Petrochemical companies in Saudi Arabia will have to weather continued soft demand and potentially begin right-sizing as they await greater economic recovery, Riyad Capital said in its Q1 2024 equity preview report.

“We maintain our uncertain-to-negative outlook in the short term for H1 2024. Moreover, Q1 2024 is estimated to receive the first wave of the effects from Saudi Aramco’s previously announced price hikes of methane and ethane,” the report said.

Petrochemical prices experienced a slight recovery in the first quarter on average, with many end-products having marginal growth or traded flat quarter-on-quarter (QoQ), such as polypropylene (+1%) and low-density polyethylene (+5%).

Despite this, we believe that Q1 24 will have muted performance, especially on gross margins, on the back of higher feedstock prices, such as propane and butane.  

With the current geopolitical uncertainty in the Red Sea, driving up shipping rates in Q1 2024, 2024 will experience more headwinds than potential tailwinds in H1 2024, Riyad Capital said.

In Q1 2024, feedstock price increases continued, with naphtha, propane, and butane increasing QoQ by 4%, 3% and 3%, respectively.

“We firmly believe these steady price increases of feedstock will further increase pressure on margins for major petrochemical producers.”

In addition, margins will be under continued pressure, driving profitability to decline by -114% year on year, the report stated.

According to the brokerage, Saudi Basic Industries Corporation (SABIC) is expected to report an 84% drop in its Q1 2024 net profit to 106 million Saudi riyals ($28.26 million), compared to SAR 657 million in Q1 2023.     

(Editing by Brinda Darasha;