Petrochemical

Petrochemical   

 

- Spreads of every product drop but remain high 

Last week, spreads of every petrochemical product dropped slightly from the previous week, but remaining high despite rapid oil price plunge. A decrease in product prices is still in line with falling raw material cost. For the olefins business (PTTGC and IRPC), spreads of commodity grade plastics (40% of PTTGC’s products and 20% of IRPC’s products) HDPE and LDPE stayed at US$772/ton and US$792/ton, and spreads of specialty plastics (40% of IRPC’s products) SM and ABS stood at US$922/ton and US$862/ton. For the aromatics business (TOP, PTTGC, ESSO, and IRPC), spread of main product Px remained at US$357m. Although spreads of most PET products (IVL) dropped, intermediate PTA-Px spread widened by 12.1%wow to US$232/ton. 

- Risk from China may weaken earnings below forecast 

We are concerned about China, which is a major petrochemical product consumer, since its demand for petrochemical products has decelerated more than expected, possibly resulting in downside on our forecast if petrochemical spreads are not strong as expected in 2H15. Under our assumption, we still expect the sector's 3Q15 net profit to be weakened by stock loss from refineries and Fx loss, but normalized profit (excluding extraordinary items) is projected to remain strong, especially for companies focusing on the petrochemical business (PTTGC, IRPC, and IVL). However, many of PTTGC's plants will undergo maintenance shutdown, thus weakening its normalized profit more than IRPC and IVL. IVL is expected to face petrochemical stock loss, while PTTGC and IRPC would not recognize this. 

- IRPC: good choice 

Our UNDERWEIGHT recommendation is still in line with risk from China’s issue. IRPC is still a top pick from its potential of a bigger profit base after the UHV project is complete in late 2015. Its share price previously plunged more rapidly than peers following global markets, currently 

significantly undervalued.