Profits dip for Mid-east chemical producers, smears outlook for energy investments

The unexpected drop in global crude oil prices appears to have caught some chemical producers in the Middle East off guard, which has resulted in their companies reporting significantly lower profits or losses in the third-quarter and threatens to undermine investments in new chemical projects in the region, says new analysis issued by US-headquartered market analysis firm IHS.

“It does appear that Middle East chemical producers were a bit surprised at just how far oil prices fell and how quickly their earnings were impacted,” said Sanjay Sharma, vice president, Middle East and India, at IHS Chemical. “The region’s producers reported mixed third-quarter results, with a majority experiencing lower profits while others reported losses. Those companies with fixed feedstock costs were particularly hard hit by falling oil prices, and that lost income is, in turn, putting a squeeze on their expenses and capital budgets. This is impacting new planned projects in the region, so it has a snowball effect.”

According to Sharma and several other IHS experts at the New Energy Environment, and Implications for the Chemicals Industry seminar held on 17 November in Dubai, UAE, during the 10th Annual Gulf Petrochemicals and Chemicals Association (GPCA) Forum, the recent cancellation of the Al Sajeel and Al Karaana projects in the Middle East, are examples of how the oil price slowdown is already impacting specific investments in the region. He expects producers are going to be fairly cautious going forward with new investments until the market volatility becomes less of a threat. In addition, this rapid oil price decline comes after a period of exceptionally strong margins and higher producer costs, as overall spending increased with the enhanced margins.

“As a result,” Sharma said, “due to a sharp decline in revenue, the producers are not only faced with scaling back investments and adjusting to volatile energy market dynamics, but they also have to reel in costs at the same time and become more efficient. It is critical now, more than ever, that they improve operational excellence and control value leakage from production ventures. The oil and gas industry has been going through this same difficult exercise since the oil prices first began to drop significantly, but now the belt tightening is being experienced by chemical producers as well.”

Profits at SABIC, the region’s largest chemical player, began to decline, year-on-year, in the third quarter of 2014, and since then, others in the region have joined SABIC in watching their earnings decline, IHS said. Earlier this year, Gulf Cooperation Council (GCC), a group of chemical producers who depend on ethane feeds, temporarily relinquished their position as the world’s lowest-cost ethylene makers to producers based on liquefied petroleum gas (LPG) in North America and Europe. However, rising LPG prices have since reversed this position.

“Since the summer, a rebound in LPG values and a decline in co-product revenues have driven up costs in other regions and reinstated Middle Eastern ethane crackers as the cost leaders on a global basis,” said Matthew Thoelke, senior director of olefins and derivatives at IHS Chemical. “The same cannot be said for those in the GCC, who are required to crack LPG or condensates; for these, costs are far less competitive. Nevertheless, despite less competitive costs and the resulting pressure on profitability, there remains a strong incentive to both run existing assets and complete assets that are under construction; it is for new projects where questions are being asked."

Production of the GCC’s petrochemicals industry increased at a compound annual growth rate (CAGR) of 8 percent during the past five years, according to the GPCA. Production grew by 8.3% in 2014, contributing 31% to the GCC’s total manufacturing GDP and making it the industry’s second-highest growth region. However, because of lower petrochemical product prices, a result of slumping oil markets and the Chinese economic slowdown, sales declined to just under US$88 billion from US$89.4 billion in 2013.