Europe a concern for Gulf petrochemicals

Sharp sell-off drags down Saudi firms after strong start

Those worried about how the European economic crisis will affect Gulf companies should note the performance of Saudi petrochemical stocks. After a strong start to the year, Saudi petrochemicals companies led the kingdom's Tadawul All Share Index lower on Saturday and yesterday. The heavyweight petrochemicals Tadawul All Share Petro Index has fallen 5 per cent over the past two days.

The sharp sell-off affecting some of the region's biggest chemicals producers, including Sabic Basic Industries and its affiliate Saudi Kayan, reflected concerns that Europe's debt crisis could cut global demand for oil and derivative products. "All this put a lot of pressure on the world economy and the oil price," said Abdullah bin Hamad al Attiyah, the deputy prime minister and energy minister of the OPEC member Qatar.

Crude dropped on Friday to a three-month low. The main futures contract on the New York Mercantile Exchange settled at US$71.61 per barrel. US crude has fallen 18 per cent since hitting a 19-month high of $87.15 on May 3. Its retreat has been accompanied by a dramatic weakening of the euro against the US dollar, triggering concerns that the European currency could implode. That would make oil and other internationally traded commodities, including chemicals, much more expensive for European importers, lowering demand. At the same time, Europe could be dragged back into recession, putting further downward pressure on global demand for basic commodities including fuel and plastics.

Petrochemicals producers in the Gulf states could lose their competitive edge over rivals in Asia and elsewhere. That is because lower oil prices reduce the cost of naptha, an oil-based feedstock, for petrochemicals companies that purchase most of their feedstock on the international market. Saudi producers and others in the GCC, however, benefit when oil prices are high thanks to subsidised domestic naptha supplies. The subsidies shrink as prices fall.

That means the Gulf's big chemicals producers could suffer badly from a global economic setback. Last month, Kuwait's Global Investment House identified changes in the outlook for world economic recovery as the main risk associated with the GCC petrochemicals sector. At the time it was bullish on the stocks, due to expectations that petrochemicals demand in Europe and the US would accelerate. How quickly the world turns.