Saudi Basic Industries (Sabic) has reported a smaller-than-forecast drop in first quarter net profit, even as lower oil prices squeeze margins at one of the world's biggest petrochemical makers.
Net profit at the Saudi company declined about 39 per cent to 3.93 billion Saudi riyals (Dh3.84bn) from 6.44bn riyals in the year-earlier period, the firm said yesterday in a statement posted on the website of the Saudi stock exchange. “The decrease in net income is attributable to lower average sales prices despite the reduction in cost of sales,” Sabic said.
Profit margins are narrowing because prices for petrochemicals, including olefins such as ethylene, are linked to the price of crude, which is down to about US$60 a barrel from last June’s high of $115 a barrel. The fall followed weaker demand in Europe and Asia and a supply glut sparked by the United States shale oil boom.
Sabic can utilise cheap gas as its feedstock and this has given it a competitive advantage against European and Asian petrochemical producers that, typically, rely on naphtha.
“Sabic’s profit in general was better than expected. We were expecting a decline because we are all aware the oil price has dropped significantly,” said Iyad Ghulam, an analyst at NCB Capital in Riyadh.
“We expect oil prices to stabilise around $60 a barrel. On this basis we expect the net income of Sabic to be 19 billion riyals [this year]. The main risk is if the oil price declines further, then it will be a big factor to revise down our estimates.”
The reduction in costs could contribute to better margins for the year, Mr Ghulam said.
Sabic, which is 70 per cent owned by the Saudi government, posted a 29 per cent drop in fourth quarter net profit to 4.36bn riyals and a 7.3 per cent decline in full year net profit last year to 23.43bn riyals owing to the oil price rout.
Yesterday, Sabic also said it had signed a deal to use shale gas from the US at its Teesside petrochemical plant in Britain, the first time American shale will be exported to the UK.
“In fact, we did sign the contract – we have not yet agreed with the supplier to publicly announce it, but we did firm up a contract for gas supply,” said acting chief executive Yousef Al Benyan, declining to name the supplier. “It is going to meet our full demand for the next 10 years and is renewable beyond 10 years.”
The company has previously said limited gas supplies at home have forced it to look at investment opportunities abroad.
Last year, Sabic said it planned to upgrade its Teesside cracker to capitalise on shale gas opportunities in the US.
Last week, Saudi Kayan Petrochemical, a unit of Sabic, posted a loss of 591.64 million riyals in the first quarter, versus a profit of 9.94m riyals a year earlier due to lower product prices, production and sales.
The firm’s olefins plant was shut down in February and developed technical problems in March that led to lower production and sales of products.
The oil price slump has also been felt in Qatar, where it led to the scrapping of the $6.4bn Al Karaana petrochemicals project, a joint venture between state-run energy firm Qatar Petroleum and Shell.
Gulf countries have invested billions of dollars in petrochemical projects in a bid to create downstream industries that will diversify oil income from pure energy products.
Petrochemical production in the Arabian Gulf region rose 4.5 per cent last year, the second highest growth region in the world, according to the Dubai-based Gulf Petrochemicals and Chemicals Association (GPCA).
Regional growth in chemicals output is due to an increase in plastics production, which grew 6 per cent last year – nearly twice the worldwide average – according to the GPCA. Sabic share prices closed up 9.8 per cent at 95.75 Saudi riyals yesterday.
dalsaadi@thenational.ae
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