PTT Global Chemical

PTT Global Chemical Plc (PTTCH)

Investment thesis

As chemical prices and spreads are expected to continue falling during 1H15 and PTTCH has lost its feedstock cost advantage, we don’t see any obvious catalysts for the share price. However, the risk of further downside is limited, as the current valuation implies a YE15 PBV of 0.9x, 2SDs below its long-term mean of 1.2x and a discount to the regional average of 1.0x. 

Chemical prices falling in tandem with crude prices

The prices of commodity chemical products have continued to drop in tandem with falling crude prices. Our study indicates an 83% correlation between the PX price and the Dubai crude price and a 78% correlation between the HDPE price and the Dubai price. We expect this trend to continue through 1H15, due to the weak crude price outlook, pressured by substantial oversupply. 

Moreover, demand for chemical products remains weak, given anticipation that crude prices will probably fall even lower. In addition, if oil prices continue to decline, there may be de-stocking flows among market players in order to mitigate the threat of inventory losses. As such, chemical spreads have also softened.   

Feedstock cost advantage lost

The price of Naphtha, a common feedstock for synthesizing olefins, has moved down almost exactly in-step with crude prices. During the past five months, crude prices have plunged 59% and the Naphtha price has dived 58%. During the same period, the price of Ethane (PTTGC’s base feedstock for olefins production), has fallen only 23%. Ethane is now effectively a more expensive feedstock than Naphtha.  

Our study indicates that at a Dubai crude price of about US$60/bbl, the cost of synthesizing Ethylene from Naphtha is about the same as the cost of making it from Ethane. Ethane is the cheaper feedstock when the price of Dubai exceeds $60/bbl; Naphtha is cheaper when the Dubai price is below $60/bbl, as it is currently.            

No obvious share price catalyst in the near-term    

PTTGC’s share price normally correlates closely with chemical price movements. As chemical prices and spreads are expected to remain under pressure and the firm has lost its feedstock cost advantage over Naphtha feedstock-driven producers, we don’t see any obvious catalysts to push up the share price in the near-term. A crude price rebound to above US$60/bbl would provide such a catalyst, as the firm would again have a feedstock cost advantage.