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Saudi Aramco's India Investment -To where is the oil flowing to?

Date : 24/10/2017
Author:  Marmore MENA Intelligence

Saudi Aramco’s India investment is one part of its global strategy that encompasses expanding its downstream operations, oil trading and marketing and petrochemicals. This investment follows deals which took place earlier this year wherein it had signed contracts worth USD 13Bn with Pertamina and Petronas to ensure long-term oil supply to both countries. The former is an Indonesian state-owned oil company while the latter is Malaysia’s.  These tie-ups reflect Saudi Aramco ambitions to cement its ties with its Asian clients that goes deeper than just being a supplier of oil. It also comes at a time when US oil has reached Asian shores for the first time since the US lifted its restrictions on exports in late 2015. This sent shock waves across the already nervous top echelons of the traditional oil-supplying companies. From a strategic point of view, moving closer to its key customers would help Aramco cater to and customise the products that would better suit the local demand and also forecast future growth in the market with far greater accuracy.

Saudi Aramco is arguably one of the world’s largest Oil and Gas Company in terms of revenues and reserves that they control. To give an idea of its size, Aramco produces close to 10.3Mn barrels per day and its closest rival, the Russian state-owned Rosneft produces a third of that. Given their relative dominance in this space, it is surprising that only recently Saudi Aramco has opened its office in India and plans to invest in India’s downstream opportunities including refining, pipeline, marketing, and technology know-how. To put things into perspective, Saudi Arabia has been a key supplier of crude to India over the years. As of 2016, imports of crude oil from Saudi Arabia accounted 20% of the total crude imports in India followed by Iraq at 16% and Iran at 11%. Even the strong economic growth witnessed in India during the pre-2007 era was not enough to entice Aramco to open an office in India. Only in 2016 did it establish a skeletal presence in the country which is now being expanded.

South East Asian countries including the likes of India and China have hitherto been most lucrative markets for Middle East countries owing to their size and their geographical proximity. Together, these countries account for four of every 10 people in the world, combined making them one of the largest consumers of oil and natural gas. India’s oil demand, especially, is forecast to grow from 135,000 barrels a day in 2017 and 275,000 barrels a day in 2018, according to the International Energy Agency (IEA). IEA also estimates that India’s refining capacity would lag behind the demand making the country a priority for companies such as Aramco that is trying to expand its global reach and diversify its assets.

New suppliers rock the Asian boat
Asian buyers, owing to their higher dependence on crude from Middle East on an average pay more than their Western counterparts. An issue that has largely been under the radar except for occasional requests from Asian government and limited studies undertaken by some governments that put the Asian oil  premium at $1-$1.5 higher than their Western counterparts. In light of this, the emergence of new shale supplies from across the Atlantic has put “Asian Premium” issue in the limelight. In March 2017, India’s oil minister had asked OPEC to look at rationalizing the oil pricing for Asian buyers since they are the major consumers now, also a sign that is reflective of OPEC’s declining clout in fixing oil prices.

India was one of the latest nations to make a purchase from US after China and Japan. India’s first purchase of oil from the US has been on ex-ship basis (Delivered ex ship (DES) is a trade term requiring the seller to deliver goods to a buyer at an agreed) making their prices very competitive vis-à-vis Middle East. Trade data from Bloomberg shows that, there are 11 full-laden tankers that is expected to arrive Asia during November 2017 with more expected to tank up late October and early November (Reuters). This coupled with the increasing price differential for Middle Eastern oil have prompted India and other countries in the region to diversify their supply sources and look at the US as an alternative supplier. US exporters have happily obliged to such increased demand, it’s per day exports reached 1.98Mn barrels by late September and is expected to reach 2.2 Mn barrels in the coming weeks.
Two large –scale investments in Indonesia, Malaysia and potentially another one in India may probably point to Aramco’s efforts at mitigating these price concerns among key clients in key markets and to ensure that future commercial deals are not unduly endangered owing to the price premium.  Besides, these investments also open up opportunities for signing long-term oil supply contracts increasing the revenue visibility.

Aramco’s larger play
Saudi Aramco already has downstream operations in South Korea (majority equity interest in S-oil), the US (through takeover of erstwhile Motiva), Netherlands (joint venture with German LANXESS) and in China (Fujian Refining and Petrochemical Company). Aramco’s signing agreements with Malaysia and Indonesia will add two more locations to its downstream operations. During market downturns, such as the one taking place in the oil market now, upstream earnings suffer significantly more than downstream businesses do. Integrated companies on an average exhibit less earning volatility and high value addition through specialized product developments resulting in higher margins. Aramco’s talks with top India refiners for a stake in a refinery located on the West coast with an annual capacity of 60Mn tonnes fits very well into its downstream play.

Aramco also stated that its goal is to increase its global refining capacity to 8m-10m b/d and it has been scouting for investment opportunities across the globe. Inherent local demand and given Saudi Arabia’s position as a leading supplier of oil for India, Aramco’s talk with Hindustan Petroleum Corporation Ltd., Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. to invest in a West Coast Refinery could be a win-win for all the parties involved.

The project on the West coast is planned to be developed in two phases – the first phase would involve building a 40Mt plant with aromatic complex, naphtha cracker unit and a polymer complex while the second phase would be a 20Mt refinery. If the deal takes shape it would help Aramco to cement its position as an important player in the Indian market despite it being a late entrant to India.

Other long-term opportunities in India
Saudi Aramco can also benefit from India’s huge agricultural base contributing for 14% of India’s GDP; it is the second largest urea importer in the world. The total demand for urea is 32Mn tons out of which India managed to produce 24.5 Mn tons importing the rest. To reduce the dependence on foreign sources, the Government of India has been pushing to increase domestic production and improve fertilizer availability in the country. It has announced plans to revive some of its old fertilizer units as a well as upgrading the current ones. While the feedstock is currently expected to be sourced locally, the demand for food and productivity improvements (through use of fertilizers) could open up a long-term natural gas supply contracts for these plants which Aramco could capitalize on.

Besides that India’s appetite for specialised chemicals such as coatings, adhesives, sealants, elastomers etc. is rising with growth in the economy. Its elastomers market alone is worth USD 900Mn driven by the robust automobile demand.  Regulatory intervention by environmental agencies aimed at carbon emission reduction through an increase in fuel efficiency has also made major automotive OEMs in India to increasingly opt for plastics as a substitute to metals and alloys in automotive components.

Saudi Aramco’s IPO, when it arrives, would be a game changer for the global investment community going by the expected valuation. With this IPO being a centrepiece of the economic reform currently being undertaken, its entry into new and growing markets, and shedding its secrecy-bound image no doubt sends a very positive and welcoming message to potential investors.

This article is published in "Marmore Blog"


 Current rating: 0 (3 ratings)

Potential Impact of Capital Market Reforms in Saudi Arabia

Date : 09/06/2016
Author:  Marmore MENA


Saudi Arabia seems to be in a hurry to reform its economy and capital markets. It is not without reasons. Low oil prices have resulted in Saudi Arabia burning through its reserves at a record pace. Saudi Arabia’s foreign exchange reserves peaked during the third quarter of 2014 reaching USD 754 Bn just before the oil prices started their plunge. Saudi Arabia lost close to $160 Bn in revenues in a matter of 18 months. Its GDP is heavily skewed on oil accounting for close to 44% of the GDP which poses a problem as oil price drops. IIF projects non-hydrocarbon revenues as a % of total to increase from 8% in 2012 to 45% in 2107 on account of low oil price and announced reforms.


The Tadawul All Share Index plans to increase the listings to 250 companies from about 170 now, over the next seven years. Its current market capitalization of $396 billion is expected to add close to $ 120-130 bn post the IPO of Aramco and possible inclusion into the MSCI emerging market index by Mid-2017. The aim of the government is to increase the size of Saudi Arabia’s stock market to match that of its GDP within seven years (2014 -$798 Bn) as part of the vision 2030 statement released by the country’s crown prince. Another aim of the government is to make the stock market a better representative of the economy. Currently Financials dominate the stock market capitalization accounting for 39% of the stock market with stocks in the energy segment accounting for 21% of the market. In terms of GDP however the share of energy companies is double that figure at close to 40%. We have tried to find out the changes that both these events would have on the distribution of the stock market capitalization.

Large-scale infrastructure spending combined with the currency peg and the necessity to finance budget deficits means that the Saudi Arabian government should look at alternative means of increasing its income. IMF (The International Monetary Fund) warned in October 2015 that Saudi Arabia could run out of financial assets by 2020 if the government maintained its current policies and spending patterns underscoring the need to shore up public finances.

In a recent announcement, Saudi Arabia announced a string of reforms to its capital market that could attract billions of dollars of foreign money and smooth sales of state jewels – for instance Saudi Aramco. There were three major changes that were introduced in the Saudi capital market – Increased foreign ownership, Securities lending and Short Selling.

  • Individual foreign institutional investor will be allowed to own a stake of just under 10 percent of a single listed company, up from a previous ceiling of 5 percent. Currently only Saudi British Bank and Banque Saudi Fransi are the two companies that have more than 5% foreign holding which are promoters’ holding of HSBC and Credit Agricole respectively.
  • All foreign investors combined will still be limited to owning 49 percent of any single firm.
  • Top  companies (by M.Cap) -  Foreign Holdings

  • This would increase the institutional investors investing the market. Single QFI (Qualified Foreign Investor) could hold onto a higher percentage of a company’s share possibly opening opportunities for higher corporate governance related disclosures, trading volumes and analyst coverage.
  • Removal of the 10% ceiling on combined ownership by foreign institutions of the market's entire capitalization. Since its opening last June the total direct and indirect foreign investment accounts for close to 4.28% percent of the stock market capitalization according to Tadawul as of 26th May 2016.
  • Reduction of minimum assets under management to USD 1 bn instead of USD 5 bn.
  • Allow new type of foreign institution including Sovereign Wealth Funds (SWFs) and University Endowments. Currently there are 9 QFIs who have registered with the Saudi CMA (Capital market Authority) for investing in the stock market.
Other changes that were introduced included – introduction of securities lending, covered short selling and extending the settlement of trades to the globally followed standard of T+2 days instead of the current T+0 days. The T+0 days had put lot of foreign investors in trouble as they had to settle the trade within the day which required huge amount of capital to be ready before trading. Also, given the Sunday - Thursday business week, things get even more complicated. Securities lending and short-selling would help in price discovery helping in better efficiency in the market.

Possible Impact of these regulations
Increase in foreign Ownership
  • Increased Foreign investment
    • Increasing foreign investment is prime objective of opening up the stock market which would further enhance the appeal of stock market to sophisticated HNWIs of the region.
    • Taking the top 20 stocks alone, if foreign investors increase their shareholding by 5% we could expect $13 Bn to enter into the market. However, assuming immediate investments from foreign investors may be premature. Refer to the analysis below to get a better understanding (Market Opened - Where are the foreign investors?).
  • Improved shareholder protection and disclosure –
  • Foreign Investors would require a robust framework to be present in order to invest into the country. While increasing the investment limit is only part of the story, ensuring equal rights for foreigners would assure them of a legal recourse
  • The Dubai Financial Market General Index doubled in the two years since the news of the MSCI upgrade was announced in June 2013.
  • Institutional investment is bound to add more liquidity supporting measures by constantly trading in these stocks
  • Sophisticated foreign investors would make the market more efficient which would dampen knee-jerk reactions from the stock market during turbulent economic times
  • Analysts from the Saudi Arabia and other GCC countries would start covering Saudi  stocks more as foreign investors start to look for alpha stocks outside of the index
  • Possible improvement in market cap as well as volumes/value traded
  • Diversified Institutional Investor base
  • Improved analyst coverage
  • Improve corporate governance practices

Securities lending
  • Higher Liquidity
    • Securities lending is a practice that has helped developed markets achieve higher liquidity by prompting short-sellers to be more active in the market
  • Price discovery
  • More number of sellers due to short selling which ensures lower bid-ask spread – Bulk trades influence the markets – Upward price movement of 0.5% for block purchases and downward revision of -0.38% for block sales according to Price Impact of Block Trades in the Saudi Stock Market working paper prepared by Ahmed A. Alzahranai, Andros Gregoriou, Robert Hudson and Kyriacos Kyriacou
  • Opportunity for earning by loaning out the securities which could lower the cost of holding for  institutional shareholders
  • Required for covered short-selling
  • Derivatives have not been able to make much of inroads into the region hitherto which could increase the depth of KSA’s market
  • Could open up opportunities for derivatives trading

Settlement of Trades
  • Less capital needed upfront as settlement can take two days instead of the current cycle of T+0
  • Possible inclusion into MSCI index
    • T+0 settlement was cited as an hindrance in MSCI’s Saudi Arabia market accessibility review removal of which should help Saudi Arabia gain a place in MSCI’s emerging market index
The exact timeline for the implementation of these measures would only be known by 1st half of 2017. Lengthy time consumed for reforms to materialize could be a deterrent for overseas funds and foreign institutions from bringing their money into Saudi Arabia. Since June 2015, the total direct and indirect foreign investments account for 1% of the USD 408 Bn Saudi stock market. As of December 2015, there were only nine foreign institutions that had registered in Saudi Arabia as foreign institutions.

Market Opened - Where are the foreign investors?
Saudi Arabia opened up its markets to investors during June 2015 following the announcement in 2014. Liberalizing the stock market, one of the few major global exchanges to have restricted foreign access was expected to attract a huge amount of foreign investors. However the expectations failed to materialize which resulted in the stock market falling on the day that foreign investors were allowed to trade. Primary reasons for the poor show on the day of market opening were two – Initially, Foreign Institutions that had applied for license did not get them on time and stock market valuations were on the higher side compared to regional markets. The situation continues to persist with foreign holdings not seeing any major improvements. QFI holdings remain below 1% for many large cap stocks.

Rich valuations play spoilsport – When the stock market opened up to investors last June it was already the region’s top performer returning 15% (As of June 2015) and trading at a PE of 15.5 times its 12 month forward earnings. In comparison the broader Middle East market were trading at a multiple of less than 14 times earnings while global emerging markets were trading at 11.9 times. Saudi Arabia is not part of MSCI EM index and currently features as a standalone market closing the doors for passively managed funds. Actively managed funds as opposed to passively managed funds are very choosy about their investments and would only invest if the returns are expected to be commensurate with the level of risk. Investor sentiments were further dampened by the deteriorating economic conditions in Saudi Arabia due to decline in oil prices. Banking sector which form the majority of the market cap was worst affected.

QFIs shareholding remains well below 5% - What is the point in changing it to 10% - Some analysts also point out that this was more of a measured opening to help foreign investors get a feel of the market and for Saudi Arabia to adjust itself to foreign investors. Recent reform announcements suggests that Saudi Arabia is serious about bringing in foreign investors and getting into indices provided by MSCI (particularly EM Index) and FTSE. On successful inclusion more foreign investment can be expected to reduce tracking errors of foreign funds tracking such indices.

How will the market segmentation look like in 2017?
There is a significant difference between the composition of GDP and the stock market segmentation (by market capitalization). Decision on Saudi Arabia’s inclusion into emerging market index is expected to be taken by MSCI by Mid-2016 and possibly addition into the index would happen by mid-2017 with an initial country weightage of 2%. We look at how this can affect the sector composition of Saudi Arabia’s stock market.


Tags:  Capital Markets, KSA, Stock Market

 Current rating: 4.5 (3 ratings)

Revealed: The Highest Dividend Yield Stocks in UAE and Saudi Arabia

Date : 28/03/2016
Author:  Marmore MENA

2015 ended up as one of the biggest disappointing years for regional and global equity investors. While many stock markets in the Gulf region struggled to live up to expectations, there is however a silver lining for investors in these volatile times — high dividend yield. As the sell-off in markets drove stock prices down it also pushed up dividend yields of stocks, making them attractive investments.

According to a report by Marmore MENA Intelligence (, a research house specialized in MENA economies and business issues with the focus on providing actionable solutions, most of the companies that have paid out high dividends during 2011 to 2015 in UAE belong to the insurance and banking sector. The report, shared exclusively with Wealth Monitor, says that Air Arabia, du and Ras Al Khaimah Ceramics are the only exceptions. Majority of the top dividend yielding companies are small and large cap companies. Contrary to the stocks in UAE, most of the top dividend yield stocks in KSA are large cap. The following two Tables lists the top 20 stocks with the highest dividend yields in the UAE as well as KSA, between 2011 and 2015.

“The KSA and UAE listed companies were mostly sitting on high cash balances, with underleveraged balance sheets, that helped them have high dividend payout ratios. For instance, the average payout ratio of top dividend paying stocks of KSA and USE was 85% and 74% respectively between 2011 and 2015,” M.R. Raghu, Managing Director, Marmore MENA Intelligence, told Wealth Monitor. For the uninitiated, while dividend is the part of net income a company decides to pay out to its investors, dividend yield shows the amount of cash dividends a company pays out to its shareholders relative to the market value per share. Represented as a percentage, dividend yield is calculated by dividing the cash dividends per share by the market value per share. As the stock price goes up, the dividend yield goes down. Similarly, when the stock price plummets, the dividend yield moves higher.
But should you be buying stocks just to cash in on the dividend? Watch out for dividend traps, caution experts! While in uncertain and volatile times, it may be a good idea to pile up stocks that pay steady dividends, a high dividend yield alone doesn’t make a stock a great investment, always. As an investor one needs to also look at consistency of dividends and the fundamentals of the company. Secondly, experts advise caution before investing in high dividend-yielding stocks since they could lure the unwary investor to arbitrarily over-buy stocks. As evidence from major world stock markets suggest, while stocks with high dividend yield are considered safe and also indicates that the company is sharing profits with investors, consider multiple metrics before making any investment decision. Apart from the consistency and fundamentals, one can consider factors such the market cap of the company, the company’s earnings, P/E ratio, and dividend payout ratio. And last but not the least, it’s always a good idea to consult with experts before investing.
The Article originally published in Wealth Monitor .

Tags:  Capital Markets, KSA, UAE

 Current rating: 0 (3 ratings)

KSA Residential Real Estate - Transactions Review (Q3 2015)

Date : 30/11/2015
Author:  Marmore MENA

During the past decade, Saudi Arabia has witnessed rapid economic development, attributable to elevated oil production and prices, vigorous private sector activity and strong government spending on infrastructure, health, and education. The nominal GDP of KSA grew from USD 754.6bn in 2013 to USD 761.9bn in 2014, and is projected to reach USD 791.6bn in 2016. High population growth coupled with rise in per capita income has fuelled the demand for residential units in the Kingdom, especially in Riyadh and Jeddah. Government’s focus has shifted towards the housing shortage in the country, as a result of the increasing growth to the population.

Due to this, strong supply is expected from projects undertaken by the local government agencies. According to Marmore’s report on KSA Residential Real Estate, The Ministry of Housing is developing 15,000 units (handover in 2017) and 15,500 more units being planned. The Ministry of Housing is developing its first project in Riyadh, which includes 675 apartments and 2,200 land plots, which is expected to increase the supply of affordable housing, as a large proportion of the population still does not own a house in KSA. But, demand for residential real estate is expected to be relatively low due to the new mortgage policy, which has reduced the amount of loan permitted on a property. Increasing land prices, lack of construction finance and availability of land, constrain supply especially in affordable housing and middle-income housing segments. As a result a significant percentage of middle-income households choose to rent rather than purchase property. On the other hand, rising income levels and changing lifestyles has led to increase in supply of luxury high-rise residential units, with greater focus on “modern luxury”. But the combination of low interest rates and continued fiscal stimulus has raised concerns of potential asset bubbles, especially in the property markets, with the bank lending to real estate increasing by 31 per cent in 2014.

Value of construction contracts awarded in the first half of 2015 stood at USD 37bn, and despite lower oil price the contracts were awarded at a faster pace in 2015, compared to 2014. Residential real estate, roads, power and healthcare were the primary sectors accounting for close to two-thirds of the total awarded contracts, while Riyadh region captured the lion’s share of awarded contracts. Construction activity also seems to have peaked, with the demand for cement rising at double digits over the last five years.

Real Estate Transactions

In Riyadh, the total value of residential transaction appear to have experienced a YoY decline of around 32.5% in Q3 2015, and a QoQ decline of 17 per cent. A similar pattern is seen in the total number of residential deals, where a 8 per cent YoY decline was recorded for Q3 2015, alongside a QoQ decline of 10.5 per cent. Similarly, in Makkah the number of residential transactions declined YoY by 24 per cent, and QoQ by 25 per cent, whereas the value of residential transactions declined 27.4 per cent YoY and 50.3 per cent QoQ in Q3 2015.

The number of transactions continued to decline due to the new mortgage law, which limits the maximum loan amount to 70 per cent of the property value. Average price per sq m experienced quarterly decline in all three major cities; average price per sqm for land in Riyadh declined 27 per cent YoY, followed by decline of 25 per cent in Jeddah.

These declines accompany a decline in total number of transactions indicating that the sharp drop in recorded prices is not sustainable and are set to adjust after the bottleneck clears, which can only be fueled by liquidity, in the form of credit availability, and a rise in affordability. Only then will the market adjust to fair and long term sustainable values with less volatility. 

Figure: Number and value of residential real estate transactions in Riyadh from July 2010 to 2015-YTD
Source: Ministry of Justice, Marmore Research

Figure: Number and value of residential real estate transactions in Makkah (Jeddah) from July 2010 to 2015-YTD

Source: Ministry of Justice, Marmore Research
Published by: Marmore MENA

Tags:  KSA, Real Estate, Residential, Sector

 Current rating: 0 (3 ratings)

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