In comments issued to the Qatar Exchange after the group’s second Board of Directors meeting for 2013, H.E. Dr. Mohammed Bin Saleh Al-Sada, Minister of Energy and Industry, Chairman and Managing Director of Industries Qatar, stated, “IQ has followed up on the record-breaking full year results in 2012 with a strong first quarter. Net profit for the three months ended March 31, 2013 was QR2.5bn, a significant improvement of QR0.6bn over the same period of 2012, as the group benefitted from an additional 2.0 million MT of urea and 240,000 MT of LDPE production capacity following the launch during 2012 of QR12.8bn of new facilities.”
Continuing, H.E. Dr. Al-Sada said, “The group is also pleased to confirm the successful migration during the quarter of relevant marketing and distribution activities for two of the group’s three affected joint ventures, Qatar Fuel Additives Company Limited QSC (“Qafac”) and Qatar Fertiliser Company SAQ (“Qafco”), to Qatar Chemical and Petrochemical Marketing and Distribution Company QJSC (“Muntajat”), the commencement of commercial operations at Qatar Steel’s Saudi Arabian associate, SOLB Steel Company, in December 2012, and the recent approval by the Board of Directors of the first elements of the group’s 10-year growth strategy.”
SOLB Steel Company (formerly known as “South Steel Company WLL”).
The group’s wholly-owned steel subsidiary, Qatar Steel, has a 31.03% interest in a Saudi Arabia-based company, SOLB Steel Company (“SOLB Steel”), which is constructing a steel facility in Jazan Economic City to produce billets, re-bar, and associated products, like epoxy coated bars.
“Saudi Arabia has founded a number of economic cities as part of an economic and social development program, and to assist the Kingdom’s further regional and industrial diversification. Jazan Economic City will offer substantial employment opportunities and is expected to be a major source of economic growth for the southwest region of Saudi Arabia. Industries Qatar and Qatar Steel are pleased to be part of this economic development story,” confirmed H.E. Dr. Al-Sada.
Commenting on the significance of the Saudi Arabian investment, Mr. Al-Shaibi added, “The group’s investment in Saudi Arabia is significant for a number of reasons. Firstly, Saudi Arabia is our largest, steel export market, and any investment that strengthens our position in this large, growing market is critical. Secondly, our steel subsidiary has secured an offtake agreement with SOLB Steel whereby Qatar Steel will supply up to 600,000 MT/PA of DRI. This will provide an assured market to Qatar Steel allowing it to operate its direct reduction facilities at full utilisation. Lastly, and most importantly, this investment, along with Qatar Steel’s Algerian joint venture, exemplifies the operator model Industries Qatar is seeking to replicate across all of its businesses. Qatar Steel currently operates the region’s oldest integrated steel mill, and one of the most profitable of its kind in the world. This operational and technical experience in steel making and re-bar production can be replicated and monetized for the benefit of countries with developing steel industries.”
SOLB Steel is the sole steel mill in the southwestern region of Saudi Arabia, with its nearest competitor approximately 700 kilometres away.
The company expects to cost effectively fulfill demand in the southern provinces of Saudi Arabia in response to the government’s significant investment in housing and infrastructure.
In addition to this, the close proximity to Yemen and East Africa provides significant opportunities for developing and penetrating into new export markets.
The Board of Directors in their first meeting of 2013 approved the initial elements of the group’s new 10-year growth strategy. H.E. Dr. Al-Sada remarked, “Over the previous 10 years, Industries Qatar has grown exponentially. From the group’s first full year of operations to date, net profits have grown at a compound annual growth rate of over 16% per annum.
The Board of Directors is determined to continue this growth story in a reasoned and responsible manner, and we firmly believe that a new 10-year growth strategy and action plan is required to deliver this.”
Mr. Al-Shaibi added, “The need for growth is clear; one of IQ’s critical mandates is to ensure Qatari nationals continue to benefit from the State’s abundant gas reserves, and the generous dividend distributions of the last 10 years were largely built on organic growth opportunities fuelled by the availability of competitively priced natural gas. With the Board’s desire for continued growth and the current dearth of domestic investment opportunities, viable and profitable alternative growth options needed to be assessed.
“Following the completion of further analysis and subsequent Board approval, additional details of the strategy and action plan will be released; but, the following can be confirmed at this point: IQ will aim to maximise the value of the group’s current domestic assets by further improving operational efficiency and expanding into easy, adjacent products. Beyond Qatar, the strategy envisages the IQ group replicating its successful operator model internationally, through both organic growth and opportunistic acquisitions. Finally, the group will actively consider selective diversification into specialised products, supported by the usage of cutting-edge technology.”
The strong year-on-year financial results can be primarily attributed to strong sales volumes following the launch of the group’s new facilities in the petrochemical and fertiliser businesses, moderate price inflation and strong EBITDA margins in all segments.
Elaborating on the group’s first quarter financial performance, Mr. Abdulrahman Ahmad Al-Shaibi, Chief Coordinator, Industries Qatar, confirmed, “This quarter’s results are the first since the enactment of a new international accounting standard, IFRS 11 Joint Arrangements, which requires the group to consolidate the results of its joint ventures, Qatar Petrochemical Company Limited QSC (“Qapco”), Qatar Fuel Additives Company Limited QSC (“Qafac”), and Qatar Fertiliser Company SAQ (“Qafco”), as single line items in the consolidated statements of income and financial position. Practically, this means, for example, that the group’s reported revenue will now consist solely of sales from the wholly-owned subsidiary, Qatar Steel Company QSC.”
Reported revenue for the three months ended March 31, 2013 was QR1.7bn, a decrease of QR0.07bn, or 4.2%, on the restated results for the same period of 2012 (2012, Q1: QR1.7bn); however, on a like-for-like basis under the previous accounting standard, reported revenue would have been QR5.3bn, an increase of QR0.9bn, or 21.1%.
Petrochemical revenue for the first quarter of 2013 was QR1.3bn (2012, Q1: QR1.0bn), a year-on-year positive variance of QR0.3bn, or 30.2%. The segmental performance can be primarily attributed to significantly-improved sales volumes following the commercial launch of the group’s third LDPE plant in the third quarter of 2012, and weak fuel additive comparatives.
LDPE sales volumes increasing by 51,000 MT, or 64.1%, versus the corresponding period of 2012 as LDPE-3 production ramped up to average 95% in its second full quarter of operation. Production levels were also assisted by the low number of shut-down days during the period (2013, Q1: 11 days), resulting in a creditable overall LDPE utilisation rate of 104%.
The group’s methanol and MTBE plants operated without incident during the quarter (2013, Q1: 0 days), with the MTBE plant having now completed a record 401 days of continuous operation without interruption, in contrast to the first quarter of 2012 where 69 days were lost to maintenance shut-downs. Utilisation rates in the fuel additives business averaged a noteworthy 95% and 113% during the quarter for methanol and MTBE respectively (2012, Q1: 69% and 61% respectively).
Price inflation across the segment contributed only QR0.06bn to the segmental year-on-year performance.
“Petrochemical prices remain generally weak with most product prices down on the same period of 2012,” elaborated Mr. Al-Shaibi.
“LDPE and LLDPE are notable exceptions; prices steadily improved from a June 2012 low, benefitting from short supply from the Middle East and Asia due to maintenance shut-downs / reduced production levels on high input costs, coupled with strong demand from core Asian derivative markets.
“It is worth noting that the prior year revenue of Qapco has been restated as the company has also been impacted by the enactment of the new accounting standard, IFRS 11 Joint Arrangements. This standard has resulted in the company’s share of results from its joint ventures, Qatofin Company Limited QSC (“Qatofin”), Qatar Vinyl Company Limited (“QVC”) and Qatar Plastic Products Company WLL (“QPPC”), being consolidated into a single line in the statement of comprehensive income, in a similar manner to IQ.”
The fertiliser segment closed the quarter with revenue of QR1.9bn, up QR0.6bn, or 49.4%, on the first quarter of 2012. The segment’s positive quarterly performance was due almost exclusively to incremental sales volumes following the commercial launch of Qafco 5 and 6 during the second half of the previous year, as price movements contributed only QR0.07bn to the year-on-year positive variance. Urea sales volume increased significantly on the first three months of 2012 by 59.3% as the new plants successfully ramped up to average utilisation rates of approximately 100%.
The majority of the incremental fertiliser volume continued to be sold to two of the group’s largest markets, North America and the Indian sub-continent, underscoring the importance of those regions to the segment’s future sales and marketing strategy.
First quarter revenue was up on the previous quarter by QR0.5bn, or 40.4%, following the resumption of normal operations after extensive, routine shut-downs in the fourth quarter (ammonia: 26 days, urea: 18 days).
The total of 10 days lost to minor downtime in the current quarter had a negligible impact on quarterly utilisation, as the company registered rates of 97% and 99% for ammonia and urea respectively.
First quarter steel revenue was QR1.7bn, a decrease on the same period of 2012 of QR 0.07bn, or 4.2%. Over this period, total production moderately increased: DRI / HBI inventory levels were raised in anticipation of the commercial launch of EF5 in the second half of 2013, and re-bar volumes improved in response to strong domestic demand. Key product prices, however, were noticeably down as low iron ore prices and high volumes of re-bar imported into the region impacted local prices. As such, the segment recorded a negative year-on-year price variance, of -QR 0.1bn, with DRI / HBI and re-bar experiencing price deflation of 8.2% and 6.7% respectively.
Versus the previous quarter, reported revenue jumped by QR0.3b, or 25.8%, as production rebounded from a cumulative 140 days of maintenance down-time across the subsidiary’s various direct reduction, electric furnace / continuous casting and rolling mill units. In contrast, total lost days across these units in the first quarter was only 40 days, leading to significantly improved DRI / HBI and re-bar utilisation rates of 110% and 115% respectively.
Commenting on the group’s first quarter net profit, Mr. Al-Shaibi said, “The group recorded first quarter earnings of QR2.5bn, a significant QR0.8bn improvement on the previous quarter, and one of the highest quarterly results on record.
Although this result may not be fully indicative of a new ‘normalised’ profit level following the commercial launch and ramp-up of the group’s major CAPEX projects last year, it does provide positive indications of the group’s profit-earning potential coming as it does on the back of muted product prices and tighter petrochemical and fertiliser operating margins.
“It is also worth noting that the transfer of relevant distribution and marketing operations of Qafac and Qafco to Muntajat that occurred during the quarter had a negligible impact on the year-to-date results due to the limited period since the transfer.”
EBITDA for the three months ended March 31, 2013 was QR2.6bn, an increase of QR0.6bn, or 32.3%, on the same period last year.
“Higher sales volumes following the commercial launches of Qafco 5, 6 and LDPE-3, weak prior year comparatives due to extended fuel additives shut-downs in 2012, and heightened steel production in response to robust domestic demand, collectively contributed QR0.6bn to the year-on-year profit improvement,” continued Mr. Al-Shaibi.
“The group also benefitted from moderate price inflation across its suite of key products, with higher prices adding QR0.2bn to the positive variance to last year, and improved operating results at one of the group’s steel associates as well as at a subsidiary of the group’s fertiliser joint venture, which together added a further QR0.07bn to the positive year-on-year performance.”
EBITDA was impacted by a number of other factors, most critically the revision to certain feedstock contracts within Qafco.
Providing further details, Mr. Al-Shaibi elaborated, “Qatar Petroleum exercised an option under the long-term natural gas supply and purchase agreements for Qafco’s trains 1 to 4 to revise the pricing formula for a new two-year term ending December 31, 2014.
The full impact of the revision is subject to a number of variables, including realised urea prices and purchased natural gas volumes. The changes were effected from January 1, 2013 and were fully accounted for in the first quarter results.
“It is important to stress, however, that the cost increase was largely mitigated by gas supplied under the train 5 contract which is broadly unaffected by the changes and has a significantly lower base price,” explained Mr. Al-Shaibi.
Quarter-on-quarter, consolidated EBITDA improved by QR0.7bn, or 34.3%, largely due to improved utilisation in the new facilities, and weak prior quarter comparatives following shut-downs in all segments and a total of QR0.3bn from losses from associates, impairment charges and a one-off exceptional item recorded in the steel segment.
Net profit for the first quarter of 2013 was QR2.5bn, an improvement of QR0.6bn, or 33.6%, against the corresponding period of 2012.
Significant incremental depreciation and finance charges following the capitalisation of the new fertiliser and petrochemical assets in 2012 accounted for the additional movement in net profit vis-à-vis EBITDA. Versus the previous quarter, net profit changed in line with EBITDA.
Petrochemical EBITDA margin closed the quarter at 80.3%: down on the first quarter of 2012 by 5.3 percentage points, as higher LDPE-3 operating costs and adverse prior year adjustments (v 2012, Q1: -QR 47.6m) negated the positive impact of increased fuel additives production levels and a 77.8% improvement in Qatofin profits (v 2012, Q1: +QR 29.0m). Versus the fourth quarter of 2012, petrochemical margins grew by 3.6 percentage points broadly in line with a 7.9% surge in LDPE prices.
Year-on-year, fertiliser EBITDA margin improved by 2.9 percentage points to 66.1% as higher fertiliser production levels, the final installment of the take-or-pay liability due to Qatar Petroleum paid in the prior year (v 2012, Q1: +QR 49.5m) and the return to profitability of the joint venture’s subsidiary, Qatar Melamine Company (v 2012, Q1: +QR 21.8m), compensated for the increase in average feedstock unit cost following the revision to the natural gas supply and purchase agreement rates / incremental supply to train 5. Predictably, margin shrank by 4.0 percentage points versus the fourth quarter as the feedstock contract revision took effect from January 1, 2013.
EBITDA profitability in the steel segment rose from 27.4% in the first three months of 2012 to 35.6% in the same period of 2013 due to the accumulative effect of lower iron ore costs, a superior sales mix, enhanced results from associates (v 2012, Q1: +QR 49.0m) and significant by-product sales (v 2012, Q1: +QR25.6m) in the current year.
The substantial quarter-on-quarter margin recovery of 28.1 percentage points can be substantially attributed to the poor prior quarter results which saw a total of QR 0.3bn from losses from associates, impairment charges and a one-off exceptional item.
The total planned down-time scheduled for the second quarter of 2013 as per the group’s approved 5-year business plan (2013 to 2017), with prior year comparatives, is as follows:
- LDPE: 0 days (2012, Q2: 7 days);
- LLDPE: 21 days (2012, Q2: 0 days); and
- DR, EF / CC, RM: 33 days (2012, Q2: 101 days).
This shut-down schedule is indicative of current plans only, and actual downtime may vary from the budgeted plan.
Continuing, Mr. Al-Shaibi said, “The current 5-year business plan envisages accumulated capital spend, consisting of routine and non-routine CAPEX, and investments, over the period 2013 to 2017 of circa QR6bn as the group incurs initial costs related to the Ras Laffan Petrochemical Complex, completes existing major CAPEX projects, and implements a number of medium-sized upgrade, renovation and shut-down related initiatives. This budgeted capital spend is expected to increase with the determination of final construction costs for existing projects, approval of projects currently under evaluation and the implementation of the group’s 10-year growth strategy.”
Qatar Steel’s Saudi Arabian-based 31.03% associate, SOLB Steel Company (“SOLB Steel”), completed commissioning of a 1.0 million MT/PA steel melt shop and a 0.5 million MT/PA rolling mill in late 2012, with construction of a second similar rolling mill in progress and due to be completed by 2014, Q3. Commercial operations commenced in December 2012, and Qatar Steel’s total investment contribution was QR225.0m for both phases.
In Q2, 2010, the group’s steel subsidiary, Qatar Steel, commenced work on its EF5 project consisting of a QR 1.2bn green field steel melt shop built adjacent to its main facility in Mesaieed Industrial City, Qatar. The facility has a design capacity of 1.1 million MT/PA of billets and an expected commercial launch date towards the end of Q3, 2013. The original intention was for the new steel melt shop’s electric furnace to immediately replace two of the company’s existing electric furnaces, increasing the company’s net saleable billets capacity by 285,000 MT/PA. However, Qatar Steel has subsequently confirmed its intention to continue operating EF1 and EF2 for an additional two years, before decommissioning those outdated facilities in 2015.
The QR0.1bn CO2 recovery project is designed to capture over 500 MT per day of carbon dioxide produced by Qafac and utilise it in the production of methanol.
The project is expected to not only reduce Qafac’s greenhouse gas emissions, but simultaneously boost production of methanol by circa 46,000 MT/PA. When commercially launched in the second half of 2014, the facility is expected to be the region’s largest of its kind and a source of incremental profits to the group.
Qatar Steel International / Algerian Investment
Qatar Steel holds a 50% stake in a special purpose vehicle, Qatar Steel International QPSC (“QSIC”), which in turn has a 49% share in a joint venture formed with the government of Algeria and other local parties established to develop a 2.0 million MT/PA integrated steel mill in Algeria.
Elaborating on the latest developments, Mr. Al-Shaibi confirmed, “A shareholders’ agreement was signed with the Algerian government on March 24, 2013 following the signing in January of a conditional joint venture agreement. The formation of the joint venture entity is due to be completed before the end of the year.
“The first phase of the project envisages a direct reduction plant, steel melt shop and rolling mill being built at an estimated cost to Qatar Steel of QR0.5bn, with a commercial launch date of 2017.”
Ras Laffan Petrochemical Complex
With regards the new QR18.2bn Ras Laffan petrochemical complex in which IQ has a 16% stake and is expected to significantly boost ethylene (224,000 MT/PA) and LLDPE (69,000 MT/PA) production, and add HDPE (136,000 MT/PA) and polypropylene (122,000 MT/PA) to the group’s product list, Mr. Al-Shaibi commented, “Following the signing of a heads of agreement with Qatar Petroleum in the early part of 2012, and subsequent appointment of Qapco as project manager and completion of an initial feasibility study, the project is progressing to the front-end engineering design phase and selection and appointment of technology provider.
“The project is on track with a tentative commercial launch date of 2018. No changes to the product list, shareholder names or participation are under consideration. The petrochemical complex, which includes a world-scale steam cracker, remains an important part of IQ’s growth and diversification plans for the latter part of the decade.”
Significant Distribution and Marketing Changes
On November 22, 2012, Decree Law number 11 of 2012 was published in the Official Gazette mandating a new, wholly owned company of the government of the State of Qatar, Qatar Chemical and Petrochemical Marketing and Distribution Company QJSC (trading as “Muntajat”), with the exclusive rights to purchase, market, distribute and sell the State of Qatar’s production of chemical and petrochemical regulated products to the global market.
Accordingly, Industries Qatar’s activities related to the marketing, distribution and selling of all of the group’s products, with the exception of the group’s steel products, will be progressively migrated to Muntajat.
The Decree Law was effective from November 4, 2012 and Muntajat’s operations commenced in Q1, 2013.
Commenting further, Mr. Al-Shaibi added, “During the first quarter, two group companies, Qafac and Qafco, transferred relevant distribution and marketing operations to Muntajat. All other affected group companies are expected to transfer relevant distribution and marketing operations during the second quarter of 2013.”
Significant Financial Reporting Changes
In May 2011, the International Accounting Standard Board issued IFRS 11 Joint Arrangements which superseded IAS 31 Interests in Joint Ventures, and is mandatory for annual periods beginning on or after January 1, 2013.
In previous years, the company accounted for its interests in joint ventures using proportionate consolidation, which allowed the company to consolidate its proportionate share of each line of the joint ventures’ financial statements in accordance with IAS 31 “Interests in Joint Ventures.”
IFRS 11 requires a joint venturer to recognise its interest in a joint venture as an investment and should account for that investment using the equity method.
The company has determined that with the adoption of IFRS 11, its interests in Qapco, Qafac and Qafco will meet the criteria for a joint venture. Accordingly, from January 1, 2013, on adoption of IFRS 11, Industries Qatar will account for its interests in the above companies using the equity method.
The equity method of accounting requires Industries Qatar to present the carrying amount of its investments in joint ventures as a single line item in the statement of financial position, and its share of the joint ventures’ net income as a single line item in the statement of comprehensive income. This change in accounting policy will not affect previously reported net income and shareholders’ equity, but will affect most other line items in the statement of financial position, statement of comprehensive income and statement of cash flows.
With respect to concerns expressed regarding the application of the new method of accounting and its impact on financial disclosure within Industries Qatar, Mr. Al-Shaibi stated, “Firstly, I have to confirm that the change in the method of accounting for our interests in our joint ventures Qapco, Qafac and Qafco is mandatory, and not an issue of management choice: as a company listed on the Qatar Exchange we are required to adhere to International Accounting Standards and, after receiving professional advice, those standards mandate this change. Management of Industries Qatar does not have the leeway to opt-out.
“Secondly, management remains committed to openness and transparency. Our investor relations team has engaged with shareholders and investors to discuss ways in which to maintain, or even enhance, the group’s historical commitment to full disclosure. It is not our intention to use this change to roll-back the improvements made over the last two or so years.
“Finally, the Board of Directors approved the release of notes to the interim condensed consolidated financial statements for the period ended March 31, 2013. Those notes include a detailed breakdown of performance by company and, in conjunction with the enhanced quarterly trading statement, therefore provide greater insight into the group’s overall performance. Further enhancements are currently under consideration and, subject to approval, will be unveiled in due course.”
In conclusion, H.E. Dr. Al-Sada remarked, “As the company’s market capitalisation reaches the benchmark QR100bn level, we reiterate our belief in the prosperous and exciting future awaiting Industries Qatar: the current financial year is expected to be the first full year of operation for over QR12.8bn of new production facilities in all segments, and is expected to also witness the launch of SOLB Steel’s second rolling mill, and Qatar Steel’s EF5 facility. In addition, we intend to start implementing the first elements of the group’s 10-year growth strategy following its recent approval by the Board of Directors. In conjunction with the resolute first quarter results, and subject to favourable economic conditions, these factors should drive the group to a successful and profitable year.”
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