Petrochemical rebound to support Thai oil and gas downstream companies: Fitch

However, the pace of recovery is likely to be slow, with challenges from the persistent oversupply in the petrochemical market and slow demand growth in some end-markets.

Fitch-rated Thai refinery and petrochemical companies' earnings rebounded strongly in the second half of 2020, from 1H20, although the recovery pace varied, depending on the companies' level of integration with downstream operations.

Companies with higher exposure to petrochemical businesses, such as PTT Global Chemical Pcl (PTTGC; AA+(tha)/Negative) and IRPC Pcl (A-(tha)/Stable), benefited from much stronger petrochemical margins relative to refinery margins in 2H20, compared with companies with large refinery operations, including Thai Oil Pcl (TOP, AA-(tha)/Negative) and ESSO (Thailand) Pcl (bills of exchange rated F2(tha)).

PTTGC's 2H20 earnings before interest, tax, depreciation and amortisation (EBITDA) surged to Bt15.8 billion from Bt522 million in 1H20 while IRPC's rebounded to Bt9.7 billion from a loss of Bt6 billion. However, their full-year EBITDA declined substantially, by 42 per cent for PTTGC and 37 per cent for IRPC in 2020, although these were far better than the negative EBITDA posted by TOP and ESSO.

Fitch expects the 2H20 improvement in the petrochemical sector to continue in 2021 as vaccinations are rolled out and industrial and business activity recover. End-market demand is likely to be the key driver of petrochemical performance in 2021.

Demand for food packaging, cleaning and hygiene products should remain strong but growth is likely to decelerate in 2021 after demand spiked in 2020, while polyethylene terephthalate bottle sales are likely to recovery slowly after plummeting in 2020 due to the shift to working from home and the cancellation of public events, Fitch said.

The rebound of the automotive and construction sectors is likely to benefit polypropylene producers.

Nevertheless, large-scale additional petrochemical capacity in 2021, mainly from China, is likely to exacerbate the existing oversupply, putting pressure on product spreads, especially for the commodity petrochemicals. As a result, Fitch expects the rebound for most product spreads in 2021 to be volatile and well below the longer-term historical average.

Thai refinery and petrochemical companies will continue to diversify their businesses into high-value products and specialty chemical businesses, which have been more insulated than commodity products during the downturn due to more resilient end-market demand, Fitch said. However, the contribution from these high-value products is likely to remain low, at least in the medium term.

Fitch forecasts Thai refinery and petrochemical companies' leverage will improve in 2021 on stronger earnings, although the ratio will remain high compared with 2019 levels.

PTTGC and IRPC are likely to report positive free cash flow before dividends in 2021-22, as we expect their cash flow from operations to be enough to cover their moderate capex. Meanwhile, TOP's financial leverage is likely to remain high in 2021 and 2022 due to its high committed investment in its clean-fuel project (CFP), before declining in 2023 and 2024 once the CFP starts operating fully and the company receives cash flow from the sale of the energy recovery unit, a power generation unit in the CFP, in 2023.