Saudi petrochemical companies to retain edge over rivals

Saudi petrochemical producers will have less margins but that doesn’t mean they will be less competitive, said Raheel Shafi, a senior consultant for the Middle East at Nexant.

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Saudi petrochemicals companies are expected to retain an edge over their global rivals despite a rise in energy prices that will lead to higher operating costs and smaller margins, analysts said yesterday.

Faced with the prospect of low oil prices for the next few years, Saudi Arabia announced on Monday a range of reforms that included lower government spending next year and an unprecedented increase in water, electricity, fuel and gas prices.

The kingdom raised the price of ethane gas to US$1.75 per million British thermal units (mmbtu) from $0.75 per mmbtu. Ethane is one of the main feedstocks used in the petrochemical industry. US gas prices were trading at $2.24 per mmbtu yesterday.

Most of the petrochemical projects in Saudi rely on ethane and methane gas for feedstock. Lower prices of naphtha – an oil by-product, has made ethane-based projects not as competitive as before.

“They [Saudi petrochemical producers] will have less margins but that doesn’t mean they will be less competitive,” said Raheel Shafi, a senior consultant for the Middle East at Nexant, a consultancy.

“The competitive advantage of all ethane has, however, taken a big hit in comparison to lower naphtha prices over the past 18 months.”

Globally, petrochemical producers’ profits are narrowing because the prices of petrochemicals are linked to crude prices. Oil is trading below $40 a barrel, nearly 65 per cent lower from last year’s high of $115 a barrel.

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.

Saudi cement and petrochemical companies were quick to announce the effect of the new energy prices on their operating costs and revenue after the government revealed the new fuel pricing on Monday.

Several of the companies said they would cut or streamline expenses to cope with the new energy prices.

The companies are unlikely to increase product prices or lay off staff, analysts said.

“They won’t be able to compensate for the loss of this margin by increasing product prices,” said Sanjay Sharma, the vice president of IHS Chemical Consulting for the Middle East and India. “The only way they can compensate this to some extent is by improving efficiency. The Saudi producers being one of the lowest-cost producers globally are essentially price takers not price setters for petrochemical products.”

Saudi Basic Industries Corp, or Sabic, one of the world’s biggest petrochemical producers, said yesterday annual costs would rise by 5 per cent next year as a result of the new energy prices and the effect would be felt from the first quarter of this year.

Sabic, the Arabian Gulf’s biggest petrochemical producer, posted a 9.4 per cent fall in third-quarter earnings, but beat analysts’ estimates as it cut costs amid lower sales prices.

PetroRabigh, a joint venture between state-run energy firm Saudi Aramco and Japan’s Sumitomo Chemical, said the effect would be 300 million Saudi riyals (Dh293.5m) next year.

The National Industrialisation Co, or Tasnee, said the effect on its results would be 190m riyals next year, but added that streaming expenses and improving efficiency would help to offset the increase in costs.

Petrochemical stocks, though, have taken a beating. The Saudi petrochemical index fell by 2.9 per cent yesterday.

Sabic fell by 1.9 per cent to 76.5 riyals, while PetroRabigh declined 3.1 per cent to 12.5 riyals.

dalsaadi@thenational.ae

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