SABIC’s Enterprise Risk & Data Management is designed to safeguard the interests of SABIC stakeholders, including customers and employees, and to manage SABIC’s risks in a way that promotes our strategy of becoming the world’s preferred leader in chemicals.
All functions regularly provide coordinated reports to SABIC’s Executive Risk Management Committee. The SABIC Board of Directors & Risk and Sustainability Committee oversees the activities of the Enterprise Risk & Data Management department in assessing key business risks for the company.
Our risk management policy is to proactively identify assets and manage risks facing the company. In addition, we seize to evaluate their impact on our performances and take preventive measures to manage them. At the same time, we are leveraging opportunities in pursuit of our goals to meet our strategic objectives. The policy covers all our operations worldwide.
The responsibility for implementing our risk management policy rests with the Chief Executive Officer (CEO), whilst the responsibility for monitoring the implementation of this policy lies with the Board of Directors, supported by the Risk and Sustainability Committee. We have established an Integrated governance system to effectively identify, understand and manage the risks facing the company. It starts with our employees and management by developing detailed reports on the risks facing the company for the Risk and Sustainability Committee, which monitors these reports on a regular basis. The Risk and Sustainability Committee then makes recommendations to the Board of Directors on the efficiency of measures taken to minimize the impact of all risks. In addition, it recommends the same measures to be taken if needed, or take additional measures to control these risks.
Principally, we are exposed to inherent risks, such as strategic risks, limiting our ability to achieve our strategic objectives. Operational risks derived from the nature of our operations and financial risks affect our profitability. Simultaneously, we are exposed to several risk factors.
Below are the main risks relating to our business and detailed description of the main risk factors.
- Insurance policies may not be sufficient to cover all risks that we face.
- Oil and gas price fluctuations and a substantial or extended decline in cracking margins would negatively influence our financial results.
- The industries in which we operate are highly competitive.
- The cyclical nature of the petrochemicals industry may have a material and adverse impact on our business.
- Exposure to risks in connection with projects under development.
- Conditions affecting transportation of products may adversely affect the performance of our operations.
- Exposure to risks associated with the use of information technology.
- Exposure to risks relating to EHSS liabilities.
- Risks of an increase in pricing of greenhouse gas emissions.
- Exposure to risks arising from defective products.
- Risks arising from accidents involving SABIC’s products
- Exposure to risks relating to EHSS liabilities.
- Risks of an increase in pricing of greenhouse gas emissions.
- Exposure to risks arising from defective products.
- Risks arising from accidents involving SABIC’s products
FINANCIAL AND ECONOMIC RISKS
- We are subject to global economic market conditions.
- Exposure to potential difficulties in fulfilling our financial obligations or funding our planned capital expenditure.
- Exposure to customer credit risk.
- Exposure to interest rate risk and foreign exchange risk.
- Reliance on the performance of, and dividend distributions and other revenue flows from, our subsidiaries, joint ventures and affiliates.
- Exposure to risks arising from pension obligations.
CURRENT EMERGING RISKS
- Impact of coronavirus disease (COVID-19)
INSURANCE POLICIES MAY NOT BE SUFFICIENT TO COVER ALL RISKS THAT WE FACE
The operations of SABIC companies are subject to hazards and risks inherent in, among other things, refining and petrochemicals operations. Such hazards and risks include fires, explosions, pipeline ruptures and spills, storage tank leaks, chemical spills, discharges or releases of hazardous substances or gases, environmental risks, mechanical failure of equipment at SABIC’s facilities, war, terrorism, sabotage and natural disasters. In addition, many of these risks may cause personal injury and loss of life, severe damage to or destruction of SABIC’s properties and the properties of others including environmental pollution which may result in the suspension of operations and the imposition of civil or criminal penalties.
SABIC maintains insurance coverage in amounts that are consistent with relevant industry practice, including coverage for the risk of property damage, business interruption resulting from, among other things, fire or machinery breakdown and thirdparty liability. However, there can be no assurance that such insurance coverage will be adequate to cover all losses that SABIC may incur in future periods, or that the liability imposed on such company will not exceed its total assets. SABIC could be subject to a material loss to the extent that a claim is made against SABIC which is not covered in whole or in part by insurance and for which third party indemnification is not available. In addition, there can be no assurance that SABIC's insurance coverage will continue to be available in the market or available at an acceptable cost.
If SABIC’s companies suffer large uninsured losses or if any insured loss suffered by any such company significantly exceeds its insurance coverage, the business, results of operations or financial condition of such companies may be materially and adversely affected. This would in turn affect the ability of the portfolio companies within SABIC to pay dividends and make other distributions to SABIC and could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
OIL AND GAS PRICE FLUCTUATIONS AND A SUBSTANTIAL OR EXTENDED DECLINE IN CRACKING MARGINS WOULD NEGATIVELY INFLUENCE OUR FINANCIAL RESULTS
Net margins within the petrochemical sector tend to be driven mostly on a combination of supplydemand dynamics and the rising cost of raw materials.
Therefore, SABIC’s financial results are significantly impacted by the margin between the prices at which SABIC sells products and the prices at which SABIC purchases feedstock for use, particularly in its petrochemicals business. However, the price of SABIC’s feedstock and the price of the product sold to customers depend on the type of product, the location of the production and the location of the customer.
SABIC’s results of operations can be significantly impacted by fluctuations in the prices of a number of commodities, primarily oil, its derivatives and gas. SABIC’s two main feedstock in Saudi Arabia (methane and ethane) are based on prices set by the Minister of Energy, Industry and Mineral Resources in Saudi Arabia. The rest of SABIC’s feedstock, both gas and liquid, are subject to various fluctuations in feedstock prices. SABIC’s petrochemicals manufacturing operations outside Saudi Arabia generally use oil-derivatives (mainly naphtha) as feedstock and purchase such feedstock in the international markets at market prices.
Many of SABIC’s sales relate to petrochemical products and sales prices for petrochemical products generally change in tandem with changes in oil prices, albeit sometimes with a time delay and with different dynamics in different regions. The significant decline in oil prices during the first half of 2020 had a significant adverse effect on SABIC's sales as prices for (almost all) of SABIC's chemical products fell during that period while a significant amount of the cost of production of SABIC's operations in Saudi Arabia, which are mostly based on gas, did not change.
Therefore, during times of increasing oil prices, as manufacturers are unable to shift all such increases to their customers, the cracker margin of SABIC’s operations outside Saudi Arabia decrease in comparative terms. As a result, the margins in the SABIC’s gas-based operations (mostly in Saudi Arabia) improve significantly in periods with higher oil prices (and higher petrochemical prices) and decline in periods of low oil prices while the margins in SABIC’s operations (mostly outside Saudi Arabia and some of the operations in Saudi Arabia) increase profitability in periods of low oil prices.
THE INDUSTRIES IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE
The markets for most of SABIC’s products are highly competitive. SABIC is exposed to the competitive characteristics of several different geographic markets and industries. SABIC’s principal competitors vary from product to product and range from large global petrochemical companies to numerous smaller regional companies. Some of SABIC’s competitors are larger and more vertically integrated than SABIC (in terms of their upstream and/or downstream productions) and therefore may be able to manufacture products more economically than SABIC can.
In addition, some of SABIC's competitors have greater technical, research and technology or marketing resources. The competitive landscape in which SABIC operates may also change in a manner currently unanticipated by SABIC – for instance, existing competitors may commit more resources to the markets in which SABIC operates and/or raw material suppliers may expand their value chains and/or worldwide and regional refining capacity expansions may result in refining production capability exceeding refined product demand. Such events may, in turn, lead to short- or long-term downward pricing pressures. Competition and innovation in the industries in which SABIC operates may put pressure on the product prices SABIC is able to charge customers. For instance, the products manufactured by SABIC may be subject to the risk of product substitution as a result of technological advancements or change in consumer preferences.
The implementation of SABIC's strategy to remain competitive may require continued technological advances and innovation in its operations. Most of SABIC's operations are based on licenses on process technologies from third party licensors. While such licensors provide SABIC with process and product improvements on their technology licenses, there can be no assurance that SABIC will have access to the most advanced technology developments from its licensors in the future or that it will have the ability to reach adequate and competitive technology advances based on its own research and development capabilities.
A key component of SABIC’s strategy is to introduce new products and applications that offer distinct value to customers. SABIC intends to continue to devote substantial resources to the development of new technologically advanced products and processes and to continue to devote a substantial amount of expenditure to the research and development functions of its business. However, there can be no assurance that SABIC will be successful in developing new products or processes, or bringing them to market in a timely manner, that products or technologies developed by others will not render SABIC's product offerings obsolete or non-competitive, that the market will accept SABIC's new products and innovations, or that competitors will not be able to produce similar products at a lower cost. As a result, the implementation of these strategies may be costly and ineffective.
SABIC’s financial condition and results of operations may be adversely affected if competitors develop or acquire intellectual property rights to technology, if SABIC’s innovation lags behind the rest of the industry, or if SABIC fails to innovate and introduce successful new products.
THE CYCLICAL NATURE OF THE PETROCHEMICAL INDUSTRY MAY HAVE A MATERIAL AND ADVERSE IMPOCT ON OUR BUSINESS
The petrochemicals industry is subject to the cycles of expansion and contraction in line with movements in the global economy, which create swings in the supply and demand of petrochemicals products and volatility in the prices of feedstock as well as finished petrochemical products. Due to this cyclicality, historically the international petrochemical markets have experienced alternating periods of limited supply (which has caused prices and margins to increase), followed by an expansion of production capacity (which has resulted in oversupply, lower prices and reduced margins). SABIC cannot predict with any measurable accuracy these economic trends and cycles or the duration and dates of such trends and cycles, which could significantly affect SABIC's business, results of operations or financial condition.
EXPOSURE TO RISKS IN CONNECTION WITH PROJECTS UNDER DEVELOPMENT
SABIC has a number of significant capital-intensive projects (such as investment in new production plants, expansion of existing plants and the upgrading of existing plants) under development or in the planning stages. Other additional capitalintensive projects may be undertaken during the term of the Report. Each of these projects entails a number of risks during construction such as the risk of investment cost over-run, the risk of delayed or incomplete start-up, the risk of any default by any appointed contractor or sub-contractor or their ability to comply with their contractual obligations, shortages or increases in the costs of equipment, breakdown or failure of equipment, processes or technology, difficulties in connecting any related upstream or downstream facility, timely availability of the required feedstock at the time of commencement of commercial operations, start-up or commissioning problems, problems with effective integration of operations, increased operating costs, exposure to unanticipated liabilities, changes in taxes or duties, difficulties in achieving projected efficiencies, synergies and cost savings, and changes in market conditions. If any of these risks materializes, the overall profitability of the relevant project would be materially adversely affected. If any new project fails to achieve the expected levels of performance or profitability, this could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
CONDITIONS AFFECTING TRANSPORTATION OF PRODUCTS MAY ADVERSELY AFFECT THE PERFORMANCE OF OUR OPERATIONS
SABIC’s operations rely on the transportation of materials, primarily exports of finished products, by sea and by railcars and trucks overland. Although SABIC seeks cost efficiencies in the distribution of its finished products, there can be no assurance that these transportation costs will not significantly increase in the future, which may reduce SABIC’s competitive advantage compared to regional producers.
Any issue affecting cargo transportation by sea, such as special taxes, dangerous conditions or natural disasters, among others, could adversely affect SABIC’s results of operations or financial condition. Further, some of the products that are required for transportation are classified as hazardous. SABIC’s production facilities in Saudi Arabia are reliant on cargo transportation from the Arabian Gulf. SABIC’s operations elsewhere around the world also rely on various forms of transportation to get the finished products to customers. Geopolitical issues, acts of war, trade blockades and piracy affecting these transportation routes could adversely affect SABIC’s business, results of operation and financial condition.
EXPOSURE TO RISKS ASSOCIATED WITH THE USE OF INFORMATION TECHNOLOGY.
SABIC relies on a number of information technology (IT) systems in order to carry out its day-to-day operations. With the increasing complexity of electronic information and communication technology, SABIC is exposed to various risks, ranging from the loss or theft of data, cyber-attacks, stoppages and interruptions to the business, to systems failure and technical obsolescence of IT systems.
Increased global information security threats and more cyber-crimes that are sophisticated pose a risk to the confidentiality, availability and integrity of data, operations and infrastructure of the IT systems, networks, facilities, products and services of SABIC. The non-availability, violation of confidentiality, or the manipulation of data in critical IT systems and applications can lead to the uncontrolled outflow of data and expertise and have a direct impact on the SABIC’s business operations.
While SABIC maintains back-up systems there are no assurances that these will work as efficiently or quickly as expected if at all. Should such threats overcome the information security measures implemented by SABIC, they could potentially lead to the compromise of confidential information, improper use of systems and networks, manipulation and destruction of data, production downtime and operational disruptions, which in turn could have a material and adverse effect on SABIC's business, results of operations and financial condition.
EXPOSURE TO RISKS RELATING TO EHSS LIABILITIES
Companies within SABIC must comply with all environment, health, safety and security (EHSS) related laws and regulations which are applicable to our operations. These laws and regulations set various standards regulating certain aspects of EHSS quality, provide for civil and criminal penalties and other liabilities for the violation of such standards and establish, in certain circumstances, obligations to remediate current and former facilities and locations where operations are or were conducted. In addition, special provisions may be applicable in environmentally sensitive areas of operation.
SABIC cannot predict what EHSS legislation or regulations will be enacted in the future or how existing or future EHSS laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of any regulatory authority, could in the future require material expenditures by SABIC for the installation and operation of systems and equipment for remedial measures. Any or all of the foregoing could have a material and adverse effect on SABIC's business, results of operations or financial condition.
RISKS OF AN INCREASE IN PRICING OF GREENHOUSE GAS EMISSIONS
The costs associated with carbon dioxide emissions could significantly increase SABIC's costs.
SABIC expects continued political attention to issues concerning climate change and adaptation or mitigation through regulation that could materially affect SABIC's operations. Internationally, the United Nations Framework Convention on Climate Change and the Paris Agreement address greenhouse gas emissions. Carbon dioxide (CO2) is a by-product of the burning of fuels (including oil and gas) and is considered a greenhouse gas. SABIC's operations result in the emission of carbon dioxide which in 2019 were 3.4 million metric tons (mmt). Saudi Arabia is a signatory of the Paris Agreement and has ratified it. Compliance with the Paris Agreement may require the reduction of CO2 emissions in Saudi Arabia, and the responsibilities of Saudi companies may change following the implementation of any CO2 mitigation regulations. Such regulations could result in, for example, increased costs to operate and maintain SABIC's manufacturing facilities and/or costs to install new emission controls and administer and manage any potential greenhouse gas emissions. These increased operating and compliance costs could have a material and adverse effect on SABIC's business, results of operations or financial condition.
EXPOSURE TO RISKS ARISING FROM DEFECTIVE PRODUCTS
A number of products manufactured by SABIC companies are developed from highly complex and technical manufacturing processes and, accordingly, there is a risk that defects may occur in any of such products. Such exposure increases when customers integrate SABIC’s products into consumer products, which are then sold to consumers. While SABIC limits its liability to its customers for product defects under sale and purchase agreements, the legal systems in a number of countries impose a strict liability on the manufacturer or the importer of products, which cannot be limited. Defects in products manufactured by SABIC can give rise to significant costs, including expenses related to recalling end-use products by downstream customers or their own customers, replacing defective items, recording defective inventory and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. Any or all of such events could have a material and adverse effect on SABIC’s business, results of operations or financial condition as well as its reputation.
RISKS ARISING FROM ACCIDENTS INVOLVING SABIC’S PRODUCTS
Accidents involving SABIC's products could cause severe damage or injury to property, the environment and human health, which could materially adversely affect SABIC's business, results of operations and financial condition.
As a business working with chemicals and hazardous substances, SABIC's business is inherently subject to the risk of spills, discharges or other releases of hazardous substances into the environment. SABIC uses as feedstock, and manufactures, stores and transports chemical products, that are volatile, explosive and/or the release of which may have an adverse impact on the environment. Environmental risks associated with SABIC's operations include:
- Fire/explosions at SABIC's production or logistics facilities
- Discharges of toxic gases into the atmosphere
- Discharge of hazardous chemicals on land or in waterways.
Accidents involving these or other substances could result in fires, explosions, severe pollution or other catastrophic circumstances, which could cause severe damage or injury to persons, property or the environment as well as disruptions to SABIC's business. Such events could result in equipment failures or shutdowns, civil lawsuits, criminal investigations and regulatory enforcement proceedings, all of which could lead to significant liabilities for SABIC. Any damage to persons, equipment or property or other disruption to SABIC's ability to produce or distribute its products could result in a significant decrease in SABIC revenues and profits and significant additional cost to replace or repair SABIC's assets, and depending on the nature of the incident SABIC may not be fully insured, or not insured at all, all of which could result in a material adverse effect on SABIC's business, results of operations and financial condition.
In addition, certain environmental laws applicable to SABIC impose strict liability, without regard to fault, for clean-up costs on those who have disposed of or released hazardous substances into the environment. As a result, given the nature of SABIC's business, it may incur environmental clean-up liabilities in respect of its current or former facilities, adjacent or nearby third-party facilities or offsite disposal locations. Pollution risks and related clean-up costs are often impossible to assess unless environmental audits have been performed and the extent of liability under environmental laws is clearly determinable. The costs associated with future clean-up activities that SABIC may be required to conduct or finance may be material. Additionally, SABIC may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Furthermore, SABIC's properties have a long history of industrial operations and its plants generate large amounts of waste materials. SABIC incurs substantial costs to manage and dispose of such waste materials. SABIC's properties generally have not been subject to comprehensive environmental audits to fully assess whether contamination is present. Any findings of contamination could require removal and reclamation action and result in other liabilities that could have a material adverse effect on SABIC's business, results of operations and financial condition.
CHANGES IN LAWS OR REGULATIONS, OR A FAILURE TO COMPLY WITH ANY LAWS AND REGULATIONS, MAY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
SABIC is subject to various laws and regulations. Such laws and regulations may relate to licensing requirements, EHSS obligations, asset and investment controls, marketing guidelines and a range of other requirements. In particular, SABIC’s petrochemicals are subject to a variety of laws and governmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used by such businesses. Compliance with such laws and regulations can be costly, and SABIC incurs and will continue to incur costs, including capital expenditures, to comply with these requirements. Furthermore, failure to comply with such regulations or any changes to such regulations, including the introduction of additional regulations, could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
SABIC uses and manufactures hazardous chemicals that are subject to regulation by the EU and by many national, provincial and local governmental authorities in the countries in which SABIC operates. In order to obtain regulatory approval of certain new products and production processes, SABIC must, among other things, demonstrate to the relevant authorities that the product is safe for its intended uses and that SABIC is capable of manufacturing the product in accordance with applicable regulations. The process of seeking such regulatory approvals can be time-consuming and subject to unanticipated and significant delays. Regulatory approvals may not be granted to SABIC on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these regulatory approvals would adversely affect SABIC’s ability to introduce new products, to continue distributing existing products and to generate revenue from those products, which could have a material adverse effect on its business, results of operations or financial condition. In addition, new laws and regulations may be introduced in the future that could result in additional compliance costs, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of SABIC’s products. The regulation or reclassification of any of the SABIC’s raw materials or products could adversely affect the availability or marketability of such products, result in a ban on its import, purchase or sale, or require SABIC to incur increased costs to comply with notification, labelling or handling requirements, each of which could adversely affect SABIC’s business, results of operations or financial condition.
EXPOSURE TO RISKS ARISING FROM INTERNATIONAL TRADE CONTROLS
SABIC exports products to countries which have adopted trade control measures such national security export controls and economic sanctions laws, and follows their applicable laws. Failure to comply with such laws and regulations may result in penalties or loss of export privileges
SABIC considers that the use of trade defense measures such as anti-dumping and anti-subsidy cases by some countries is likely to increase in the future. For example, prior to a trade deal with China in January 2020, the U.S. had increased restrictions on international trade and significantly increased tariffs on certain goods imported into the U.S and China responded with similar measures on goods imported from the U.S.. SABIC serves the U.S. market primarily through exports but it also imports raw materials and exports products manufactured in the U.S. and may therefore be adversely affected should additional protectionist measures be adopted by the U.S. administration and countermeasures adopted by other countries, in particular China, which is a significant export market for SABIC. On the other hand, SABIC benefits from trade barriers in markets where it sells domestically produced products. The worsening of such trade relations, in particular between the U.S., China and the European Union, could result in negative repercussions in these countries and have a knock-on effect on global trade and the economic environment. SABIC is exposed to such measures since its main products (plastics and chemicals) may be a target of such instruments and certain of SABIC's main export markets (such as China) are affected by such measures. Any trade defense measures or duties imposed on exports or imports from SABIC, its suppliers or customers could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
CHANGES IN LAWS OR REGULATIONS, OR A FAILURE TO COMPLY WITH ANY LAWS AND REGULATIONS, MAY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
SABIC is subject to various laws and regulations related to licensing requirements, EHSS obligations, asset and investment controls, marketing guidelines, climate change trends/pressures and a range of other requirements. In particular, SABIC’s petrochemicals are subject to a variety of laws and governmental regulations regarding the use, discharge and disposal of toxic or otherwise hazardous materials used by such businesses. Compliance with such laws and regulations can be costly, and SABIC incurs and will continue to incur costs, including capital expenditures, to comply with these requirements. Furthermore, failure to observe such regulations or any changes thereto, including the introduction of additional regulations, could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
SABIC uses and manufactures hazardous chemicals that are subject to regulation by many national, provincial and local governmental authorities in the countries in which SABIC operates. In order to obtain regulatory approval of certain new products and manufacturing processes, SABIC must, among other things, demonstrate to the relevant authorities that the product or process is safe for its intended uses and that SABIC is capable of manufacturing the product in accordance with applicable rules. The process of seeking such regulatory approvals can be time-consuming and subject to unanticipated and significant delays. Any delay in obtaining, or any failure to obtain or maintain, these regulatory approvals would adversely affect SABIC’s ability to introduce new products, to continue distributing existing products and to generate revenue from those products, which in turn could have a material adverse effect on its business, results of operations or financial condition. In addition, new laws and regulations may be introduced in the future that could result in additional compliance costs, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of SABIC’s products. The regulation or re-classification of any of the SABIC’s raw materials or products could adversely affect the availability or marketability of such products, resulting in a ban on its import, purchase or sale, or require SABIC to incur increased costs to comply with notification, labelling or handling requirements, each of which could adversely affect SABIC’s business, results of operations or financial condition.
Additionally, many of SABIC's products are used in the production of other consumer goods, such as plastic packaging. Negative public perceptions or bans, restrictions or disincentizisations from regulators relating to the use of plastic, due to environmental concerns with respect to the production and disposal of plastic, could reduce demand for SABIC's products. In addition, some jurisdictions have introduced legislation (or in some cases, more stringent legislation) to ban, restrict or disincentivize the use of certain types of plastic packaging or products, such as single use plastic bags. For instance, number of countries have introduced regulations to ban the use of polyethylene-based lightweight nonbiodegradable plastic bags, while others have imposed taxes on their use. Further legislative action could lead to a reduction in demand for SABIC's products and could adversely affect its business, results of operations or financial condition.
Laws and regulations and their interpretation and application may change from time to time. Any such change of law, regulation or interpretation (or divergence of views by any authority from that of SABIC's) could have a material and adverse effect on SABIC's business, results of operations or financial condition.
SABIC's future success depends in part on its continued ability to hire, integrate and retain highly skilled employees.
EXPOSURE TO RISKS RESULTING FROM DISPUTES AND/OR LITIGATION
SABIC is subject to risks related to legal and regulatory proceedings to which it or its subsidiaries, associates and joint ventures are currently a party or which could develop in the future. These may include, in particular, risks regarding product liability, competition and antitrust law, export control, data protection, patent law, procurement law, tax legislation and environmental protection. SABIC’s involvement in litigation and regulatory proceedings may result in the imposition of fines or penalties, or could adversely affect its reputation.
Furthermore, litigation and regulatory proceedings are unpredictable, and legal or regulatory proceedings in which SABIC is or becomes involved (or settlements thereof) could result in substantial penalties which may give rise to significant losses, costs and expenses. Such losses, costs and expenses may not be covered, or fully covered, by insurance benefits. Investigations of possible legal or regulatory violations may result in the imposition of civil or criminal penalties and/or other adverse financial consequences.
Any of the foregoing could have a material and adverse effect on SABIC’s business, results of operations or financial condition as well as on SABIC’s reputation.
EXPOSURE TO RISKS ASSOCIATED WITH THE USE OF INTELLECTUAL PROPERTY AND TECHNOLOGY LICENSES
SABIC depends upon a wide range of intellectual property to support its businesses and has obtained licenses for certain technologies which are used in its manufacturing facilities. SABIC’s petrochemical operations in Saudi Arabia are primarily based on technology process licenses from joint venture partners and other third parties. Any termination of a material technology license or dispute related to its use could require the relevant SABIC entity to cease using the relevant technology and therefore possibly adversely affect such entity’s ability to produce the relevant products. SABIC’s inability to maintain any license, which is the subject of a sub-license of technology to any subsidiary of SABIC, could require the relevant subsidiary to cease using the technology and to license such rights from other third parties on less favorable commercial terms or obtain substitute technology of lower quality or performance standards at greater cost.
to hire, integrate and retain highly skilled employees. Experienced and capable personnel in the industries in which SABIC
operates remain in high demand and there is continuous competition
SABIC’s future success depends in part on its continued ability to hire, integrate and retain highly skilled employees. Experienced and capable personnel in the industries in which SABIC operates remain in high demand and there is continuous competition for their talents. SABIC may not be able to successfully recruit, train or retain the necessary qualified personnel in the future. SABIC is dependent upon its executive officers and key personnel, and the success of its business is driven by the performance of such officers and key employees and the ability of SABIC to retain them. The unexpected loss of the services of SABIC’s executive officers or key personnel could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
SABIC may need to offer competitive compensation and other benefits in order to attract and retain key personnel in the future. If SABIC cannot recruit new qualified personnel to support its growing business, this could have a material and adverse effect on SABIC's business, results of operations or financial condition.
RISKS RELATED TO POLITICAL AND SOCIAL INSTABILITY IN THE MENA REGION
SABIC is centrally located in a region that is strategically important and parts of this region have been subject to political and security concerns, especially in recent years. Several countries in the region are currently subject to armed conflicts and/or social and political unrest, including conflicts or disturbances in Yemen, Syria, Libya and Iraq. Instability within the Middle East region may have a material adverse effect on Saudi Arabia's attractiveness for foreign investment and capital, its ability to engage in international trade and, subsequently, its economy and financial condition.
In addition, unrest and conflict in the Middle East and North Africa remains a significant concern with regard to business operations and it may cause continued uncertainty in forecasting performance in the near- to mid-term future. Further, important SABIC shipping line routes have been recently compromised. For example, the Strait of Hormuz is a key passageway for import and export of products to and from Saudi Arabia, and in particular into and out of the Port of Jubail where SABIC maintains large-scale manufacturing operations. Any shutdown or compromise of shipping routes via this Strait would substantially impede SABIC’s ability to transport products.
A number of products manufactured by SABIC companies are developed from highly complex and technical manufacturing processes.
WE ARE SUBJECT TO GLOBAL ECONOMIC MARKET CONDITIONS
SABIC faces risks attendant to changes in the economic environment globally and in the main regions where it conducts its business. In particular, SABIC’s performance is particularly influenced by economic cycles affecting end-user industries, such as the construction and automotive industries, since the products manufactured by SABIC are used as intermediates in the manufacturing of the products utilized by such companies. In the last decade, the global economy has continued to experience periods of slowdown, high volatility, reduced business activity, unemployment, decline in interest rates and erosion of consumer confidence, that have affected downstream demand for chemical and plastic products in certain industry sectors and regions.
SABIC cannot predict adverse trends in the global economy and their effect on the market demand for SABIC's products and SABIC's profitability. Any downturn in regional or worldwide economies, market crisis or prolonged periods of instability could have a material and adverse effect on SABIC’s business, results of Operations or financial condition. In particular, a worsening economic climate can result in decreased industrial output and decreased consumer demand for products including automotive products, consumer goods, packaging, industrial goods, textiles and agricultural goods, all of which incorporate SABIC’s products globally or in some regions where SABIC conducts its business.
An extended recession in any of the geographies that SABIC operates (or globally) could substantially decrease the demand for SABIC's products. Accordingly, adverse conditions in the global economy could adversely affect SABIC's business, results of operations or financial condition. In addition, changes in global trade policies may limit our ability to competitively operate in targeted markets and achieve our growth targets.
EXPOSURE TO POTENTIAL DIFFICULTIES IN FULFILLING OUR FINANCIAL OBLIGATIONS OR FUNDING OUR PLANNED CAPITAL EXPENDITURE
Any disruption in the global credit markets, re-pricing of credit risk and any difficulties in the conditions of the financial market may impact SABIC’s ability to fund its businesses or projects at all or in a similar manner, and at a similar cost, to the funding raised in the past. If the repayment of any loans or other debt instruments in respect of financing taken by SABIC or its subsidiaries cannot be refinanced or extended at acceptable terms, or paid with the proceeds of other transactions, SABIC’s cash flows and financial results would be adversely affected. If prevailing financing costs or other factors at the time of any such refinancing result in higher financing costs, such increased financing costs would adversely affect SABIC’s financial results.
External funding may not be available to SABIC on acceptable terms. If SABIC raises additional debt in the future, it may become subject to additional or more restrictive financial covenants and ratios or may be required to extend security over its assets for the benefit of lenders. Any such increased indebtedness may require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest (to the extent payable) on SABIC’s indebtedness, thereby reducing the SABIC’s ability to use its cash flow to fund its operations and future business opportunities.
Additionally, this may limit SABIC’s ability to raise capital to fund any future capital expenditure or operations, expose SABIC to the risk of increased interest rates and/or increased costs to hedge interest rates and expose SABIC to refinancing risk, to the extent that SABIC is unable to repay its borrowings out of internally generated cash flow. If SABIC is not able to obtain adequate financing or other capital contributions to fund capital and investment expenditures in the future, this could require SABIC to alter, reduce the scope of, defer or cancel such projects which may, in turn, affect the profitability and competitiveness of SABIC’s operations.
Any of the foregoing could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
EXPOSURE TO CUSTOMER CREDIT RISK
SABIC provides services and products to a variety of customers and is subject to the risk of non-payment for the services and products that it has supplied, primarily through trade receivables. These risks are heightened when conditions in the industries in which its customers operate, or general economic conditions, deteriorate. While SABIC has procedures in place to monitor credit risk on their receivables and continuously monitors customers’ credit limits and risk associated with it, there can be no assurance that such procedures will prevent the occurrence of credit losses that could have a material and adverse effect on SABIC’s business, results of operations or financial condition.
EXPOSURE TO INTEREST RATE RISK AND FOREIGN EXCHANGE RISK
SABIC is subject to interest rate risks in the ordinary course of business, primarily because of its longterm debt obligations with floating interest rates. Interest rate risks result from potential changes in prevailing market interest rates. These can cause a change in the present value of fixed-rate instruments and fluctuations in the interest payments for variable-rate instruments, which would positively or negatively affect earnings. Any future unhedged interest rate risk may result in an increase in SABIC’s interest expense and may have a material adverse effect on SABIC’s business, results of operation and financial condition.
Furthermore, SABIC operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to fluctuations of other currencies against the Saudi riyal. This exposure is primarily through account receivables, trade payables and certain non-SAR denominated bank accounts and borrowings. However, as long as the Saudi riyal is pegged to the US dollar and SABIC’s business is primarily conducted in US dollars; SABIC does not have any significant exposure to US dollars. As a result, the most significant foreign currency to which SABIC is exposed is the euro. SABIC is also exposed but to a lesser extent to the British pound, Japanese yen and Chinese yuan. SABIC’s policies require subsidiaries to conduct a regular review of currency exposures, while SABIC manages all derivative executions centrally. However, there can be no assurance that any hedges will adequately protect SABIC or that any future currency exchange rate fluctuations may not have an adverse effect on SABIC’s business, results of operations or financial condition
In response to the declining price of crude oil since June 2014, certain regional oil producing countries that have traditionally "pegged" their domestic currencies to the US dollar have faced pressure to remove these foreign exchange "pegs". Kazakhstan, Nigeria and Azerbaijan have chosen to unwind the US Dollar peg of their domestic currencies. While the likelihood of the GCC states pursuing a similar course of action is unclear, there remains a risk that any such future de-pegging by the GCC states could result in a devaluation of any such de-pegged currency against the US. dollar and could impact open cross-currency positions leading to currency fluctuations. Any change to the existing exchange rate policy that results in a significant depreciation of the Saudi riyal against the US dollar or other major currencies could have a material and adverse effect on SABIC's business, results of operations or financial condition.
RELIANCE ON THE PERFORMANCE OF, AND DIVIDEND DISTRIBUTIONS AND OTHER REVENUE FLOWS, FROM OUR SUBSIDIARIES, JOINT VENTURES AND AFFILIATES
SABIC conducts its operations principally through, and derives most of its revenues from, its subsidiaries, joint ventures and affiliates, and has limited revenue-generating operations of its own. Consequently, SABIC’s cash flows and ability to meet its cash requirements, including its obligations depend upon the profitability and cash flows from its subsidiaries, joint ventures and affiliates. This includes their ability to make dividend distributions to SABIC, repay interest on intercompany loans extended to them by SABIC and pay fees to SABIC for any inter-company services provided to them (such as the sale of their products, providing/sub-licensing technology licenses and providing catalyst supplies as well as providing certain administrative and other technical services).
In particular, SABIC conducts certain business operations through joint ventures, which are not controlled by SABIC. SABIC may also enter into additional joint ventures in the future. Some of SABIC’s joint ventures with third parties are managed by the respective joint venture’s own board of directors who are mandated to make business, financial and management decisions by taking into account the corporate interest of the relevant joint venture company. Such decisions may therefore not be solely in the interests of SABIC and may reflect the interests of the other joint venture partners, including in relation to dividend distributions. In addition, SABIC’s joint venture partners may breach their obligations to SABIC or the joint venture, have economic or business interests inconsistent with SABIC’s or the joint venture’s interests and/or take actions contrary to SABIC’s objectives or policies, any of which may result in disputes between SABIC and its joint venture partners.
Any decline in such subsidiaries, joint ventures or affiliates profitability could affect their ability to pay dividends, interest and/or make other payments to SABIC and, in turn, could have a material and adverse effect on SABIC’s results of operations and financial condition.
EXPOSURE TO RISKS ARISING FROM PENSION OBLIGATIONS
SABIC has defined benefit pension plans in various countries (the largest of which are in the United States and the United Kingdom). In the United States, certain SABIC companies also have post-retirement plans that provide certain medical benefits and life insurance for retirees and eligible dependents. The relevant SABIC companies have funding and other obligations with respect to such pension, benefit plans in accordance with the rules applicable to the respective pension, or benefit plan. The accounting for these plans requires that management make certain assumptions relating to the long-term rate of return on plan assets, discount rates used to measure future obligations and expenses, salary scale inflation rates, health care cost trend rates, mortality and other assumptions. The selection of assumptions is based on historical trends and known economic, and market conditions at the time of valuation. However, these estimates are highly susceptible to change from period to period based on the performance of plan assets, actuarial valuations, market conditions and contracted benefit changes. Unfavorable changes of those estimates, as well as actual results substantially differing from the estimates, might result in a significant increase in SABIC’s obligations or future funding requirements. This in turn could have a material and adverse effect on SABIC’s results of operations and financial condition.
IMPACT OF CORONAVIRUS DISEASE (COVID-19)
The outbreak of communicable diseases on a global scale, including COVID-19, the disease caused by coronavirus that has spread rapidly across the world and was declared a pandemic by the World Health Organization on March 11, 2020, has affected investment sentiment, resulted in volatility in global capital markets and impacted demands and prices in many industrial sectors in which SABIC sells its products. Throughout 2020, COVID-19 outbreak resulted in restrictions on travel and public transport, restrictions on trade and transportation of goods, prolonged closures of workplaces and also contributed to declines in global bond and stock valuations. While some countries have reduced or eliminated restrictions, others continue to implement restrictions or are forced to reinstate them after experiencing resurgences in the number of cases or deaths reported. In addition to the aforementioned impacts, the outbreak of COVID-19 has severely disrupted the global economy, resulted in high levels of unemployment, negatively impacted the global demand and is expected to have a material negative impact on global growth rates, which are likely to negatively impact the GDP of Saudi Arabia and other regions in which SABIC operates and, specifically, the demand in the product markets where SABIC and its customers operate. On the supply side, there was a dramatic increase in feedstock volatility, while in addition the operational performance of the industry was negatively impacted by the disruption of supply chains and the inability to operate assets normally due to social distancing considerations. The COVID-19 pandemic is ongoing and the duration, impact and severity of the outbreak cannot be predicted and may be significant, particularly in the short-term, although the vaccine may start containing further spread.
In particular, while the vast majority of SABIC's products are considered essential during this time of crisis, demand for many of SABIC's products declined, particularly products that serve the automotive and other durable-related end markets. The chemical sector is designated as critical infrastructure in many of the worlds' largest economies, therefore SABIC's manufacturing sites were and are widely excluded from governmental shutdown orders. As a result, most of SABIC's plants around the world remained and remain in operation, albeit operating under increased health and safety standards aligned with government measures, and in some cases at reduced operation rates to reflect decline in demand, both of which had an increase on costs. In addition, SABIC is committed to capital discipline and maintaining a strong balance sheet and has suspended all capital expenditures, except for non-discretionary capital expenditures for safe and reliable operations and late stage projects.