Saudi Arabia Review

Al Benyan ... resorting to cost cutting

Al Benyan ... resorting to cost cutting

Sabic counts on cost cutting

Cost-cutting would help Sabic offset the increase in chemical feedstock prices after the Saudi government cut subsidies at the end of last year

Saudi Basic Industries Corp (Sabic) is counting on lower costs to help combat slack demand and volatile commodity prices after the state-controlled group, one of the world’s largest petrochemical companies, reported a sharp fall in quarterly profit. "What the petrochemicals industry is going through isn’t new to Sabic," the Saudi company’s acting chief executive Yousef Al Benyan says.

"Our industry is a cyclical industry. This is expected. Strong companies try to absorb these changes and benefit from them to improve results and invest for the future," Al Benyan says.

The Saudi government owns a majority stake in Sabic, the biggest listed entity in the Middle East. The company’s performance is closely tracked by investors, especially after the kingdom allowed foreign investors to directly buy Sabic stock last year.

The petrochemical giant had reported a 29 per cent drop in net profit to 3.08 billion riyals ($821 million) in the three months to end-December compared with the same period last year, below most analysts’ expectations. Brokerage house NCB Capital had forecast 4.02 billion riyals in profit, while Al Rajhi Capital expected 4.24 billion riyals. Fourth-quarter revenue fell 21 per cent to 34.16 billion riyals.

Sabic attributed its decline in profit to lower average sales prices.

In response, Al Benyan says Sabic has taken steps to cut costs and increase efficiency of its factories. The benefits should materialise later this year, he says.

In particular, cost-cutting would help Sabic offset the increase in chemical feedstock prices after the Saudi government cut subsidies at the end of last year. "We buy more than 40 per cent of our feedstock from outside the kingdom, in Europe, America and China," he says. "We have the experience to deal with economic changes and adapt."

Sabic’s diversified portfolio and global presence has to an extent buffered the company against the sharp drop in oil prices. Still, its results are tied to prices of commodities and global economic growth, as many of its products such as plastics and fertilisers are sold and used across the world.

Al Benyan says that he is upbeat about this year, confident about growth in the US and a moderate recovery over the short-term in Europe.

As for China, he called the current slow growth "temporary," with the country’s long-term prospects still good. Sabic wants to expand in Southeast Asian countries like Vietnam and Indonesia, he says.

Asked about the potential impact of Iran re-entering the market after sanctions on the country were lifted, Al Benyan says he has no information about the current situation of the Iranian petrochemicals industry, noting that it could take between three to five years for the country to establish itself in the market.

Sabic is sanguine about future competition, he says. "We focus on the competitive position of the company. If you are worried about the entry of new competitors then you won’t seek to improve your position. On the contrary, the competition would be positive," he says.

Sabic can adapt to any new petrochemicals supply entering the market from outside the kingdom, Al Benyan say, as Iran’s release from sanctions promises increased global oil supply.

Petrochemical companies in the kingdom have been struggling with falling oil prices, both as product prices are closely linked to crude and cheaper oil erodes the competitive advantage which Saudi manufacturers accrue over non-oil producing nations due to subsidised energy and feedstock.

The pressures could be amplified further with Iranian oil being reintroduced to global markets: the prospect has already driven crude prices to a 12-year low.

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