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Global Economic Weakness Weighs On Saudi Petchems

Saudi petrochemical and refining companies traded on Saudi Arabia�s Tadawul stock exchange have been hit by slower global economic growth, with most reporting lower 2Q12 earnings. This has impacted share prices, although these have started to edge up from the lows they hit in July, reports Melanie Lovatt.

Saudi Arabia�s benchmark index, the Tadawul All Share Index (TASI), was helped to its highest level in three and a half years in April by strength in petrochemical and refining equities. But gains were erased and they also pushed the TASI down to a six-month low at the end of June. The TASI has since edged up and ended trading on 1 August at 6,892.62 points, its highest close in almost two months.

Most of the 14 companies in the sector saw lower profits or increased losses in 2Q12 compared with year-ago levels (see table). Market heavyweight Saudi Basic Industries Corporation (SABIC) was hit by the continuous slowdown in global economic growth, especially in Europe, China and North America. This negatively impacted petrochemical product prices, said the world�s biggest petrochemical producer by value, with this explanation echoed in many of its compatriots� earnings statements.

Saudi Petrochemical/Refining Trading And Financial Data 

Source : Adapted from Tadawul Data.

* P/E is a ratio of share prices compared to earnings. Based on four quarters of financial data to 2Q12, M=minus ratio due to losses.

While earnings have slipped, Saudi petrochemical companies are nevertheless performing better than many of their global competitors given that the industry is based on gas feedstock priced at $0.75/mn BTU, which is one of the cheapest rates in the world. This has allowed many of the petrochemical producers to stay in the black, and some recently distributed dividends. SABIC gave shareholders a SR6bn ($1.6bn) dividend, while SAFCO gave them SR1.5bn ($400mn) and Sipchem SR183.3mn ($49mn).

Impact Of Crude Prices

The main reason petrochemical prices have fallen is because they track crude oil prices. OPEC Basket crude went from around $122/B in March to under $95/B in June (although it edged back above $100/B last week) on Europe�s economic slowdown and stilted growth in the US, with China also showing signs of a slowdown. Ethylene prices were off 14% year-on-year in the second quarter, in tandem with a 9% fall in Brent crude, said Riyad Capital in a July report.

Global prices of petrochemicals and polymers are set by the economics of naphtha cracking, and the naphtha price tracks crude oil. �All other things being equal, the prices of ethylene and polyethylene go up and down with� the� price� of� oil,�� said� one� expert.� He� explained� that� he prices need to allow marginal producers in Europe and Asia based on naphtha feedstock to cover their production costs. Operations based on fixed price low cost ethane will make even more money on higher crude prices, because this will be reflected in the polyethylene and ethylene prices. �At $95/B crude, these [Saudi] plants are making a lot of money. They�re just not making as much money as when the crude price is $110/B,� he said. However, he cautioned that while SABIC enjoys a low cost feedstock advantage at home, its naphtha based units in Europe and China could be �struggling for profitability.� Furthermore, SABIC�s fertilizer subsidiary, SAFCO, was unable to fully capitalize on robust second quarter urea prices, which are up 23% year-on-year, due to plant shutdowns, said Riyad Capital. Urea prices reached $620/ton in June, their highest level in more than three years, noted the Riyadh-based investment bank.

Petrochemicals Outlook

The petrochemicals outlook is difficult to forecast, given that there are so many economic uncertainties. The ongoing Eurozone crisis still represents a real threat to global economic growth. However, some are more concerned about Eastern markets. �China is the demand engine and it is seeing some slowing,� said the petrochemicals expert. The International Monetary Fund (IMF) revised down its 2012 economic forecast by 0.1%, predicting 3.5% growth in 2012. It put the 2013 forecast down 0.2% to 3.9% (MEES, 23 July). However, Riyad Capital sees petrochemical demand improving in the fourth quarter, suggesting that �traces� of this trend are already becoming apparent.

Meanwhile, Saudi Aramco/Sumitomo�s petrochemical venture Petro Rabigh blamed its losses on depressed refining margins, particularly for naphtha. Earnings improved from 2Q11, which was hampered by the shutdown of its refining and petrochemical complex for maintenance, but it nevertheless failed to meet expectations. Riyad Capital said that the Petro Rabigh II project, which is finally going ahead after a long delay, �provides the best hope to fix company operational and financial troubles.� Petro Rabigh II is an expansion to the existing $9.8bn, 2.4mn tons/year operation, and will allow the company to increase profit margins through production of value-added petrochemical products. Sponsors Saudi Aramco and Japan�s Sumitomo have started to award engineering, procurement and construction (EPC) contracts for the project (MEES, 30 July). Saudi Aramco is also setting up Sadara, a $20bn, 3mn t/y petrochemical project in partnership with the US�s Dow Chemical. The two partners are now evaluating bids from banks planning to provide funds to the project.

SABIC is also expanding by setting up a $3.4bn Kemya specialty elastomers project at its existing site in Jubail with partner ExxonMobil. When completed in 2015, it will produce 400,000 t/y of rubber, including halobutyl, styrene butadiene, polybutadiene, and ethylene propylene diene monomer (EPDM), thermoplastic specialty polymers and carbon black to serve local markets in the Middle East and Asia (MEES, 16 July). The project is part of the kingdom�s �cluster� strategy which aims to boost growth and diversify manufacturing in the kingdom. In Kemya�s case, development of an automotive industry is in focus. Officials from the two companies were joined by Prince Saud ibn 'Abd Allah bin Thunayan al-Saud, Chairman of the Royal Commission for Jubail and Yanbu�, when they formally unveiled the project on 31 July.

© Copyright MEES 2012.