Sabic cost cutting offsets slump in third-quarter sales

Saudi Basic Industries Corporation (Sabic) posted yesterday a 9.4 per cent fall in third-quarter earnings, but beating analyst estimates as it cut costs amid lower sales prices.

The Arabian Gulf’s biggest petrochemicals producer said net profit dropped to 5.6 billion Saudi riyals (Dh5.5bn) from 6.18bn riyals in the year-earlier period.

Sabic shares rose 2.7 per cent to 90.25 riyals in Riyadh yesterday.

The company cut costs by 22 per cent in the first nine months of this year by improving production efficiency, Reuters quoted the chief executive, Yousef Al Benyan, as saying.

Lower costs helped to offset the 22 per cent slump in third-quarter sales of 37.3bn riyals (from 48.7bn for the year-earlier period), said Mr Al Benyan.

Sabic also benefited from the low price of naphtha, the oil derivative used as feedstock in Sabic's international operations, said Iyad Ghulam, an equity analyst at NCB Capital, a unit of Saudi Arabia's National Commercial Bank (NCB).

NCB Capital had forecast a third-quarter profit of 4.1bn riyals for Sabic. “These are very strong results,” said Mr Ghulam. “It is clear that Sabic benefited from the improvement in the profit margins. They benefited from the drop in the price of feedstock of naphtha, leading to better profit margins.”

The challenge for Sabic in the fourth quarter and beyond is to maintain its profit margins. NCB Capital is projecting Sabic to deliver a full-year profit of 17.3bn riyals.

“According to our projections, it will be difficult for Sabic to maintain high profit margins due to the technicality of petrochemical prices,” said Mr Ghulam. “When there is a huge drop in oil prices, petrochemical prices do not fall as fast, leading to better profit margins. But with time there will be normalisation.”

The price of the benchmark Brent crude has plummeted to about US$50 per barrel from last year’s peak of $115 per barrel because of weaker demand in Asia and Europe, a global oil supply glut and the strong US dollar.

Petrochemical producers’ profits are narrowing because the prices of petrochemicals are linked to crude prices.

Saudi Kayan Petrochemical, a unit of Sabic, this month reported a worse-than-expected third-quarter loss of 13.8 million riyals, down from a profit of 66.9m riyals in the same period last year. It attributed the loss to declining production and sales, and lower selling prices.

The revenues of Arabian Gulf petrochemical producers are expected to decline further this year after sliding 20 to 30 per cent in the 12 months to June because of the oil price slump, according to Abdulwahab Al Sadoun, the secretary general of the non-profit Gulf Petrochemicals and Chemicals Association in Dubai.

The collapse of oil prices has also affected petrochemicals projects in the region.

Last October, Royal Dutch Shell and Sabic cancelled the expansion of Saudi Arabia Petrochemical Company, their joint venture, saying that the feasibility studies were “not encouraging”.

The oil price slump has also affected Qatar, where it led to the scrapping of the $6.4bn Al Karaana petrochemicals project, a joint venture of Qatar Petroleum and Shell.

Arabian Gulf countries have invested billions of dollars in petrochemical projects to create downstream industries that will diversify their energy earnings and generate jobs for their citizens.

* with Reuters

dalsaadi@thenational.ae

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