Petrochemicals

Sharp upturn in naphtha price sank product spread. While petrochemical product prices continued to head south (-2% to -5.8% WoW) on lower feedstock cost in previous weeks and seasonally slow demand, naphtha price made a U-turn up (+5.9% WoW). This slashed PE/PP product spreads over naphtha by 5.5-8.2% WoW, especially for polypropylene. Sluggish demand from China continued to play a vital role in depressing regional product prices down by 2-5.8% WoW for olefins and derivative products. Non-integrated PE producers were not spared – their margins narrowed by 1.8-5.5% WoW, the first WoW decline since mid-September.  

Surprising WoW increase in aromatics prices. Aromatics product prices turned positive WoW, up 4.7-5.7%, especially PX, lifted by higher downstream prices for PTA and styrene monomer (SM) brought by tight supply in the region. Supply has been crimped by a steady cut in production in an attempt to support market prices. How long this recovery will last is open to question given the abundant PX supply in the region.  

Higher PTA price unable to absorb higher feedstock cost. Despite a rise in PTA price (+1.3% WoW) on higher demand for downstream PET, integrated PET/PTA margin plunged 13.2% WoW to US$272/t on higher feedstock costs for both PX and MEG (+2.2% WoW). We do not expect the higher demand for PET/polyester chain products to stay around very long until solid signs of China’s economic improvement are seen.

Investment view: Despite weakening product spread, the Petrochemical sector index (+2.6% WoW) was able to outperform the market (+1.3% WoW). This was driven by both key stocks in the sector, PTTGC (+3.1% WoW) and IVL (+2.8%). We believe the market has turned more optimistic about PTTGC’s earnings prospects, driven by olefins business and lower concern on feedstock cost from energy price reform. Nonetheless, the outlook for the sector remains clouded by seasonally softer demand and short-term uncertainty of oil price.