July 19 (Bloomberg) -- Saudi Basic Industries Corp., the world's biggest chemicals maker by market value, reported second- quarter profit increased 17 percent on rising fertilizer demand and access to discounted oil-based feedstock.

Net income increased to 7.54 billion riyals ($2.01 billion) from 6.47 billion riyals a year earlier, the Riyadh-based company said today in a statement on the Web site of the Saudi bourse. Earnings per share weren't disclosed. HSBC estimated earnings of 2.36 a share, according to analysts Hassan Ahmed and Diana Lawrence.

Sabic, which is 70 percent government owned, used its access to the world's biggest reserves of oil and gas to expand in markets such as China while European and North American rivals struggled with rising prices for the same raw materials. It's also adding to agrochemicals unit Saudi Arabian Fertilizer Co., which on July 8 reported that quarterly profit more than doubled on higher prices and rising global demand.

``This is the cost advantage that Sabic has,'' said Amrith Mukkamala, senior research analyst Markaz, Kuwait Financial Centre SAK, in a telephone interview on July 17. ``Sabic is able to supply petrochemicals to China more cheaply than China can produce them.''

Lower Price

Sabic pays Saudi Aramco, the world's largest government- owned oil supplier, 75 cents per million British thermal unit for natural gas, compared with current spot Henry Hub natural gas prices above $10.69 that some competitors must pay.

First-half profit increased 13 percent to 14.5 billion riyals, or 4.82 riyals a share, from 12.8 billion riyals, or 4.25 riyals, a year earlier.

The company agreed to pay a first-half cash dividend of 1.75 riyals a share, Chairman Prince Saud bin Abdullah al-Thunian al- Saud said in the statement. The payout of 5.25 billion in total dividends will start Aug. 5, he said.

Six-month sales increased 54 percent to 83 billion riyals, while operating profit rose 20 percent to 23 billion riyals.

Sabic shares gained 1.7 percent to 137.25 riyals in Riyadh today. They have declined 17 percent this year, valuing the company at 411.75 billion riyals. The earnings were released after the market close.

China Expansion

Chief Executive Officer Mohamed al-Mady has expanded in China to tap demand for plastics and other chemical-based products used to make auto-parts, packaging and plastics. Sabic and China Petroleum & Chemical Corp. agreed in January to a 50-50 venture in Tianjin.

The $1.7 billion Tianjin plant will have the capacity to produce 4 million tons a year of petrochemicals when it opens in September 2009. The venture may be the first of many in China, al-Mady said in an e-mailed statement in May.

The Asian country will account for 25 percent of the global demand for chemicals by 2015, according to Exxon Mobil Corp.

``Sabic has invested a lot in terms of people and resources in China to serve the local market,'' Pat Rooney, Dubai-based managing director of Chemical Market Associates Inc., said in a telephone interview. ``As you have economic expansion and more disposable income, people tend to buy more convenient goods. Plastics go into things like toys, packaging material and ice chests. The multiplier potential is big.''

Steel and Fertilizers

Sabic, which provided thermoplastic sheets for four UEFA Euro 2008 soccer stadiums, has also diversified into higher-value products such as plastics to become less dependent on ``basic'' chemicals such as ethylene. Sabic purchased GE's plastics unit for $11.6 billion in August, the largest acquisition by a Gulf region company, adding a network of factories making resins and thermoplastic sheets as well as the Lexan brand used in roofs and lighting.

Saudi Arabia's efforts to diversify its economy and develop infrastructure with new industrial cities, such as the $120 billion King Abdullah Economic City on the Red Sea coast, is also spurring demand for Sabic's petrochemicals and metal products.

The fertilizer division, known as Safco, and Sabic's Saudi Iron and Steel Co. unit, will build a 1.7 million metric ton iron sheet plant in the Jubail Industrial City on the Persian Gulf Coast to meet rising demand in an economy that may grow by 4.9 percent in 2008, according to the median estimate of seven economists surveyed by Bloomberg News.

``These industrial cities will need a lot of steel, aluminum, glass and cement,'' Faisal Hasan, head of global research at Global Investment House KSCC, said in a telephone interview from Kuwait City. ``Sabic is one of the kingdom's major players in steel production.''

Access to Financing

Sabic will also raise its phosphate and ammonia output through a venture with Saudi Arabian Mining Co. The plant, scheduled to start in the first quarter of 2010, will meet global demand and supply National Agriculture Development Co. and Saudi Fisheries Co., the two largest farmers in the kingdom by market value.

In December, Sabic and Ma'aden completed the financing for their $5.56 billion phosphate fertilizer project. The raw materials for the plants, phosphate and bauxite, will be transported to Ras Az Zawr on the coast by a 1,600-kilometer (1,000-mile) railroad.

``They are right now in a region with excess liquidity, and they have access to a good amount,'' Global's Hasan said. ``With Sabic's credit profile, they can demand reduced borrowing costs.''

Sabic has $16.2 billion of loans and bonds outstanding, Bloomberg data show. It has an A1 credit rating from Moody's Investors Service and an equivalent A+ from Standard & Poor's, their fifth-highest investment grades.

To contact the reporter on this story: Abdulla Fardan in Bahrain at afardan@bloomberg.netGlen Carey in Dubai at gcarey8@bloomberg.net

Last Updated: July 19, 2008 11:06 EDT