tons/year of ethane, where its share will be about 144,000 tons/year. The abundant raw materials will allow Sidbec to expand its production, and the additional import cost is estimated at US$100-150/tonne of ethane, equivalent to US$2.3-3.4/MMBtu, according to our calculations.
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