petchem margins benefit from oil
Last Updated : GMT 06:49:16
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Last Updated : GMT 06:49:16
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Petchem margins benefit from oil

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Arab Today, arab today Petchem margins benefit from oil

Petchem margins benefit from oil
Jeddah - Arab Today

Second-quarter earnings in Saudi Arabia’s petrochemical industry beat expectations as producers reaped the benefits of volatile oil prices, but companies look unlikely to be as lucky in the second half of this year.
Combined net profits of the Kingdom’s 14 listed petrochemical firms, announced over the past couple of weeks, fell by a fifth from a year earlier to SR6.8 billion ($1.8 billion) in the April-June period, but they beat the forecasts of analysts, who had on average expected a 40 percent plunge.
Two firms posted profits while analysts had predicted losses. Saudi Kayan, an affiliate of Saudi Basic Industries (SABIC), swung to a net profit of SR91.0 million ($24.3 million), ending a run of five straight quarterly losses and exceeding analysts’ average estimate of a loss of SR184.2 million.
That was good news for Saudi Arabia’s stock market, where petrochemical firms account for about a quarter of the bourse’s capitalization of $385 billion.
To a large degree, however, profit margins were inflated by fortunate timing in the way oil and feedstock prices moved during the period — a pattern which may not be repeated.
“Higher spreads pushed up margins, which exceeded expectations, but this is not sustainable as oil prices have started to decline,” said Mohammad Al-Shammasi, chief investment officer of Riyadh-based Derayah Financial. 
Saudi Arabia’s petrochemical sector is under pressure from two sides. In foreign markets, it faces weak petrochemical prices and competition; combined revenues dropped 16 percent in the second quarter, in line with analysts’ forecasts. 
Meanwhile, costs are rising at home after the government cut feedstock, fuel and electric power subsidies in its 2016 budget. More subsidy cuts are expected in coming years, further reducing Saudi firms’ cost advantage over foreign rivals.
So far, however, oil price moves have worked to the firms’ advantage. In the first quarter of 2016, when many companies bought feedstock, Brent crude oil was around $30-35 a barrel, keeping feedstock prices low.
A rebound of oil prices, to a range of $40-50 in the second quarter, let firms sell products made with this feedstock at fat profit margins.
National Industrialization Co. swung to a quarterly profit after five straight quarters of losses because of high spreads across propane-derived products. Saudi propane prices rose 7.4 percent in the second quarter compared to the first quarter but prices of polypropylene, the end-product, increased about 13.5 percent, Aljazira Capital said.
The biggest firm, SABIC, reported a 23.2 percent drop in second-quarter profit to SR4.74 billion, but came ahead of analysts’ forecast of SR3.92 billion.
Producers took advantage of favorable spreads by operating their facilities close to, and in some cases beyond, full capacity in the second quarter, said Jassim Al-Jubran, analyst at Aljazira Capital.
But the profitable divergence between feedstock and petrochemical product prices will only continue if oil prices keep rising steadily in the months to come.
Analysts said such an uptrend looked unlikely in the coming months. In fact, Brent has been trending lower since early June, and now stands at around $45 compared to $50 at mid-year.
“A stabilization in oil prices will adjust margins and bring them back down again,” said Iyad Ghulam, head of research at NCB Capital. 
Santhosh Balakrishnan, equity analyst at Riyad Capital, said: “Barring any event that will swing oil violently in either direction, I think petrochemical earnings are set to fall for full-year 2016,” though he added the drop was unlikely to be as sharp as the fall of three-fifths seen in 2015.

Source: Arab News

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