Petrochemical Industry of Saudi Arabia - Dissertation Example

?Corporate Finance Table of Contents Corporate Finance Table of Contents 2 Chapter Introduction 3 1 Petrochemical Industry of Saudi Arabia 3 1.2 Research Aims and Objectives 4 1.3 Research Question 4 1.4 Structure of the Paper 5 Chapter 2 – Literature Review 5 Chapter 3 – Methodology of the paper and Data Collection 6 Chapter 4 – Interpretation of Data 8 Chapter 5 – Policy Implications of the Result 8 Chapter 6 – Conclusion and Recommendations 8 References 9 Bibliography 10 A. Appendix 12 Chapter 1 - Introduction Saudi Arabia is largely dependent upon oil for its revenues. The presence of this very mineral is likely to attract a large amount of investment in the nation. However, in order to venture out to any particular sector, an investor normally takes into consideration the extent to which the respective stock is volatile to market fluctuations. Volatility of a stock is important given that it decides the return that the investor is likely to earn in future. Volatility of a stock is highly dependent upon the financial structure of the underlying economy which makes it necessary for the investor to stay concerned about the general market situation in the nation as well. The present paper is dedicated to the assessment of investment prospects in the petrochemical industry of Saudi Arabia. Although the industry appears to be quite prospective apparently, there might be some intrinsic factors which the investors need to take a note of. An outcome of the sum up of all these factors could be expressed through the value of ‘beta’, which could again be estimated by means of CAPM (Ross, Westerfield & Jaffe, 2004). In addition, given the importance that the industry enjoys in the nation, the national authorities must also be highly concerned about the same. For instance, it is necessary that the national government stays updated about the state of its most profitable sector and make arrangements for investors to feel it highly lucrative. This is especially the need in an era of high globalization where economies strive to attain the highest attention or rather market demand. 1.1 Petrochemical Industry of Saudi Arabia Petrochemical industry is regarded as one of the most important of all sectors in the economy of Saudi Arabia owing to the volume and proportion of revenue that it contributes to the national income of the nation. The records of the year 2005 state that Saudi Arabia consists of almost 250 petrochemical firms of diverse sizes which invest a gross yearly amount of US$ 29 billion in the industry. In addition, the nation is accountable for exporting petrochemical products worth US$ 3.2 billion. The nation is also home to the Saudi Arabian Basic Industries Corporation (SABIC), which is the world’s 11th largest producer of petroleum and also one of the world’s fastest growing companies (Shoult, 2006). At present, Saudi Arabia is the largest producer of oil in the world accounting for producing 10.5 million barrels per day annually, which serves the needs of one-tenth of the global population. The nation’s potential capacity is believed to be 262 billon barrels per day (Falola & Genova, 2005). 1.2 Research Aims and Objectives The objectives of the present research paper could be stated as follows – Factors which enhance investment in a sector, i.e., what are the aspects that investors generally examine prior to making investments in a particular sector? Importance of investment behind the economic development of a nation. Petrochemical industry, being one of the pillaring sectors, deserves much of the government’s attention. This necessitates the purpose of the paper and the conclusion to be reached hence. Research aims will be – Figure out the extent to which petrochemical industry will be affected by market fluctuations Reach a conclusion regarding the appropriate step to be adopted by potential investors. Forecast the possible trend that the Saudi Arabian petrochemical industry is likely to adopt over the span of another quarter. This forecast could help the national government to frame certain future policy measures meant for economic development. 1.3 Research Question The research question to be answered in the present paper will be – How much volatility is the Saudi Arabian petrochemical industry exposed to, with regard to market fluctuations? 1.4 Structure of the Paper The paper will be arranged in the following format – Chapter 1 will introduce the chapter including stating of the research aims and question to be answered. Chapter 2 is the Literature Review Chapter 3 will state the methodology to be followed while seeking an answer to the research question. It also includes the steps followed while collecting relevant data. Chapter 4 interprets the data being collected in line with the methodology stated. Lastly, chapter 5 tries to conclude whether the research answer stated earlier in the paper, has been effectively answered or not. Chapter 2 – Literature Review The literature review of the paper tries to assess the following factors – Firstly, how do petrochemical firms in the Saudi Arabian economy help in boosting the revenue of the nation? The manufacturing sector of the economy of Saudi Arabia is highly dependent upon its indigenous petrochemical industry which has been undergoing expansion since 1980s (Oxford Business Group, 2010). The nation basically had been involved in the petroleum industry and petrochemicals had been the latest addition to the same. Nonetheless, the nation is expanding in this frontier as well (Cordesman, 2003). However, the petrochemical industry, despite its importance and potentials in triggering economic growth, receive little attention from the political authorities of the nation. In other words it could be said that the nation does not lay much importance to its petrochemical industry despite the scope that it is endowed with (Ali, 2008). Secondly, a review of the foreign direct investment that the economy attracts or rather, the economy’s various sectors receive. Assess the importance of Saudi Arabian petrochemical industry to the foreign investors. Saudi Arabia had not been open to foreign participation till 2000, in comparison to other Middle East nations (Coredesman, 2003). However, the situation has considerably improved over time as could be understood from the relative figures of FDI investment in 2000, 2004 and 2007 (Oxford Business Group, 2007; Oxford Business Group, 2009; Ramady, 2010; International Business Publications, 2011). Thirdly, an examination of different external and internal shocks which have disrupted the economy of Saudi Arabia has to be made. In addition, the extent to which such changes have affected the domestic petrochemical industry needs also to be checked. In other words, the volatility that the industry has exhibited to market fluctuations has to be checked. A discussion is to be held about the way that Saudi Arabia had responded to the global subprime crisis of 2009 (Al-Hamidy, 2010; Gasiorowski, 2010; Cordesman, 2009; Bourland, 2008). The way that investors have responded to the aberrations in the industry has to be assessed. In most of the global examples, investors are found to have responded to the subprime crisis through withdrawing their investments thus leading to stock market collapse. Such kind of behavior is normal in situations when the concerned economy is a highly globalized one, as had been the case for USA. However, Saudi Arabia is least likely to have undergone such a sorry state (Bourland, 2008; Oxford Business Group, 2008; Ramady, 2010; Nakov & Nuno, 2009). Capital Asset Pricing Model to test degree of volatility to market fluctuations (Shiller, 1992; Jonathan, 2010). Had such deviations affected the economic growth rate of the economy over times? (Ramady, 2010; Devaux, 2009). Chapter 3 – Methodology of the paper and Data Collection The paper attempts to assess the extent of volatility that the Saudi Arabian petrochemical industry is characterized by. The industry is comprised of a number of private firms though not all of them are listed in the local stock exchange, Tadawul. Given that large scale investment is legally possible only in firms enlisted under a recognized stock market, the smaller non-listed firms will not be taken into consideration while assessing the position of the domestic petrochemical industry. There are in all 14 such private firms involved in the petrochemical industry, enlisted under the Tadawul stock exchange. Thus, these 14 firms will be basis of the research in the present case. Returns from these 14 firms will be considered to draw an average return generated by the domestic petrochemical industry. In addition, market returns as a whole also needs to be considered, for the same span of time, given that the purpose is to measure the volatility of the industry returns against market returns. The third step is to figure out the risk free rate of the market. The fourth step will be to structure the CAPM which could be expressed through the following equation – r – Rf = a + b (Km – Rf) Where, r = Return of the petrochemical industry Rf = Risk free rate Km = Market return Here, ‘a’ is alpha and ‘b’ is beta. ‘Beta’ is the one that deduces the extent of market volatility, i.e., the proportion by which the petrochemical industry is found to depend upon market changes. In other words, it implies the proportion by which market fluctuations over and above the risk free rate, decides the proportion by which the industry returns over the risk free rate, fluctuates. On the other hand, ‘alpha’ decides the amount of fluctuation that the concerned portfolio is exposed to over and above market fluctuations. The above equation could be estimated through applying a linear regression model with (r – Rf) as the dependent variable and (Km – Rf) as the independent variable. The regression parameters after estimation are projected to a hypothesis testing in order to testify that the sample estimates indeed predict the true population parameters. Based on the above estimated equation, a security market line will be drawn for the petrochemical industry of Saudi Arabia and conclusion has to be drawn on the basis of the steepness of the slope as well as its intercept. An assessment of the implications that the estimated values of ‘beta’ and ‘alpha’ exert over the vulnerability of the concerned industry. As an extension, a forecast of the possible returns that the petrochemical industry is likely to generate over the next quarter, i.e., 3rd quarter of 2011, will be made. The software to be used in this paper is MS-Excel and the tool to be implemented is that of Regression underlying Data Analysis. The data to be used in the present case have been collected from the archives of the domestic stock exchange of Saudi Arabia, Tadawul. The data contains - Information on 14 petrochemical firms enlisted under Tadawul. The list has been provided in the Appendix. In addition, historical index values of Tadawul also have been collected. Daily data has been collected between the interval – June 1, 2010 and June 1, 2011, so that there are in all 365 data points. The data being collected is unadjusted in nature for seasonality. Chapter 4 – Interpretation of Data The data has to be interpreted according to the steps mentioned above. Chapter 5 – Policy Implications of the Result Based on the forecasted data above, policy prescriptions are to be made, that the national authorities are suggested to follow for improving the state or vulnerability of the domestic petrochemical firms, and hence invoke economic development. Chapter 6 – Conclusion and Recommendations The conclusion about the accomplishment of research aims and objectives to be made, on the basis of the answer to the research question. Recommendations for further research on this topic. Some instances – comparison between the susceptibility of the petrochemical industries in other Gulf nations which are members of OPEC; such a comparison could be objected towards an analysis of the intrinsic socio-political state of these nations. References Al-Hamidy, A. (2010). “The global financial crisis: impact on Saudi Arabia” [PDF]. BIS Papers No 54: 347-357. Available at http://www.bis.org/publ/bppdf/bispap54u.pdf [Accessed: June 25, 2011]. Ali, A. (2008). Business and management environment in Saudi Arabia: challenges and opportunities for multinational corporations. USA: Taylor and Francis. Bourland, B. (2008). “Saudi Arabia: national security in a troubled region” [PDF]. Available at http://www.jadwa.com/Research/store/Monthly%20Bulletin%20December%202008.pdf [Accessed: June 25, 2011]. Cordesman, A. H. (2009). Saudi Arabia: national security in a troubled region. Washington, D.C., USA: Centre for Strategic and International Studies. Cordesman, A. H. (2003). Saudi Arabia Enters the Twenty-first Century: The political, foreign policy, economic, and energy dimensions. USA: Greenwood Publishing. Devaux, P. (2009). “Saudi Arabia: stability despite the crisis” [PDF]. Available at http://research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByCountryEN/AC5502279179011FC12575C4002C1EBC/$File/C0905_A2.pdf?OpenElement [Accessed: June 25, 2011]. Fayola, T. & Genova, A. (2005). The politics of the global oil industry: an introduction. USA: Greenwood Publishing. Gasiorowski, M. J. (2010). “Economic Crisis and Political Regime Change: An Event History Analysis” [PDF]. The American Political Science Review, Vol. 89, No. 4: 882-97. Available at http://www.cerium.ca/IMG/pdf/gasiorowski_1995.pdf [Accessed: June 25, 2011]. International Business Publications (2011). Saudi Arabia Investment and Business Guide. Washington, D.C., USA: IBP. Jonathan, B. (2010). Financial Management. New Delhi, India: Pearson Education India. Nakov, A. & Nuno, G. (2009). “OILGOPOLY: A GENERAL EQUILIBRIUM MODEL OF THE OIL-MACROECONOMY NEXUS” [PDF]. Available at http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0932e.pdf [Accessed: June 25, 2011]. Oxford Business Group. (2007). The report: Emerging Saudi Arabia 2007. USA: OBG Publishing. Oxford Business Group. (2008). The Report: Saudi Arabia 2008. USA: OBG Group. Oxford Business Group. (2009). The Report: Saudi Arabia 2009. USA: OBG Publishing. Oxford Business Group. (2010). The Report: Saudi Arabia 2010. USA: OBG Publishing. Ramady, M. A. (2010). The Saudi Arabian Economy: Policies, Achievements, and Challenges (2nd ed.). London, UK: Springer. Ross, S. A., Westerfield, R. W. & Jaffe, J. (2004). Corporate Finance (7th ed.). New York, USA: McGraw-Hill. Shiller, R. J. (1992). Market Volatility. USA: MIT Press. Shoult, A. (2006). Doing business with Saudi Arabia. London, UK: GMB Publishing. Tadawul. (2011). “Company List: Petrochemical Industries”. Available at http://www.tadawul.com.sa/wps/portal/ [Accessed: June 25, 2011]. Bibliography Brealey, R. A. et al., Financial stability and central banks: a global perspective. London: Routledge, 2001. Case, K. E., and R. C. Fair. Principles of Economics. 8th Edition. New York: Doring Kindersley, 2007. Calvo, G. A., and M. S. Kumar. Financial sector reforms and exchange arrangements in Eastern Europe. Washington, D. C.: IMF Publications, 1993. Troster, R. L. The international handbook on financial reform. Edited by M. Hall. Massachusetts: Edward Elgar, 2003. United Nations. 2009. The global economic and financial crisis: Regional impacts, responses and solutions. USA: United Nations. A. Appendix List of petrochemical companies enlisted under Tadawul is as follows – Symbol Company Name Short Name Acronym 2330 Advanced Petrochemical Company Advanced Advanced 2170 Alujain Corporation Alujain ALCO 2001 Methanol Chemicals Company CHEMANOL CHEMANOL 2210 Nama Chemicals Co. Nama Chemicals NAMA 2060 National Industrialization Co TASNEE NIC 2002 National Petrochemical Company Petrochem Petrochem 2380 Rabigh Refining and Petrochemical Co Petro Rabigh PETRO RABIGH 2260 Sahara Petrochemical Co. Petrochemical SPC 2020 Saudi Arabia Fertilizers Co. SAFCO SAFCO 2010 Saudi Basic Industries Corp SABIC SABIC 2250 Saudi Industrial Investment Group SIIG SIIG 2310 Saudi International Petrochemical Co Sipchem SIPCHEM 2350 Saudi Kayan Petrochemical Company Saudi Kayan KAYAN 2290 Yanbu National Petrochemical Company YANSAB YANSAB Read More