Sabic Poised to Report Profit Decline as Europe Demand Stutters

Saudi Basic Industries Corp. may report a 14 percent decline in annual profit, highlighting the petrochemical maker’s struggle with slowing economies in Europe and a resurgent U.S. chemical industry.

Net income at the world’s largest petrochemical company by market value probably fell to 25.1 billion riyals ($6.7 billion) from 29.2 billion riyals last year, according to 14 analysts polled by Bloomberg. The Riyadh-based company may report results as early as Jan. 19.

The U.S. shale gas industry is testing the long-standing advantage that state-owned Sabic has had from proximity to the world’s largest reserves. Dow Chemical Co. is adding an ethylene plant in Texas fueled by local shale supplies. Heightened competition comes at a time when demand among European automotive and construction clients has ebbed.

“The shale-gas revolution in North America is really a game changer,” Ahmed Shams El Din, Cairo-based director of equity research at EFG-Hermes Holding SAE, said in an e-mail. “It provides the chemicals industry with cheap and sustainable access to ethane and methane gas that will facilitate building low-cost chemical and fertilizer capacity.”

Sabic shares rose 0.3 percent to 93.75 riyals in Riyadh yesterday, bringing their advance this year to 4.5 percent.

Slashed Demand

Europe’s economic woes also reduced demand for Sabic. The International Monetary Fund cut its 2012 global growth forecast to 3.3 percent, the slowest since the 2009 recession, from a July forecast of 3.5 percent. The fund, which lowered its 2013 forecast to 3.6 percent from 3.9 percent, warned of even slower expansion unless the U.S. and Europe address threats to their economies.

Lower pricing has weighed on earnings this year, with further pressure stemming from weak demand for polymers and derivates against a backdrop of slowing growth in China and volatility in energy prices, El Din said.

Subsidiaries also suffered from shutdowns. Saudi Kayan Petrochemical Co. on Jan. 13 fell the most in six months after quarterly results for the affiliate of Sabic missed estimates for the eighth consecutive time.

“In terms of its subsidiaries, Saudi Kayan started off a year ago and has yet to report any significant profitability,” said Muhammad Faisal Potrik, an analyst at Riyad Capital.

Subsidiaries Suffer

Saudi Kayan’s fourth-quarter loss widened to 195 million riyals from 191 million riyals in the year-earlier period. That missed estimates for losses of 50.3 million riyals at NCB Capital and 28 million riyals at Securities & Investment Co.

Saudi Arabian Fertilizer Co., known as Safco, is 43 percent owned by Sabic and Yanbu National Petrochemicals Co. is 51 percent owned. Both also reported a decline in quarterly earnings.

Petrochemical and plastic products represented 75 percent of the kingdom’s non-oil exports in November, according to data from the Central Department of Statistics and Information in Riyadh. Asia was the top destination for non-oil exports at 40 percent, followed by the Middle East at 29 percent.

Sabic’s results will provide a window on European chemical companies, from synthetic rubber-maker Lanxess AG to BASF SE. The company has taken five years to integrate GE Plastics, which it bought in 2007 for $11.6 billion in it’s biggest transaction to date.

“Sabic’s consolidated earnings are also leveraged to Sabic Innovative Plastics, which is currently loss making due to high feedstock prices and relatively weak end market demand in automotive, construction and electronics,” El Din said.

Fifteen analysts have a buy rating on Sabic shares, and one recommends holding them, according to data compiled by Bloomberg. Fourth-quarter results may show some improvement as pricing pressure eased, said Mohammed Al-Omran, a financial analyst and president of the Gulf Center for Financial Consultancy in Riyadh.

Before it's here, it's on the Bloomberg Terminal.