Steel making may well be the "backbone of industry" but it is hardly a bulwark of profits for the region's largest publicly traded company, Saudi Basic Industries Corporation (SABIC). Higher costs in its steel plants and petrochemicals production led to lower than expected profits at SABIC, which remains vulnerable to a new global economic slowdown.
Quarterly profit was 5.02 billion riyals, up from 1.81bn riyals in the same period last year, but lower than analysts' expectations. SABIC blamed the "decrease in the prices of major products, higher feedstock cost and higher prices of raw materials for Hadeed [its iron and steel subsidiary]products" for the weak profit report. SABIC remains likely to become the world's top chemicals company by 2015, with advanced technology that allows it to produce more diversified products than its peers.
But yesterday's results show the company and its shareholders remain exposed to downside risks in the short-to-medium term as prices for metals and chemicals fall. Prices for ethylene, a key product for SABIC, have decreased by between 15 per cent and 40 per cent in the past three months, while steel prices are down between 10 and 20 per cent. EFG-Hermes had predicted net profit of 5.52bn riyals for SABIC, while Global Investment House put it at 6.7bn riyals.
"SABIC's earnings were disappointing and well below our expectations, and at the lower end of the consensus range," wrote Scott Darling of Nomura Securities, a Japanese investment bank that had forecast a quarterly profit of 5.8bn riyals. "SABIC's results seem to be partly driven by higher costs in the petrochemical and steel businesses, which do raise some concerns over the ability of the company to manage its cost base."
SABICs' stock fell 75 halalas yesterday to 87 riyals. The stock is down 18.5 per cent since SABIC reported better than expected results for the first quarter of this year at the end of April. Mr Darling pointed out the company's steel operations do not have access to the same below-market rates for raw materials as its petrochemicals operations. This year, SABIC retook its position as the largest steel maker in the Arab world. "Although its steel business is important for the kingdom's industrialisation, it may be a drag on profitability for SABIC's other businesses," Mr Darling wrote.