Market outlook: Investors consider Middle East petchems

06 December 2013 09:45  [Source: ICB]

While some of the region’s chemical manufacturers are improving financial performance, others are struggling to return a profit

The petrochemical industry in the Arab Gulf is coming back into favour among investors after its leading players, particularly in the petrochemicals heartland of Saudi Arabia, have recorded rising sales and profits.

 

 Profits are up in Saudia Arabia, the petrochemical heartland of the Middle East

Copyright: Rex Features

Last year, in the wake of falling profits, the share index for Saudi Arabia’s 14 petrochemical companies listed on the Saudi stock exchange (Tadawul) went down while that for the exchange as a whole increased. But between the start of this year and the end of October, the index for the country’s petrochemicals sector has gone up by 12%, although below the 17% average for all shares on the exchange.

Saudi Basic Industries Corp (SABIC), which is by far the biggest petrochemicals producer among the six Arab states of the Gulf Cooperation Council (GCC), has been raising its profits after suffering narrowing margins. In 2012, on flat sales of Saudi riyal (SR) 189bn ($51bn), its net profit fell 15.5% to SR24.7bn.

In the first nine months of this year, net profit of SABIC, which is 70% state owned, was stable at SR19bn but operational profit rose 4.9% to SR32bn after an increase in volume sales backed by higher sales prices. In the third quarter, net profit was 2.5% higher than the same period in 2012 but 7% higher than in the second quarter while operational profit went up between the quarters by 14%.

SABIC’s share price on the Tadawul exchange was 12% higher in late October than its average in 2012 after dropping last year below its level in 2010.

Saudi Arabia Fertiliser Co (Safco), an ammonia and urea manufacturer in which SABIC has a 43% share, remains one of the most profitable bulk chemical companies in the Middle East with a net income last year of SR3.87bn on sales of SR4.98bn, equivalent to a margin of 78%. Nonetheless, its Tadawul share price has been only marginally higher than a year ago although it is still the most highly valued among petrochemical producers in the exchange.

However, some Saudi petrochemical producers, particularly those with recently opened new plants, have continued to struggle with heavy debts and operational problems. Saudi Kayan, which has been bringing on stream a 6m tonne/year petrochemicals complex in Jubail City since 2011, almost quadrupled its sales to SR9.5bn last year. But the net loss of the company, in which SABIC has a 35% stake, tripled to SR 72m mainly because of financial charges.

In the first nine months of this year, net losses have been cut by 40% while in the third quarter it made an operational profit of SR198m.

This improvement spurred a recovery in its shares, which slumped to a 52-week low of SR10.9 in June, only just above their intital public offering (IPO) value of SR10 five years previously. By October they had risen to SR13.65, helped by forecasts by analysts that the company could be returning a relatively substantial profit by as early as next year.

Rabigh Refining and Petrochemical Co (PetroRabigh), a joint venture between the state oil company Saudi Aramco and Sumitomo Chemical of Japan in which 25% of shares are floated on the stock market, appears to be heading for big losses this year after recording a SR811m loss in the first nine months. Last year it made a SR88m net profits on sales of SR62bn.

Since starting operations four years ago the integrated refinery and petrochemicals complex has been hit by poor refining margins. But the current losses are being blamed by the company on breakdowns in its water, steam and power utilities and maintenance work on its ethane cracker. In October the share price had slid to around SR16, below their 2008 IPO level of SR21.

Sahara Petrochemical, a olefins and polyolefins producer, announced earlier this year that it was seeking a merger with Saudi International Petrochemical (Sipchem), a privately owned holding company with a number of petrochemical subsidiaries, in what analysts saw as a move to create a business with greater critical mass.

Sahara reported a 48% fall in net profit last year to SR204m on flat sales of SR1.5bn while Sipchem’s net profit decreased by 15% to SR601m on an 18% sales increase to SR3.9bn. The companies had profit margins in 2012 of 13% and 15% respectively.

In neighbouring Qatar, Industries Qatar (IQ), a government-controlled holding company running the three main arms of the country’s manufacturing sector in petrochemicals, fertilisers and steel, has highlighted the advantages of size in bulk chemicals in a country with a population less than a tenth of Saudi Arabia’s 29m.

Last year IQ made a Qatari riyal (QR) 8.4bn ($2.3bn) profit on sales of QR18.7bn, equivalent to a 45% margin. With petrochemicals and fertilisers, accounting for a third each of sales, the margins have been around 60%.


Author: Sean Milmo



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