Egypt Petrochemicals Report Q2 2010

The economic slowdown is having a negative impact on the Egyptian petrochemicals market, although domestic producers are managing to maintain their market share, according to our latest Egypt Petrochemicals Report. The long-term future is promising, with a number of major new complexes under way. In 2009 Egypt had ethylene capacity of 300,000 tonnes per annum (tpa) with PP and PE capacities at 200,000tpa and 225,000tpa respectively. In the fertiliser sector, the country had ammonia and urea capacities of 7.52mn tpa and 4.32mn tpa respectively.

Although Egypt is handling the recession better than expected, key petrochemicals consuming industries are struggling with the construction sector. This has been hit particularly hard with growth falling from 10.32% in 2008 to 1.73% in 2009 and set to remain flat over the next two years. This is likely to depress polymer segments like PVC, which are highly exposed to the construction sector. At the same time, the automotive sector is suffering from subdued lending, which is depressing car sales with a knock-on impact on production with mediocre performance expected in 2010. The chief growth area, both shortterm and long-term, is the plastic packaging industries and appliances, which in turn will be heavily influenced by private consumption and investment. High rates of unemployment and rising real interest rates will mean that it could take some years before Egypt resumes the kind of consumption boom seen before the recession. Meanwhile, foreign direct investment remains depressed and the government is not finding as many projects as it would like, inviting the interpretation that stimulus funds cannot always find a home.

At the same time, export markets will offer little relief. Egyptian analysts had suggested that petrochemical exports could decline by up to 40% in 2009. We believe that the outturn was not as bad with some of Egypt’s main markets in the Middle East showing signs of recovery towards the end of 2009. According to our estimates, Egypt’s petrochemicals exports were down 25-30% with a degree of stabilisation and inventory restocking in late 2009.

We expect ethylene capacity to reach 600,000tpa in 2010. PE capacity should rise from 225,000tpa in 2009 to 600,000tpa in 2010. We expect PP capacity to rise to 600,000 by the end of the forecast period. We do not believe EHC’s proposed complex near Suez will come online by 2013, even if it does manage to secure financing by 2010. Similarly, it is doubtful that GAFI’s bid for foreign investment in a US$200mn PVC plant with a capacity of 120,000tpa and a US$150mn PS plant with a capacity of 200,000tpa will materialise in time for them to come onstream by the end of the forecast period. Meanwhile, the E-Methanex JV, with 1.3mn tpa of methanol capacity, may be ready to come onstream in H110. Once operational, the methanol plant will turn Egypt into a net methanol exporter.

Egypt’s fertiliser industry received a boost in early 2010 with an Egyptian-Canadian joint venture (JV) securing US$1.05bn in financing to triple production at a fertiliser plant in Damietta. This is the largest financing underwritten by Egyptian led banks and will be used to expand the second and third phases of production at the facility. The expansion is expected to be completed by the first half of 2012 with total annual production at 2mn tpa urea and 150,000tpa of ammonia.

In the Middle Eastern Petrochemicals Business Environment Rankings matrix, Egypt is ranked ninth, with 45.9 points, down 0.5 points since the previous quarter due to the impact of the economic downturn on the domestic petrochemicals market, although this has been mitigated by an improvement in Egypt’s country risk scores. The score has considerable downside risk due to declining scores for external risk and financial markets, compounding problems arising from government policy in the petrochemicals industry, specifically the imposition of tax on companies operating in free zones.