INSIGHT: SABIC hit by falling prices but hopes for tighter markets

18 July 2012 17:36  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--SABIC, the first big petrochemical producer to report second quarter and half year financial results, has spelled out just how tough market conditions have become.

Routine maintenance in its fertilizers, metals and some petrochemicals plants had a negative impact on the second quarter but the 35% fall year on year in net profit for the period is really down to lower prices and margins.

The slowing global economy, and for SABIC slowed chemicals demand in Europe, China and North America, took its toll. The results came in well below analysts’ estimates but the shares hardly budged on Wednesday. The prospect of a significant slowdown across the sector in the latest reporting quarter is widely expected.

For SABIC, plastics customers particularly in the second quarter held off purchases in anticipation of lower prices, as oil tumbled in April from earlier highs. The petrochemical price impact, however, was widespread from the cracker downstream.

SABIC is among the lowest cost producers of ethylene with its large gas-fed production base in Saudi Arabia, so in the good times can produce impressive profits. As markets loosen it should also be able to hold out and maintain production while retaining a healthy profit margin.

SABIC said that its net income of Saudi riyals (SR) 5.30bn ($1.41bn) compared with SR8.10bn earned in the second quarter of 2011 and SR7.27bn in the first quarter of this year. The profits decrease between the first and second quarter of 2012 was 27%.

The first half results illustrate how the operating environment has changed in the past year. For the six months to the end of June the company reported a net profit of SR12.57bn, 20% lower than in the first half of 2011.

“The decrease in net income of the quarter ended June 30, 2012 compared to the previous quarter is driven by lower product pricing as well as lower production and sales volumes due to plant maintenance activities,” SABIC said in a statement on Wednesday.

The financial report reflects the sharp decrease in petrochemical prices in the second quarter in the major markets for petrochemicals and plastics.

The ICIS petrochemical index (IPEX), which is based on prices for 12 petrochemicals, was down 8.8% year on year for Europe in the second quarter but up 2.4% sequentially. The Americas IPEX was down 8.2% year-on-year while the Asia IPEX was down 12.1%; the Asia index was down 9.1% sequentially in 2012.

SABIC suffered somewhat from the consequences of shutdowns in the second quarter.

An extended unplanned shutdown at the Ma’aden Phosphate Company (MPC) ammonia plant at Ras Al Khair in Saudi Arabia in April, for instance, tightened the market for that product. SABIC’s Safco number IV, 1.1m tonnes/year ammonia plant was in a turnaround from 7 April which lasted more than a month with work on the ammonia pipeline at Al-Jubail.

SABIC subsidiary Jubail United Petrochemical Co had problems with its monoethylene glycol (MEG) production in the second quarter.

But it was the demand slowdown that really took its toll. To what extent that slowdown was driven for SABIC by price and how much by actual downstream demand reduction remains to be seen.

“As a result of the global economic slowdown customers seek to reduce the size of their inventory of petrochemical products in anticipation of the decline of prices for these products worldwide,” SABIC said. “This adds additional pressure on the prices of these products.

“In the third quarter, we may see the return of these customers to increase the volume of their inventories.”

The company also alluded to its strong cost position relative to almost all other players in the market.

“In addition, some high-cost producers will decrease their production levels, which helps to return back the balance in the market,” it said.

“We will be focusing on the reliability of operations to improve the operating costs and to introduce new products with higher returns from our innovation centres around the world. We expect a positive impact on the future results.”

($1 = SR3.75)

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By: Nigel Davis
+44 20 8652 3214

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