S&P expects Saudi chemical firms to withstand potential feedstock price rise

S&P Global Ratings said that chemical producers in Saudi Arabia are preparing for a possible rise in feedstock prices, expecting the chemical companies listed on the Saudi Exchange (Tadawul) to withstand this potential rise.

The Saudi chemical producers are in a more favorable position than their global peers because domestic feedstock prices are significantly lower than global benchmarks, and will likely remain so, even in the event of a price hike in the next few months, the ratings agency said in a report.

Feedstocks such as ethane and propane form the bulk of Saudi chemical producers' operating expenses, making them sensitive to price hikes despite their advantageous position over global peers, the report said, expecting a narrowing of the gap between local ethane and methane prices and international standards over the next few years.

The ratings agency added that publicly listed chemical companies in Saudi Arabia could absorb higher feedstock prices, expecting that the companies' earnings before interest, taxes, depreciation and amortization (EBITDA) will remain above 17%, albeit with a greater effect for those with more exposure to fertilizers.

The drivers of profitability for fertilizer companies vary widely, as demand is linked to the basic need for food in light of population growth, limited arable land, and challenges from climate change, all of which are independent of macroeconomic conditions.

S&P stated that although increases in feedstock prices are major drivers of profitability, the ability to pass price increases to customers is no less important in easing pressure on profitability. The ratings agency indicated that this will be a challenge for petrochemical companies in the near term, due to the increase in production capacity in the sector and the link between demand and macroeconomic conditions in several end markets.

Furthermore, S&P pointed out that chemical companies in Saudi Arabia are more sensitive to higher interest rates than lower EBITDA margins, pointing out that it is closely monitoring refinancing and liquidity risks, as well as their financial policy decisions and actions taken to maintain liquidity positions.

The report stated that chemical companies, including Saudi Basic Industries Corp. (SABIC), could sustain a 25% drop in EBITDA due to higher feedstock costs in 2024, projecting the petrochemical major will maintain profitability and modest leverage.