The UAE petrochemicals industry continues to enjoy growth despite facing headwinds in China andEurope but will face an increasingly competitive market as Chinese capacities are ramped up, accordingto BMI?s latest USE Petrochemicals Report.Abu Dhabi-based petrochemicals producer Borealis reported a strong quarter in Q211, overcoming theslowdown in market growth that was set to continue through H211. Its net profit reached EUR168mn,bringing its total for H111 to EUR341mn, up 133.6% y-o-y. Q211 was impacted by continued highvolatility in feedstock prices, leading to lower profit by Borealis? polyolefins business compared to Q111and Q210. The base chemicals business continued the strong performance of Q111, driven by a highmargin environment, improving the results compared to Q210. It reported that its European markets werevolatile, particularly the construction sector. However, this was mitigated by strong growth experiencedby its customers in the automotive sector in Germany and China.The UAE?s petrochemicals sales could come under pressure from a moderation in Chinese demandgrowth. Most Chinese petrochemicals imports declined in June as monetary policy tightened and pricesrose. Power shortages have also contributed to the weakness in Chinese petrochemicals demand. Ofnotable concern for UAE exporters is the decline in PE and PP imports. HDPE imports fell 4% y-o-y to234,000 tonnes, LLDPE fell 3% to 147,000 tonnes and PP fell 12% to 268,000 tonnes. Meanwhile,China?s exports of most petrochemical products have been rising in the past months, supporting the viewthat domestic demand is weak, although the volume of shipments remained small compared to imports.The decline in Chinese imports and narrowing of the petrochemicals trade surplus is also related to anincrease in domestic capacities as the country strives to improve self-sufficiency. BMI has warned in thepast that the UAE will face an increasingly competitive Chinese market an

We continue to be concerned by the state of the shipping industry. Container shipping companies arestruggling to push through rate increases and liquid and dry bulk operators are contending with some ofthe lowest daily returns in years. The cause is overcapacity, which looks unlikely to ameliorate any timesoon. Furthermore, there are fresh challenges on the way, including the mega ships being built by Valeand Maersk Line. Global air freight is struggling, but the Middle East is one region that is faring betterthan most. The UAE in particular is seeing growth on the back of the new al-Maktoum InternationalAirport, which is connected to Jebel Ali by the Dubai Logistics Corridor.Headline Industry Data2011 Jebel Ali and Port Rashid total tonnage throughput growth forecast at 6.7%, and to average6.0% to 2015.2011 air freight tonnes through Dubai airport forecast to grow by 0.5% and average 4.3% to2015.The UAE's total trade real growth in 2011 forecast to be 8.6%, and to average 7.6% over themedium term, to 2015.Key Industry Trends10% Growth For Gulf's Logistics SectorThe Arabian Gulf's logistics sector has seen 10% annual growth. The region has become a major hub forinternational logistics, particularly as a result of conscious decisions by areas such as Dubai to placethemselves at the heart of international trade flows. Much of the growth in the sector is from third partylogistics providers, which support the operations of more established firms. Revenues from the UAE'slogistics market are expected to hit US$9.4bn by 2014 according to a report from Frost & Sullivan,released in May. The growth is led by the new al-Maktoum airport, and the Dubai Logistics Corridor thatconnects the facility with DP World's Jebel Ali port.New Abu Dhabi-Frankfurt Service Example Of Middle Eastern Air Freight ExpansionEtihad Crystal Cargo, the cargo wing of Abu Dhabi-based Etihad Airways, has begun a new servicewith the new freighter aircr

With data hard to come by, assessing the state of the UAE consumer is not always clear-cut. Leadingup to 2009, the economy was booming, and the real estate market was in overdrive. High-spendingexpatriates flocked to Dubai, creating a fantastic platform for anyone involved in the premiumiseduniverse. Most of this momentum came to a grinding halt during the global financial crisis and stillremains quite a way off the pre-crisis peak. As a result, high-spenders might not be as confident abouttheir wealth as they were before the crisis. We note, however, that at the top end of the market, thereare likely to be consumers in Dubai and Abu Dhabi who are still spending quite freely.Headline Industry Data?? 2011 per-capita food consumption growth in local currency = 2.07%; forecast compoundannual growth to 2015 = 3.08%?? 2011 soft drinks value sales = 3.67%; forecast compound annual growth to 2015 = 4.74%?? 2011 mass grocery retail sales = 6.76%; forecast compound annual growth to 2015 = 7.72%Key Company TrendsWestern Restaurants Playing A Big Part In Casual-Dining Takeoff: Casual dining and fast-foodrestaurants have become increasingly popular across the Gulf region over the past decade. A host ofthese restaurants have sprung up as richer consumers and a strong eat-out culture drives growth.Based in Kuwait, Americana Group is one of the leaders in bringing Western food to the region. It isthe franchise partner for a number of American food companies including KFC, Pizza Hut (bothowned by YUM! Brands) and TGI Fridays, and UK company Costa Coffee.Retailers Targeting Convenience Growth: Convenience stores are becoming more important in theUAE, especially those that are modern, focused on fresh food and neighbourhood-specific.Convenience stores in the UAE traditionally have been add-ons to petrol stations and focused onbasics rather than fresh food. This is changing, with retailers such as Carrefour investing in thesector.Risks T

For investors looking to limit their risk exposure, we recommend entering the banks in the MENA region as a holding in a global portfolio. Given their different risk-return profile, we see the MENA banks complimenting European and US banks. At this stage European and US banks carry more short term risk but the valuations are at severe discount, while valuations for the MENA banks are richer but with high quality loan books and very limited downside.

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