DUBAI (S&P Global Ratings) -- Chemical producers should be able to withstand higher feedstock prices if, as media reports suggest, a hike materializes in the fourth quarter of 2023 (see "Saudi Chemical Producers' Credit Metrics Can Withstand A Possible Feedstock Price Hike," published today).

"After measuring the impact of a hypothetical deterioration in EBITDA, we believe that publicly listed chemical companies in Saudi Arabia could absorb higher feedstock prices," said S&P Global Ratings credit analyst Rawan Oueidat. "We would expect their EBITDA margins to remain above 17% and adjusted debt to EBITDA below 1.5x on average, albeit with a greater effect for those with more exposure to fertilizers," Ms. Oueidat added.

All else being equal, we estimate that these companies, including Saudi Basic Industries Corp. (A/Stable/A-1), could withstand up to a 25% decrease in EBITDA due to higher feedstock costs, among other causes, in 2024.

Feedstocks such as ethane and propane form the bulk of Saudi chemical producers' operating expenses, making them sensitive to price hikes despite their advantageous position over global peers. Media reports suggest that the country's Ministry of Industry and Mineral Resources could raise feedstock prices for the industrial sector at the end of the year.

Saudi chemical producers are in a more favorable position than their global peers because domestic feedstock prices are significantly lower than global benchmarks, and will likely remain so, even in the event of a price hike in the next few months. Saudi ethane and methane cost less than $2 per metric million British thermal unit (/mmbtu), compared with average Title Transfer Facility prices of $42/mmbtu in 2022 and $7.8/mmbtu in late May 2023.

Historically, these competitive prices have helped listed Saudi chemical producers' EBITDA margins remain above 17%, our threshold for above-average profitability, even in periods of volatile prices and macroeconomic uncertainty. The gap between feedstock prices for Saudi and global players widened following the Russia/Ukraine conflict because of the uncertainty over gas supply to Europe and the volatility in commodity prices, but we expect it to narrow over the next few years.

This report does not constitute a rating action.