Petchem firms seen to post lower profit in H2: EFG Hermes

Yousef Husseini, Head of Petrochemicals Department at EFG Hermes, expects the Saudi petrochemical companies to post lower earnings in the second half of 2024, due to higher shipping and logistics rates as well as stable prices of raw materials, such as propane and butane, in the Kingdom.

On the sidelines of EFG Hermes' 10th Annual London Conference, Husseini told Argaam that peak for margins was in the second quarter of this year. "So I'd expect more pressure on profitability generally. Of course, there are exceptions," he noted.

2024 was very challenging year for the petrochemicals sector, not just in Saudi Arabia, but regionally and globally as well.

"I think there is a sort of two factors here that are playing a part; you have the demand side of course, along with inflation and higher energy prices. This is going to put pressure on demand," Husseini said.

He added that the other side is - of course - a big structural slowdown in China. "We are seeing much less demand coming from China, and that's also - of course - putting pressure on the demand side."

On the supply side, you have also quite few issues. When looking at the past three or four years, there has been a wave of capacity additions, particularly in China. "We are still even seeing more coming in the second half this year as well. There has been a lot of pressure on prices and margins," Husseini said.

He added that product prices dropped by nearly 5-10% in Saudi Arabia on pricing and margin pressures.

Commenting on the strong relationship between oil and petrochemicals, Husseini said the most common feedstock for petrochemical producers globally is naphtha; hence, production costs are affected by oil prices.

Additionally, oil price volatility negatively weighs on global demand, as it creates uncertainty and lack of visibility, so it becomes very hard for a buyer to take a decision.

The official predicted continued pressure on prices in the second half of 2024 on oil prices.

He added that China significantly increased production capacity over the past three years and continues to do that in H2 2024.

China, which accounted for around 40% to 50% of petrochemicals demand growth over the past decade, is now experiencing a manufacturing slowdown and a decline in real estate market prices, affecting product demand.

Saudi producers have a global competitive edge on lower production costs, but they seek to keep away from the Chinese market, given the improved prices in other regions such as Southeast Asia, Europe, and Turkey.

Touching on local demand, Husseini said the Saudi manufacturing sector is witnessing significant growth, supported by Vision 2030. The number of factories in the Kingdom rose from 7,200 in 2016 to 11,500 by the end of 2023, with a target to reach 36,000 factories by 2035. This growth will lead to increased demand for petrochemicals in the near future.

Husseini emphasized the importance of keeping track of macroeconomic factors, particularly in China, as it is the big driver of global demand for petrochemicals.

"At the moment, the signal is a kind of neutral so it could go one way or the other. On the supply side, unfortunately, there is not much certainty," the official said.

He added that there is a lot of supply coming, but the global macro situation over the next months is most likely going to be the largest factor indicating what is going to happen with the price movement.