Saudi companies express concerns over Aramco’s fuel price hike impact on earnings

Yousef Husseini, Associate Director for Equity Research at EFG Hermes, noted that while the market reacted negatively to the news, investors were somewhat prepared for a potential increase due to the historically low prices.

Several Saudi Arabian companies have voiced apprehensions regarding potential impacts on their earnings this year as state energy group Saudi Aramco plans to significantly increase feedstock and fuel prices. Entities including Nama Chemicals and Saudi Ceramic revealed in regulatory filings that Saudi Aramco notified them of a substantial rise in retail diesel prices for 2024, marking the third increase since 2016. The adjustment, effective from January 1, sees a 53% surge to 1.15 riyals ($0.3067) per litre.

Qassim Cement, Saudi Aramco Base Oil Co., and Rabigh Refining and Petrochemical also issued regulatory filings, acknowledging their vulnerability to the impending price hikes. While the companies anticipate rises in natural gas and other fuel prices, specific details regarding these adjustments were not provided.

Concerns are heightened as companies anticipate feeling the impact in the first quarter of the year. In response, many are exploring avenues to enhance efficiencies and offset the anticipated rise in production costs. Saudi Aramco has not yet responded to requests for comment on the matter.

The Tadawul stock index in Saudi Arabia experienced a 1.6% decline in early trading on Thursday, influenced by the negative sentiment surrounding petrochemical and cement stocks.

These price increases align with Saudi Arabia’s domestic fuel price reforms, initiated in 2016 as a response to lower oil prices at that time. The reforms, aimed at gradually eliminating energy subsidies, led to significant jumps in gasoline, diesel, and electricity prices, reaching up to 80%.

Yousef Husseini, Associate Director for Equity Research at EFG Hermes, noted that while the market reacted negatively to the news, investors were somewhat prepared for a potential increase due to the historically low prices. The government had been discussing further restructuring since 2016, but the exact magnitude and timing of these increases were unclear.

Middle East Company for Manufacturing and Producing Paper stated that it anticipates a roughly 3% increase in total annual sales costs due to the fuel price hike. Similarly, Saudi Industrial Investment Group highlighted that its subsidiaries are expected to face higher production costs this year as a direct consequence of the fuel price increase.

As the market navigates these changes, the focus remains on how companies will adapt to mitigate the impact on their bottom lines, and investors are keenly observing the ongoing developments in response to these economic shifts.