UPDATE 2-SABIC sees 'more challenges' ahead as costs rise

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By Souhail Karam

RIYADH, Feb 11 (Reuters) - Saudi Basic Industries Corp 2010.SE warned investors on Monday that it saw "more challenges" in 2008 because of higher raw material costs and a possible decline in demand in the United States and Europe.

The world's largest chemicals firm by market value also said it was cutting costs, according to a statement carried by the official Saudi Press Agency (SPA).

SABIC expected "more challenges in light of an increase in the prices of raw materials and chances of declining demand as a result of a slowdown in the economies of the United States and Western Europe to some extent", it said.

Sriharsha Pappu, analyst at HSBC Global Research, said SABIC had to take measure to counter the rise in costs. "Since 75 percent of its costs are from raw materials, they (SABIC) don't have too many options," he said.

State-controlled SABIC also sought to calm investors about the viability of its $11.6 billion acquisition of GE's (GE.N: Quote, Profile, Research) plastics unit, saying it was a crucial growth step for the company that would generate value in the long term.

SABIC has lost 30 percent of its value since it ended a record profit run in the fourth quarter as U.S. chemicals demand faltered.

The company's fourth-quarter costs soared 115.7 percent against a 77 percent rise in sales. This surge slashed the firm's net margin by more than a third to 17 percent, which is still far above 12.8 and 12.1 percent operating margin respectively for competitors BASF (BASF.DE: Quote, Profile, Research) and DuPont (DD.N: Quote, Profile, Research).