Gulf petrochemical giants well placed to weather tough economy

Reuters/Faisal Al Nasser

Petrochemical companies in the Gulf have safe credit ratings despite rising interest rates and higher energy costs.

S&P Global reported this week that Saudi Arabia’s SABIC and Industries Qatar (IQ), which are both ultimately state-controlled, benefit from low feedstock prices, strong shareholder support and “solid bases” of customers.

Feedstock is raw material used for processing or manufacturing another product.

• Saudi capital spending surges 38% on back of higher oil prices
• Behind the scenes at the controversial OPEC+ meeting

Fossil fuels, including natural gas, are the main feedstock for petrochemical products and the ratings agency noted Gulf producers receive theirs at “significant discounts” to European benchmark prices, while Saudi prices are fixed. 

This gives Gulf firms an advantage over rival producers from other regions: petrochemical prices are closely linked to those of oil and gas, so soaring energy costs have supported margins at SABIC, IQ and Abu Dhabi’s Fertiglobe. Fertiliser prices, for example, hit 14-year highs. 

Long-term supply agreements with state-owned oil companies, which have abundant reserves, should also provide stable cash flows for Gulf producers, S&P noted. 

“That said, the pressures on the GCC’s chemical companies are similar to the rest of the world,” the report said.

“Increased geopolitical fallout in Europe and prolonged Covid-19 restrictions in China have strained supply chains and translated into a weaker global macroeconomic picture.”

S&P in August revised its ratings and outlook for various European chemicals companies including Germany’s BASF due to the increased business risks these firms now face. 

“The higher prices and threats to supply of natural gas, which is not only used to generate electricity and steam, but also serves as raw material in chemical value chains, introduced grave operational supply chain challenges,” S&P said.

They forecast that publicly listed chemical companies will nevertheless achieve EBITDA margins of about 30 percent this year versus 34-35 percent in 2021.

For the Gulf petrochemical companies S&P covers, “increases in interest rates place more downside pressure on credit metrics than rising energy costs, mainly because most debt carries floating interest rates, and feedstock is significantly discounted to market prices”. 

If interest rates were to rise 10 percentage points over the next two years, the financials of SABIC, IQ and Fertiglobe would still be sufficiently strong not to warrant a downgrade. 

“Even though most of the gross debt of the region’s chemical companies comprises floating debt or has a component of variable interest rate movements, we estimate that on a weighted average basis, overall financial thresholds would remain largely unchanged, at least for the bigger players,” S&P said.