How will feedstock price hikes impact petchem firms?

The Tadawul-listed petrochemical producers announced receiving an official notice from Saudi Aramco on adjusting feedstock prices as of Jan. 1.

The companies expected the relevant financial impact to be varying increases in the total cost of sales, based on their latest audited financial statements.

Sahara International Petrochemical Co. (Sipchem) and SABIC Agri-Nutrients Co. (SABIC AN) disclosed the highest financial impact, as both petrochemical producers mainly rely on ethane and methane.

Methane accounts for 100% of SABIC AN’s feedstock. On the other hand, ethane and methane make up 15% and 35% of Sipchem’s feedstock, respectively. Meanwhile, Methanol Chemicals Co. (Chemanol) is still assessing the expected financial impact. It is set to report a similar impact, as methane is the main feedstock for its methanol production unit.

After factoring in the recent price increases, SABIC AN and Sipchem recorded the lowest cost of sales to total sales ratio, with 42.6% and 54.8%, respectively, based on the 2022 financial statements. The following table shows the impact expected from the feedstock price hikes:

The following table shows the companies that do not use natural gas, ethane and methane, as feedstock. Accordingly, they will see no significant impact.

In early 2016, Saudi Arabia adjusted energy product prices. Methane prices were raised to $1.25 per million British thermal units (BTU), and ethane prices to $1.75 per million BTU.

The propane and butane pricing equations were adjusted to 0.80 (multiplied by the average price per ton in Japan for the previous month, less the shipping and insurance costs from Ras Tanura to Japan). 

Feedstock prices in Saudi Arabia are among the lowest worldwide. The significant variance in global gas prices is related to the obstacles hindering liquefying, transporting, and storing gas compared to liquid crude oil, which can be easily transported via oil tankers. Unlike oil, there is no global market for gas except in North America, where futures contracts for domestically produced and sold gas are traded.

The Kingdom’s feedstock prices are expected to remain lower than other regions in the world. While negotiating to join the World Trade Organization, Saudi Arabia gained recognition that its low gas prices do not support the local petrochemical industry but rather represent the very low cost of producing natural gas, mainly produced as associated gas with oil. Therefore, the production and processing costs are extremely low. Regarding gas liquids, the approximately 20% discount compared to export prices reflects the variance related to exporting, including gas liquefaction, shipping, storage, and distribution.