Sabic's second-quarter profit misses analysts' estimates

Saudi Basic Industries Corp's second-quarter profit missed analysts' estimates as falling revenue and lower product prices slowed income growth at the world's biggest petrochemicals maker.

A view of the headquarters of Saudi Basic Industries Corp (SABIC) in Riyadh January 20, 2009. SABIC, one of the world's largest chemical firms, saw profits nearly erased in the fourth quarter due to the global slowdown, saying it would shut plants and cut jobs. REUTERS/Fahad Shadeed (SAUDI ARABIA)
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Saudi Basic Industries Corporation (Sabic) increased net profits in the second quarter, but failed to meet analyst forecasts as the world's largest producer of petrochemicals was exposed to a subdued market, with economic woes in Europe and slower growth in China dampening demand.

Sabic's profits rose by 14 per cent to 6.04 billion Saudi riyals (Dh5.91bn). Revenues declined by 3.2 per cent compared with a year earlier.

"The increase in net income is attributable to a decrease in cost of sales and financial charges, despite reduced revenues due to lower sales prices for certain products," the company said in a statement on the Tadawul, the Saudi stock exchange.

Sales dropped on lower demand in China and Europe, Sabic's chief executive, Mohamed Al Mady, said yesterday.

"Growth in China decreased... and this is affecting our profits," he said, adding that he expected a "positive" second half of the year and overall "profits of this year similar to last year's".

Sabic missed the average earnings estimates of analysts sampled by Bloomberg and Reuters. Some analysts ascribe this to the predictions being made in advance of earnings statements of Sabic's subsidiaries, which were below expectations.

With prices lower than foreseen, the company could not expand its profit margin further.

Results in the third quarter should surpass the latest results, said Sriharsha Pappu, an analyst at HSBC.

"Prices have started to pick up. The current quarter is at the bottom of the pricing cycle," he said.

Sabic shares closed at 93.5 Saudi riyals yesterday, up 1.36 per cent.

The company's share's have advanced by 5 per cent this year, compared with a Tadawul average of 13 per cent.

Sluggish demand in Europe led Sabic to announce in April it would slash more than 1,000 jobs and close some of its assets on the continent.

The same month, Mr Al Mady reiterated that the company was interested in expanding its business in the US.

Sabic bought General Electric's plastics unit in 2007 for US$11.6 billion.

A market leader in basic petrochemicals, the company, which is majority state-owned, is seeking to broaden its footprint further downstream with the production of more complex products.

It is also keen to increase its market share in the US, where production costs have been slashed by the shale gas revolution, which has brought feedstock prices crashing down.

After new extraction techniques vastly increased the amount of natural gas produced in the US, the domestic petrochemical industry is predicted to threaten Sabic's market position, which is built on cheap feedstock allocations by the Saudi government.

By becoming part of the US petrochemical revival, Sabic can head off this threat.

With company debts low and a slew of new cracker projects under way in the US, Sabic's growth in North America will likely be through the purchase of existing assets, said Mr Pappu. "They have the financial firepower for an acquisition."

Sabic is also under pressure to grow the downstream industry in its native Saudi Arabia, where the government regards industrial expansion as key to its efforts to tackle high rates of unemployment.

Companies such as Tasnee are already active in plastics production in the kingdom. A focus on production in Saudi Arabia could come into conflict with maximising shareholder value, analysts say.

* with agencies