Saudi petrochemical giant faces challenges

A weakening global economy affected by trade disputes caused a drop in production and demand for plastics and chemicals.
Saturday 03/08/2019
A general view of the headquarters of Saudi Basic Industries Corporation in Riyadh. (AFP)
A general view of the headquarters of Saudi Basic Industries Corporation in Riyadh. (AFP)

Petrochemical giant Saudi Basic Industries Corporation is feeling the financial pain from slowing global economic demand, recording its lowest quarterly profit in a decade while putting the brakes on a joint venture deal with a European speciality chemicals firm.

The developments come amid state oil and gas firm Saudi Aramco’s purchase of a majority stake in Saudi Basic Industries Corporation (SABIC) — the world’s fourth-biggest petrochemical firm. SABIC and Saudi Aramco may be facing a downturn in worldwide petrochemical demand and subsequent declining earnings could colour investor enthusiasm for the expected initial public offering of Saudi Aramco.

A weakening global economy affected by trade disputes has caused a drop in production and demand for plastics and chemicals.

Declining vehicle sales in Europe and China are particularly hitting the petrochemical industry hard because automobile manufacturers are dependent on plastics and chemicals in the production process. Rising prices for primary products needed in making petrochemicals have affected the bottom line for many petrochemical firms, which are also feeling the pinch of lower selling prices.

SABIC had been bracing for a tough year financially. Company CEO Yousef al-Benyan said in April after SABIC’s first-quarter results were released: “Our expectations are that 2019 will be better than what the market gives but it will not be as it was in 2018.”

SABIC’s first-quarter results were a sign of a potentially rocky year. The company posted a net profit for those three months of $909 million, a 38% drop from the same period a year earlier.

The company’s second-quarter earnings have proven even more disappointing, with SABIC’s quarterly profit drop the worst it has experienced since late 2009. In its end of June accounting, the Saudi firm reported net income for the second quarter of $565 million, a 68% fall from the same period in 2018. SABIC’s net profit for the first six months of this year was $1.46 billion, a 55% decline from the same period in 2018.

“The slowdown in global GDP growth coincides with a decline in petrochemical prices due to a significant increase in new supply capacity resulting in lower product prices and margins in key product lines,” Benyan said in a statement.

“Though lower petrochemical prices have negatively impacted SABIC’s second-quarter results, our operational performance remains robust.”

The Saudi state firm’s poor financial results coincided with news that talks on a $3.9 billion joint venture between SABIC and Swiss speciality chemicals firm Clariant had been suspended, a victim of the “current unfavourable market conditions,” SABIC said.

SABIC purchased a 24.99% stake in Clariant last September, making it Clariant’s largest strategic anchor shareholder. The two firms signed a memorandum of understanding to create a joint venture that would be a leading supplier of high-performance plastics by combining Clariant’s additives and masterbatch businesses with parts of SABIC’s speciality chemicals operation.

The joint venture partners were reportedly at odds regarding the values of their respective businesses. Clariant said the Swiss firm will sell its entire masterbatch business instead of including it in the joint venture with SABIC.

News of the suspension of joint venture discussions came a day after the sudden resignation of Clariant CEO Ernesto Occhiello, a former SABIC specialities executive vice-president who had only been leading Clariant for ten months.

In announcing its decision in March to purchase a 70% stake in SABIC for $69.1 billion, Saudi Aramco highlighted the fact that merging the two state firms’ petrochemical businesses would strengthen its downstream operations, making it a truly integrated company that would be more attractive to potential investors.

However, the petrochemical industry is facing some speedbumps, including muted economic growth — if not the potential for a global recession — and a cyclical industry downturn exacerbated by increasing public calls for bans on single-use plastic products and extra petrochemical plant capacity being available at a time of tepid demand.

Declining petrochemical earnings might be a drag on Saudi Aramco’s financial statements as the Saudi energy conglomerate readies for its limited shares sale, which government officials recently insisted would take place next year or early 2021.

SABIC, which is the kingdom’s largest publicly listed company, experienced price volatility in trading on the domestic stock exchange July 28, the day the Saudi petrochemical firm released its second-quarter earnings.

Opening at 109 riyals ($29.06) on the Tadawul, the SABIC share price dipped to 106.80 riyals before closing at 110.20 riyals. SABIC shares closed out the month of July at 107.40 riyals a share, down 7.20 riyals from July 1’s settled price.