Top executives at Saudi Arabia’s petrochemical producers probably have little in common with Russian Marxist Georgi Plekhanov. Yet the revolutionary’s mantra “the worse, the better” may prove the unlikely route to salvation for their beleaguered industry.
First-quarter results among Saudi petrochemical producers, which were forecast to be poor, proved to be even worse than expected. Margins remained close to multi-decade lows thanks to oversupply and subdued demand.
This malaise will persist for as long as producers, especially those in higher-cost regions around the world, delay tough decisions to halt production, analysts say.
Somewhat counterintuitively, therefore, a decline in global economic growth on the back of heightened trade tensions may hasten a rebound in the petrochemicals industry.
Economists have cut their global GDP growth forecasts for 2025 across the board. The US economy, the world’s largest, shrank 0.3 percent in the first quarter.
“Recessions enable the industry to sort out the supply side, with all those plants just about hanging on despite running at a loss, finally capitulating and shutting down production,” says Yousef Husseini, director of chemical equity research at EFG Hermes in Cairo.
Saudi Basic Industries Corp (Sabic), the world’s seventh largest chemicals manufacturer by sales, made a net loss of $323 million in the three months to March 31, compared with a near $70 million profit in the year-earlier period.
Higher-cost plants in Europe and East Asia would be likely to close first. Already, shutdowns have removed about 4 million to 5 million tonnes of annual polyethylene and polypropylene production, the two top petrochemical products.
However, annual production capacity is still growing an average 7 million tonnes per year while demand growth is on average only about half that.
Even with these shutdowns, oversupply is likely to persist unless more plants shut down.
“You’d need to see a massive scale of shutdowns, which would only happen in a global recession,” Husseini says.
“The sector is unlikely to improve until at least 2027 because, no matter what happens on the demand side, it’s the supply side that’s the problem.”
Petrochemical products are made mostly from oil and gas, and so tend to track crude prices. Brent crude is down nearly 13 percent this year, although it has rebounded from a four-year low in early May to trade at about $65 per barrel.
“If oil prices were to fall to the $50s for a sustained period it would cause the petrochemicals market to reset faster,” says Oliver Connor, director of energy equity research at Citigroup in London.
“But Opec seems to have oil prices under control. Saudi Arabia seems happy to manage prices in the $60s so we’re unlikely to be pulled into an ultra-bearish scenario of oil prices in the $50s for a sustainable period.”
Without an increase in demand, there will have to be more widespread plant closures among higher cost producers worldwide, Connor says.
“Investors are struggling to estimate when sector earnings will recover,” he says.
“There’s yet to be any widespread consolidation or mothballing of assets, although companies are more open about taking those sorts of strategic decisions which are what’s needed for industry margins to recover.”
For now, the market will remain oversupplied and that will weigh on product prices and margins, Connor says.
Saudi Arabia and US petrochemical companies have the lowest production costs thanks largely to cheaper feedstocks.
As such, Saudi producers can always sell their products, says Husseini, because they can undercut higher-cost rivals.
“I’m not worried about volumes and plant utilisation,” Conor says of these producers.
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