INSIGHT: SABIC results highlight price pressure not volume demand

17 October 2012 23:24  [Source: ICIS news]

By Nigel Davis

HOUSTON (ICIS)--It is telling that after nine months of 2012, SABIC’s net profits are down 21%. On a third quarter to third quarter basis, they are down 23%.

And while SABIC’s performance may not prove to reflect totally that of a broader set of petrochemical producers, the numbers highlight the pressure on prices in the first three quarters of this year relative to 2011.

Petrochemical prices have fluctuated as quantitative easing has worked to push up the cost of oil. Subsequent corrections in the crude price have forced petrochemical prices down. What the SABIC numbers do not show is the pressure on demand for key derivatives in many parts of the world.

SABIC did not talk much about volumes in its brief note to the Saudi stock exchange on Wednesday. “The decrease in net income for the nine months period ended September 30, 2012 compared to the same period in 2011, is due to lower product pricing, despite increased production and sales volumes,” it said.

Net income in the third quarter of this year was up compared with the second quarter driven by increased production volume “due to improvement in operational efficiencies,” it added. “In addition, other income includes income from the polycarbonate technology licensed by SABIC Innovative Plastics to the Tianjin project, which is equally owned by SABIC and China Petroleum & Chemical Corporation.”

SABIC is in the enviable position of being able to produce efficiently based on low cracker feedstock and energy costs but it still suffers, in a relative way, when product prices fall. Other producers are likely to have been hit much harder in the most recent quarter by lower volumes compared with a year ago and in the first nine months of the year.

Looked at on a largely downstream European chemical company perspective, the quarterly earnings momentum remains “to the downside”, analysts at investment bank Credit Suisse said on Tuesday.

“[The] outlook for H2 [the second half] flat on H1 [the first half] is starting to look optimistic as demand appears further at risk,” it said. There has been little reported improvement on quarter on quarter trading across the entire sector.

The bank’s main concerns have to do with building inventories in the automobile sector, slower growth in Asia, the general lack of forward visibility and the industry’s propensity to spend on capital projects even when times start to look much worse.

On the sidelines of the recent European Petrochemical Association (EPCA) meeting in Budapest, Hungary, many chemical players were talking of relatively lacklustre third and fourth quarters in 2012.

Upstream players displayed more optimism for an upturn, possibly starting in the second quarter of 2013. Others, including some downstream players, were less confident pushing the timescale for a return to healthier growth out to the second half of next year.

An example is US specialities maker Chemtura, which said it had not seen the recovery in demand in the second half of 2012 that it had hoped for.

“We planned to have a recovery this year in the third quarter - we’re just not seeing that. Demand didn’t come back," said Chet Cross, Chemtura executive vice president, group president, engineered & performance industrial products.

“I think for a volume perspective, what I am hearing is [2013] will be pretty much like 2012,” he added. “There may be a pickup in the third, fourth quarter but certainly not the recovery that we thought we would see this year,” Cross said.

It is, of course, all relative, but there is not enough good news to engender a mood of optimism across the sector. The rate of growth for some products is down quite sharply, even in the once buoyant China market. US and particularly European sales volumes are under pressure. Couple that with somewhat lower product prices and there is little room for optimism.

Producers are making money but it is the feedstock, asset, product and structurally efficient that are doing best. Those with exposed product and operating profiles are finding the going particularly tough.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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