Petrochemical and Refinery

Petrochemical and Refinery

- Px spread makes three-year new low
For aromatics business (TOP, PTTGC, ESSO, IRPC), Px-Naphtha spread has been
declining since late-2013 and made a three-year new low to US$210/ton due to a
new Px supply in 2014 (800,000 ton/year from Tenglong factory, 4.1 million
ton/year from a factory in Korea, and another 2-3 million ton/year from a factory
in China; totaling 6-7 million ton/year). As PTA supply (Px as raw material) would
grow by only 4-5 million ton/year, so oversupply of Px is possible in next few
years. However, we expect this abnormally low Px spread at US$210/ton would be
a short-term negative pressing factor: 1) For petrochemical production, upstream
production comes first, then followed by intermediate and downstream production.
Thus, it would take three to six months for all upstream products to be processed.
2) According to the ten-year statistics, every time spread dropped below
US$250/ton, entrepreneurs would lower production capacity or shut some factories
down, and spread would rebound.
- Already included negative factor in TOP and PTTGC's earnings forecast
We maintain FY2014-2015 earnings forecast for TOP and PTTGC (aromatics
business), as the decline in Px spread is already in our assumption. For TOP, we
expect PX-ULG95 spread to drop to US$110/ton. For PTTGC, we project FY2014
Px-Condensate to stay unchanged. Despite the uptrend, we project olefins spread
to stay flat. Thus, the impact on PTTGC would be beneficial. Sensitivity analysis of
how every US$0.5/ton decline in Px spread has impact on TOP and PTTGC's
FY2014 EPS and fair value is shown next page.
- Switch to IVL for short term
A rapid decline in Px spread would have a negative sentiment for
TOP(BUY:[email protected]) and PTTGC(BUY:[email protected]). We recommend switching to
IVL([email protected]) as it benefits from PTA spread and record-high cotton price.