Sabic’s Dismal Q2 Results Unlikely Representative of the Petrochemical Industry

Sabic buys feedstocks at a low, fixed price, so falling prices mean falling EBITDA.

Market conditions for Sabic in Q2 of 2008 were different that for other non-Middle Eastern producers.

It would be a mistake to expect robust earnings from petrochemical producers for Q2 of 2009. But it would also be a mistake to expect them to mirror Sabic’s performance. True: Sabic is the world’s largest petrochemical producer. True: While Sabic has operations in Europe, the lion’s share of their capacity is in the cost advantaged Middle East. However, this is exactly why their results will be different.

 

In Saudi Arabia most of Sabic’s capacity buys feedstock at an extremely low, flat, fixed price. As a result, every $1 per ton drop in the price of polyethylene is a $1 drop in revenues AND EBITDA. In Q2 of 2008, LLDPE prices, for example, were nearing their zenith. The average price of LLDPE in Q2 of 2008 in Asia was about $1,700 per ton. In Q2 of 2009, the Asian price has averaged $940 per ton. This is the source of Sabic’s plummeting earnings. Producers outside of the Middle East manage volatile feedstocks costs, coproduct prices, and product prices every day. The market conditions for them in Q2 of 2008 was very different than they were for Sabic.

 

For producers mainly operaing in North America, or at least outside of the Middle East, earnings were already beginning to decline by the second quarter of 2008. Spot WTI averaged $124 per barrel pushing feedstock costs much higher. On the US Gulf Coast, ethane (petrochemical feedstock) was $1.40 per gallon and naphtha was $3.00 per gallon (Source: Petrochem Wire) in June of 2008. In June of 2009, these feedstocks were 48¢ per gallon and $1.40 per gallon, respectively.

 

So, how should analysts think about Q2 ‘09 versus ‘08 for non-advantaged producers? Look at the spreads between feedstocks (used to produce ethylene) and the products producers actually sell, like LLDPE. The LLDPE-ethane spread in Q2 2008 was 35.5¢; in Q2 2009 – 33.7¢. This continuity is representative of most ethylene derivatives.

 

While Sabic is right to blame diving commodity prices for its drop in earnings, non-Middle Eastern producers will have a different story to tell. Don’t anticipate the rest of the petrochemical industry results based on Sabic.