Sabic May Report Slower Third-Quarter Profit Growth: Week Ahead

By Glen Carey

Oct. 11 (Bloomberg) -- Saudi Basic Industries Corp., the biggest company in the Persian Gulf by market value, may report its weakest profit growth for nine straight quarters as U.S. and European demand declines and petrochemical prices fall.

Sabic, 70 percent owned by the Saudi government, will report a 6.8 percent rise in third-quarter net income to 7.9 billion riyals ($2.1 billion) from 7.4 billion riyals a year earlier, according to an average of estimates from EFG-Hermes Holding SAE, Global Investment House KSCC and Shuaa Capital PSC.

``It is a challenging environment for Sabic because demand is slowing,'' Laurent Gally, an industry analyst at Dubai-based Shuaa Capital, said in a phone interview in Dubai on Oct. 9. ``The upsides for the company are going to be offset by the slowdown in U.S. operations and European operations.''

The credit crisis and slowing economies threaten Sabic's payback on last year's $11.6 billion acquisition of a plastics business from General Electric Co. The purchase, the largest by a Gulf-based company, added a network of factories making resins and thermoplastic sheets used in cars, roofs and lighting, just as the auto and construction industries cut output.

Sabic has dropped 45 percent this year for a market value of 270.8 billion riyals. BASF SE, the world's largest chemicals provider, has slipped 43 percent.

EFG-Hermes, which has a ``buy'' rating on Sabic and a price estimate of 189.1 riyals, forecast profit of 8.3 billion riyals. Global Financial, with a ``buy'' recommendation and a price estimate of 168.5 riyals, predicted 7.83 billion riyals and Shuaa has put quarterly income at 7.6 billion riyals.

Feedstock Advantage

Sabic has leveraged its access to the world's biggest reserves of oil and gas by making acquisitions to expand in the U.S. and China. Purchases have come at a time when General Motors Corp. and Ford Motor Co. are cutting costs and paring output after each lost at least 17 percent in U.S. sales this year. Debt markets have also seized up as the U.S. housing market suffers its worst slump since the Great Depression.

``The problem with the GE Plastics division they bought is that 50 percent of its sales are in the U.S.,'' Gally said. ``The U.S. automotive industry has experienced a serious slowdown in sales so their demand for GE Plastics products will slow as a consequence.''

Declining petrochemical prices in Asia and Europe have also curbed Sabic's profit growth. Ethylene prices dropped 26 percent in Asia and 20 percent in Europe as of Oct. 3, year to date, while film grade polymers have declined more than 8 percent in Asia, according to Bloomberg data.

Fertilizer Prices

Sabic's operations will get support from its agrochemicals unit Saudi Arabian Fertilizer Co., which is benefiting from higher prices and rising global demand. Saudi Arabia's efforts to develop infrastructure with new industrial cities, such as the $120 billion King Abdullah Economic City on the Red Sea coast, is bolstering demand for its steel products.

``Safco exports a majority of its fertilizer products,'' Syed Taimure Akhtar, an analyst at Kuwait-based Global Investment House, said on Oct. 9. ``There is a global shortage of fertilizers and at the same time there is increasing demand for food items. This benefits Sabic.''

Sabic also pays Saudi Aramco, the world's largest government-owned oil supplier, 75 cents per million British thermal unit for natural gas, compared with current spot Henry Hub natural gas prices at $6.81 on Oct. 9 that some competitors must pay.

Markets Last Week

Persian Gulf shares dropped last week, following declines in global markets, on concern the deepening credit crunch will topple more banks and slow economic growth.

Indexes pared losses on the last trading day after some of the region's central banks followed the U.S. Federal Reserve and others in cutting interest rates to ease the effects of the worst financial crisis since the Great Depression.

The Dubai Financial Market General Index posted the biggest slump, losing 23 percent during the week, while the Abu Dhabi Securities Market Index plunged 19 percent. Saudi Arabia's Tadawul All Share Index retreated 17 percent. Bahrain's market was the best performer, declining 5.4 percent.

Emaar Properties PJSC, the region's biggest real-estate developer by market value, retreated 26 percent and Saudi Basic Industries Corp., the largest company in the Middle East, dropped 14 percent.

The following is a list of events in the Gulf next week:

Event                                                  Date
Iran Oil Refinery Conference                           Oct. 11
Qatar National Bank third-quarter Results              Oct. 11
Dlala Holding third-quarter results                    Oct. 12
Mideast Steel Conference - Dubai                       Oct. 13
Industries Qatar third-quarter results                 Oct. 15
Qatar Electricity & Water third-quarter results        Oct. 15

To contact the reporter on this story: Glen Carey in Dubai at gcarey8@bloomberg.net.