Petrochemical producers in Saudi Arabia are facing new challenges that could affect their profitability. Disruptions in ship traffic in the Red Sea, especially ahead of the new season, threaten the recovery of production in the country's petrochemical complexes.
Factors Affecting Petrochemical Profitability
The petrochemical industry in Saudi Arabia, which is one of the most important industrial sectors in the country, is concentrated in two main areas near the eastern and western coasts. Petrochemical companies such as Rabigh Refining and Petrochemical Company (Petro Rabigh) and National Petrochemical Company Yanbu (Yansab) on the western coast had a successful performance in the second quarter, as rising prices due to supply constraints from shipping disruptions contributed to their revenue increase.
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In contrast, producers on the eastern coast, including Sabic and Sahara International Petrochemical Company (Sipchem), faced difficulties in shipping goods through the Strait of Hormuz. This has exacerbated their net losses. Given the Houthi efforts in Yemen to create a blockade in the Bab el-Mandeb Strait, it is expected that the income gap between eastern and western coast petrochemical producers will narrow.
Impact of Disruptions on Sabic
Sabic, the largest petrochemical producer in Saudi Arabia, incurred a net loss of $221 million in the second quarter of 2023. Forecasts indicate that this loss will rise to $320 million in the third quarter and reach $693 million for the entire year of 2026. Alex Stephanou, head of equity research at UBS in London, believes that Sabic will face challenging conditions in the third quarter.
Polymers account for 70% of Sabic's petrochemical product volume, which is primarily transported by truck. The remaining 30% consists of liquids that require maritime transport. In the second quarter, Sabic's polymer shipments to western coast ports increased by 150% compared to the previous quarter, but the company's ability to export southward through the Red Sea is now in doubt.
Analysts expect that global petrochemical supply will continue to outpace demand, which has been the main factor in reducing product prices and profit margins in this industry over the past 20 years. However, resolving disruptions in the Strait of Hormuz could lead to a temporary increase in petrochemical product prices.
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