Saudi petchem margins benefit from oil, but not for long

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 6.8 billion riyals ($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 91.0 million riyals ($24.3 million), ending a run of five straight quarterly losses and exceeding analysts' average estimate of a loss of 184.2 million riyals.
That was good news for Saudi Arabia's stock market, where petrochemical firms account for about a quarter of the bourse's capitalisation 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, grappling with a huge budget deficit due to low oil prices, 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 Industrialisation 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 4.74 billion riyals, but came ahead of analysts' forecast of 3.92 billion riyals.