Petrochemical & Refinery

Petrochemical and Refinery
- Good olefins and PET spreads this week
For the recent week, PET business (IVL) remained the most outstanding. PTA-Px
spread (20% of total sales volume) has increased by 9.7%wow to US$189/ton.
Raw material (Px) cost has dropped further by 2.1%wow to US$1,180/ton thanks
to growing Px supply in 2014. Also, cotton price has made the two-year high at
94.75 cent/lb, thus boosting polyester fiber price (substitute product) in the near
future and benefiting polyester fiber business of IVL (20% of total sales volume).
Meanwhile, olefins business (PTTGC, IRPC) has rebounded since the raw
material (Naphtha price fell 3.1%wow to US$941/ton while the product price
stayed high. MEG-Naphtha spread recovered significantly to –US$26/ton, while
HDPE-Naphtha and LDPE-Naphtha spreads widened 5.2%wow and 4.6%wow to
US$609 and US$679/ton, respectively. Similarly, spreads of specialty products
e.g. PP-Naphtha, PS-Naphtha, and ABS-Naphtha (main products of IRPC, making
up 30-40% of total sales volume) increased 5.5%wow, 3.9%wow, and 3.2%wow
to US$574, US$809, and US$954/ton, respectively.
- 1Q14 profit rebounds, led by IVL and IRPC
We project the sector's 1Q14 net profit to rebound from 4Q13, thanks to widening
petrochemical spreads. IVL is expected to recover most outstandingly. Excluding
extraordinary items and inventory gain/loss, IVL's 1Q14 normalized profit is
expected to double from 4Q13 as a result of the following positive factors: 1)
Petrochemical spreads are projected to widen. PET (50% of total sales volume)
and PTA (30% of total sales volume) spreads are expected to rise averagely by
18%qoq because raw material (Px) cost has fallen significantly. 2) Sales volume is
projected to grow by 2.1%qoq, mainly from PET, thanks to high season (festive
season and winter). Thus, 1Q14 core EBITDA is projected to rise by 4.5%qoq to
US$91/ton. In addition, profit from olefins business is likely to increase, thus
benefiting PTTGC and IRPC, albeit a slight effect from weak aromatic spread for
PTTGC.
- Top picks: IVL and IRPC
We recommend buying IVL([email protected]) and IRPC([email protected]) as FY2014 earnings
results are projected to rebound most significantly.