05/06/2012 08:15 AST
Gulf petrochemical companies witnessed a 10% decline year-on-year (y-o-y) in their net profit in the first quarter (Q1) of this year mainly due to rising cost of sales, which, in turn, impacted the gross margins in the sector, says a study.
The GCC (Gulf Co-operation Council) petrochemical companies Q1 2012 earnings declined by 10.2% to $3.1bn compared to $3.5bn in the same period last year, while on a quarter-on-quarter (q-o-q) basis the earnings improved by 23.9% mainly due to stronger product prices and higher volumetric sales, Global Investment House said in its study.
Overall, the performance of regional petrochemical companies was mixed on a q-o-q basis with Sabic (Saudi Basic Industries, Industries Qatar, Yansab (Yanbu National Petrochemical Company), Sahara Petrochemical, Shell Oman, Petro Rabigh and Dana Gas reporting better than expected earnings while other stocks such as Saudi Kayan Petrochemical, Safco (Saudi Arabia Fertilizers), Tasnee (National Industrialization), Sipchem (Saudi International Petrochemical Co) and Nama Chemicals reporting drop in earnings or extended their losses.
Reasoning for the drop in year-on-year net profit for petrochemical companies, the study said cost of sales rose during the period by more than 16% which dropped the gross margins of the sector to an average of 33.1% in 1Q12 compared to 37.4% in the same period last year.
Among Global’s universe, margins dropped in the case of Sipchem and Industries Qatar; while Dana was the only company to register growth in gross margins.
Finding that internationally, gas prices continued to drop, it said price of natural gas (Henry Hub); feedstock used in the petrochemical industry, fell by 26.2% q-o-q and down 41.3% y-o-y. The drop in average prices of benchmark was mainly because of discovery of considerable amount of natural gas reserves in western countries.
On an average price of petrochemical products rose by 2.2% q-o-q during Q1 2012, it said, adding price of ethylene witnessed an increase of 17.8% q-o-q; while price of LDPE and LLDPE dropped q-o-q by 6.9% and 0.1% respectively.
The sector top-line witnessed a Y-o-Y increase of 8.8% in1Q12, which was due to the combined effect of increase in price of petrochemical products along with commencement of commercial production from the newly expanded facilities, Global said.
“Overall net income registered by the companies under our coverage was $2.96bn in Q1 2012 compared to $3.09bn in the comparable period last year. Sabic continued to remain the lead contributor to the sector profitability at 65.5% followed by Industries Qatar and Safco at 17.7% and 7.1% respectively,” it said.
During the first quarter of this year, the companies were able to reduce the cost of funding which dropped the interest expense by 13.5% Y-o-Y, it said, adding overall interest expense during Q1 2012 dropped to $249mn against $288mn in the previous year period.
“Drop in the interest expense was on the back of cheaper refinancing rates available worldwide and easier fund raising for these companies because of backing of their oil rich governments,” it said.
Cash and bank balances of the sector continued to rise, reaching $19.6bn in Q1 2012 compared to $14.6bn in the year-ago period, recording a growth of 34.7%.
According to a study from AlixPartners - the petrochemical companies in the Middle East have benefited significantly from the availability of, and proximity to, oil and natural gas feedstock, production of many petrochemical products in the region will exceed demand significantly over the next few years, leading to low utilisation rates and poor margins for less-competitive companies.
The major reason for this threat is the huge expansion of chemical production capacity in the GCC, whcih the projects coming on stream in the next three to five years.
Gulf Times
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