SABIC Posts 95% Plunge in Profits in 4Q08, Expects Higher Earnings in 1Q09

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a recent interview with CNBC, the Chief Executive Officer of Saudi Basic Industries Corporation (SABIC) (Riyadh, Saudi Arabia), Mohammed Al-Mady, indicated that the global chemicals sector was poised for growth in 2009. Al-Mady was also optimistic that if the current trend of increasing product prices were sustained, the global chemicals market would see a positive turnaround.

In January this year, SABIC, the world's largest chemicals manufacturer, declared that its profits for the fourth quarter of 2008, which ended December 31, had declined by 95% to $80 million. The sharp plunge in profits was attributed to low demand for petrochemical products worldwide. SABIC's subsidiaries outside Saudi Arabia were also adversely affected because of the decline in demand of specialty products. However, earnings in the first quarter of 2009 are expected to be higher than those of the last quarter of 2008.

Industry experts have stated that SABIC's earnings in 1Q09 may dwindle even though the market prices of chemical products have risen by 15-25%. While low demand could be one of the reasons for the plunge in prices, it is also believed that SABIC's acquisition of the plastics division of General Electric Company (NYSE:GE) (GE) (Fairfield, Connecticut) in 2007 for $11.7 billion led to the decline. The buyout has not been profitable for SABIC, and its first-quarter earnings may not be sufficient to cover the goodwill losses. Mutlaq Al-Morished, Vice President for Corporate Finance at SABIC, also confirmed that the purchase of the plastics division of GE and the weakening demand in the plastics sector have negatively impacted SABIC's profits.

The company is now in the process of trimming operating costs, cutting jobs, and improving production effectiveness and resource utilization. Bonuses to employees and promotions have been deferred across the group. SABIC's performance in 1Q09 may be better than in 4Q08 but is not expected to be as good as in the other quarters of the past year. However, Al-Mady indicated that SABIC's investment in the plastics business is a long-term strategy, and with the markets improving worldwide, this sector will also become profitable soon.

Meanwhile, SABIC has started operation of a logistics hub in Thessaloniki, Greece. The hub will function as a distribution center to Romania, Serbia, Greece and Bulgaria for polystyrene, polypropylene, high-density polyethylene (HDPE), low-density polyethylene, polyethylene terephthalate, polyvinyl chloride and other products used extensively in the piping and food packing industries.

SABIC is now focusing on the chemicals market of southeastern Europe, which is expected to grow at a rate of 10% per year. The company also recently started commercial production of the SABIC Vestolen-A grade of pipes at its new bimodal HDPE slurry plant in Gelsenkirchen, Germany. The plant, which will provide opportunities for product innovation, will reduce resource costs and operating expenses. In comparison to the conventional HDPE plant, SABIC's state-of-the-art facility reduces emissions by 85%, electricity consumption by 8%, and sewage and effluents by 50%.

The economic slowdown and weakening demand had reduced new investments in the chemicals and petrochemicals sector. However, with the current trends indicating positive growth, stalled or deferred projects are expected to commence. Growing economies, especially India, are likely to benefit from these investments.

The Indian chemicals industry, including fertilizers and refining, generates annual sales of around $150 billion. This industry is presently growing at an annual rate of 12.5%. By 2011, the gap between demand and supply in the country is expected to touch 4 million tons per year for polymers and 5 million tons per year for ethylene. Ten polymer production facilities and five steam crackers will be required to bridge this gap.

Foreign investors, recognizing the potential of this industry in India, are showing keen interest in developing new projects. Arkema SA (OTC:ARKAY) (Paris, France) is contemplating a joint venture with Essar Group (Mumbai) to produce acrylic acid in Vadinar, Gujarat. Mitsubishi Chemical Corporation (Tokyo, Japan) plans to ramp up the production capacity of its purified terephthalic acid plant in Haldia, West Bengal, by 800,000 tons per year to 1.3 million tons per year. Discussions are in progress between Total SA (NYSE:TOT) (Paris) and Hindustan Petroleum Corporation Limited (BSE:500104) (Mumbai) to set up a refinery and petrochemicals plant in Vishakhapatnam, Andhra Pradesh.

In 2008, the $35 billion Indian chemicals industry contributed about 6.7% to the nation's gross domestic product (GDP). In one of its sector study reports, Business Monitor International (London, England) indicated that although India is garnering global attention, a steep increase in input and infrastructure costs could deter some of the project developers.

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