Sabic third-quarter earnings suffer as petrochemicals margins squeezed

Sabic reported net income for the quarter of 6.18 billion Saudi riyals, down from 6.47bn riyals in the same quarter last year.

Saudi Basic Industries Corp, the largest publicly listed company in the region, yesterday said its profit suffered in the three months to the end of September, as sales slowed and margins for its petrochemical products declined.

Typical contracts for the company’s slate of products — which range from olefins such as ethylene to polymers and speciality plastics — are linked to oil prices, so have declined sharply as benchmark Brent crude prices have fallen by about 30 per cent since a midsummer high above US$115 a barrel. The slowing in global economic growth also has hit sales and margins.

The company, known as Sabic, reported net income for the quarter of 6.18 billion Saudi riyals (Dh6.05bn), down from 6.47bn riyals in the same quarter last year. Sabic's revenue for the third quarter declined slightly to 48bn riyals from 48.8bn for last year's third quarter.

Meanwhile, Sahara Petrochemical, also based in Saudi Arabia, saw its shares drop 5.6 per cent to 21 riyals after it also posted weaker third-quarter results, with profit falling to just 17m riyals from 148m riyals a year before. Production disruptions added to Sahara’s woes to depress revenue.

Speaking at a press conference in Riyadh after the results, the Sabic chief executive, Mohamed Al Mady, foresaw a rebound in oil prices because of the steady rise in global demand, but he said the timing was hard to predict because of the political and other unpredictable influences on the market.

Last week, Sabic and its partner Royal Dutch/Shell Group said they were scrapping a joint-venture project to expand an existing petrochemicals plant in Jubail on the Arabian Gulf coast, saying the results of their feasibility study were not encouraging. The plan had been to broaden the range of chemicals to the plant’s range of products.

But Mr Al Mady said Sabic continued to grow its business in China, even if consumption patterns were shifting there. The company’s Safco 5 fertilizer and its Kemya synthetic rubber projects, joint ventures with Exxon Mobil, are on track, he said.

Despite the quarterly setback, Sabic continues to be a dominant force in the sector.

“They are the cheapest petrochemicals maker on earth,” said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi. “Their break-even point is extremely low. They are making big profits, it is only a matter of margins being less strong than in the past.”

Sabic has long-term contracts for its feedstocks from Saudi Aramco. So, the decline in oil prices will not have affected its cost base. But as the naphtha-linked sales of its end products decline, it will take time to adjust and recover margins

Mr Henin said that Sabic and other petrochemicals makers would likely see further pressure on margins as the oil price continued to decline sharply into the fourth quarter.

As well as the hit from oil prices, demand may also decline. Sabic's third quarter results fell short of estimates despite the growth of its fertilizer subsidiary's 24 per cent year-on-year net income growth, said Turki Fadaak, an analyst at Al Bilad Capital in Riyadh.

“On the other hand, there was a decline in [Saudi petrochemicals company] Yansab’s Q3 net income by 20 per cent,” he said. “So, it seems that the demand factors vary among the different petrochemical products. There are concerns that the demand on petrochemicals may shrink in Q4 of this year.”

Sabic saw a steady rise in its share price from early last year to a peak this summer above 135 riyals, but the sharp sell-off in September pushed its shares down to about 108 riyals before rebounding in the last few days.

The company’s shares closed yesterday at 114.69 riyals, down 0.6% for the day.

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