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Tue 7 Jul 2009 10:28 PM

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SABIC Q2 net profit seen falling 78%

Reuters poll cites low prices for Saudi petchem firm's products and lingering impact of 2007 US purchase.

Saudi Basic Industries Corp (SABIC), one of the world's largest petrochemical makers by market value, is expected to post a 78 percent plunge in net profit due to low prices for its products and the lingering effects of a 2007 US acquisition.The average forecast of four analysts for second-quarter net profit is 1.67 billion riyals ($445.3 million), compared with 7.55 billion riyals in the same quarter last year.

SABIC, seen as an industry bellwether, rattled the market when it reported a deeper than expected loss in the first quarter, partly because of a writedown on its acquisition of GE Plastic, which it bought for $11.6 billion in 2007 just before the US economic downturn.

Lower petrochemical prices also contributed to the first-quarter loss, which Hesham Abu-Jamee, head of asset management at Bakheet Investment Group, believes will again be a factor in SABIC's second-quarter results.

Abu-Jamee said the price of a basket of SABIC's petrochemical products, which include polyethylene and polypropylene, rose 5 percent from the first quarter, but are still 50 percent lower compared with the second quarter of 2008.

The acquisition of GE Plastic would also likely have an effect, partly because it had reshaped the geography of SABIC's revenues, KSB Capital Deputy Chief Executive Ibrahim Al-Alwan said.

"The US market now accounts for a substantial, but not a majority, part of SABIC's revenue. It reduced Asia's share and made SABIC more vulnerable now to changes affecting the US market," he said.

"There is also the problem of volumes (sold) ... There is little positive news out of America," Alwan said.

Petrochemical prices have been affected by sinking demand and the oil price, which has fallen from a record $147 a barrel last July before crashing to $32.40 a barrel in December. Oil has since risen, and was around $65 on Tuesday.

Rising oil prices are seen as positive for petrochemical firms because they increase petrochemical product prices and make them more competitive against rival manufacturers from countries with higher tax rates for oil.

SABIC's share price has risen 40 percent since the end of March, outperforming both the petrochemicals index, which has risen 34 percent, and the all-share index, which added 16 percent over the same period.

Abu-Jamee believes the worst seems to be over for SABIC. "We are moving from a net loss in the first quarter to a net profit in the second quarter."

SABIC's affiliate Saudi Fertilizers Co, which produces urea and ammonia, is forecast to post a 60 percent drop in second-quarter net profit compared with a year earlier, according to the average of four estimates.

"Safco prices are still decreasing. They are 2 percent below the first quarter (2009) and 60 percent below their level in the second quarter of 2008," Abu Jamee said.

SABIC and Safco together account for some 70 percent of the market value of 13 chemical and petrochemical firms in Saudi Arabia, and make up about 30 percent of the Saudi bourse's capitalisation. (Reuters)

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