Saudi’s SABIC to merge, spin off units

RIYADH / Reuters

Saudi Basic Industries Corp (SABIC) has combined its chemicals and polymers businesses and will spin off its steel unit as part of its restructuring efforts to counter the depressed oil market and weak product prices.
Chief Executive Yousef Abdullah al-Benyan was speaking after the firm, one of the world’s largest petrochemicals groups, on Wednesday reported a 6.8 percent drop in third-quarter net profit, its ninth successive quarter of declining earnings.
Global petrochemical companies have been hit hard by low oil prices, which have dragged down product prices and forced firms to implement cost-saving strategies aimed at stemming the damage from lost revenues.
Having already reorganised its innovative plastics unit – the old GE Plastics business it bought in 2007 – at the end of 2015, Benyan said SABIC had last week combined chemicals and polymers into one unit called petrochemicals. It would also reclassify its struggling Hadeed steel firm as an independent company in which SABIC would retain ownership but Hadeed would market its products and manage itself. No timeframe was given for this move.
“Restructuring had a positive impact on our performance in 2016 and it will help SABIC to maintain strong operations and face challenges through cutting costs and increasing reliability,” Benyan told reporters at a media event.
SABIC has reduced its cost of sales by 15 percent and had increased its production by 3 percent through efficiencies year-to-date, Benyan said, adding the company was seeking to do more as it expected 2017 to be “a quite challenging year for us”.
Pressure on product prices remains a significant drag on SABIC – sales in the third quarter were down 10.8 percent year on year to 33.31 billion riyals. This helped reduce net profit in the three months to Sept. 30 to 5.22 billion riyals ($1.39 billion).
While down from 5.60 billion riyals in the year-earlier period, it was broadly in line with the 5.05 billion riyals average forecast of five analysts polled by Reuters. SABIC’s share price was 1.8 percent higher at 1050 GMT.
Petrochemical prices are linked partly to the oil and natural gas that producers such as Sabic use as feedstock. Benchmark Brent crude is trading near $52 a barrel, compared with a 2015 high of about $70. While petrochemical companies are often insulated from falling product prices by a parallel drop in feedstock costs, Saudi Arabian companies “could be a bit more vulnerable” because they typically buy raw materials at fixed prices from local producers, said Yousef Husseini, an analyst at EFG-Hermes Holding SAE.
“If prices drop, their feedstock costs don’t necessarily move down at the same rate,” Husseini said by phone from Cairo. Sanyalak Manibhandu, an Abu Dhabi-based analyst at NBAD Securities LLC, said, “the problem with petrochemicals has been about average selling prices, and they’re not recovering.” Saudi Arabia, the world’s biggest oil exporter, has introduced austerity measures and launched its first-ever international bond sale to offset the widest budget deficit in more than two decades. The kingdom has also hiked utility prices, increasing the costs faced by energy-intensive industries including petrochemicals.
“Despite the challenges, Sabic will continue in its growth policy,” al Benyan said. “We will expand our marketing operations and sales in China to reach the strategic share we want.” The U.S. and Africa are also promising markets, he said. Sabic’s production this year has gained 3 percent on the same period of 2015, al Benyan said.