Egypt Petrochemicals Report Q3 2009

Egypt continues to win financial backing for petrochemicals projects against the odds, but BMI's latest Egypt Petrochemicals Report outlines its reservations over the timing of capacity expansion during a global economic downturn and the growing problem of over-capacity in areas where the local industry intends to expand.

The completion of full financial arrangements for TCI Sanmar Chemicals' US$868mn chloralkali project in March suggested the Egyptian petrochemicals industry still retained the confidence of the financial sector and the industry is continuing to grow. This came despite the global financial crisis, the negative impact of cancellation of the EAgrium project in mid-2008 and the effective abandonment of free trade zones. The TCU Sanmar complex is due to add capacities of 400,000 tonnes per annum (tpa) of VCM and 200,000tpa of PVC. However, this coincides with growing over-capacity in China that is undermining PVC prices. Overall petrochemicals prices had already fallen by over 50% year-on-year (yo- y) in Q109, while volumes could fall by a further 20%, according to the government. At the same time, the industry is forecasting a 40% fall in exports in 2009.

Egypt's US$20bn petrochemical masterplan could still be derailed by the international financial crisis and the global economic downturn. Progress on petrochemical projects depends on securing investment, which will be harder to find at a time of significantly tighter lending standards and higher borrowing costs. At the same time, the Egyptian government has made investment unattractive by imposing a 20% profit tax on petrochemicals operators, including those located in the 'free zones'. Industry players are now calling for the industry tax breaks to be re-instated and also for the Egyptian government to lower the price of feedstock. Projects are already delayed.

BMI believes ethylene capacity will double to 600,000tpa and PE capacity should rise from 225,000tpa to 525,000tpa in 2009. We expect PP capacity to rise to 820,000 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 200,000 tpa will materialise in time for them to come onstream by the end of the forecast period.

In the Middle Eastern Petrochemicals Business Environment Rankings matrix, Egypt is ranked eighth with 47.2 points. The country is 6.1 points behind South Africa and 0.6 points ahead of Turkey. 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. The Egyptian petrochemicals sector represents about 12% of total industrial production and is worth around US$7bn, or just 3% of total GDP. The business environment is obviously not as strong as Middle Eastern rivals, such as Saudi Arabia with its well-developed existing capacity and the ability to attract foreign investment. However, it ranks above Algeria because of higher production and a significantly better national (as opposed to sector-specific) business environment. The government will need to convince petrochemicals producers that their investments are safe and will not be jeopardised by arbitrary government intervention, as has been the case recently in the fertiliser sector. Without greater transparency and consistency in government policy, Egypt will find it difficult to meet the ambitious targets under its petrochemical industry plan.