>ASIAN OIL & PETROCHEMICALS (MACQUARIE RESEARCH)

Slow demand put pressure on margin

Event
■ Last week, the Asian oil refining margin continued to decline while petrochemical margins were mixed.

Impact
■ Asian gross refining margins keeps sliding: Last week, the Singapore gross refining margin (GRM) continued its decline to US$1.40, down 29% WoW. Gasoline margin dropped 11% on weak demand and a 3mbl jump in US inventory. Diesel and kerosene margins declined 22% and 10%, respectively, as inventories of middle distillates increased 865,000bbl to a record 15.4mbl in Singapore. The negative fuel oil spread continued to widen as demand switch from gasoline to fuel oil is delayed by record distillate inventories.

■ Asian producers reducing operating rate amid sluggish demands: Ethylene and propylene margins continue to be squeezed on sluggish demand and dwindling buying interest from the poor downstream market. Already, Asian crackers are cutting October production to cope with the low margins. In Japan, Mitsui Chemicals, Sanyo Petrochemical and Sumitomo Chemical said they would run crackers at below 90%. In Taiwan, CPC Taiwan may run its three crackers around 90%, and Formosa Petrochemical may reduce its Miliao crackers operating rates to 90%. In Korea, KPIC and Honam were reported to have reduced their cracker operating rate to 85–90%.

■ Petrochemical margins continue to weaken: Spreads continue to weaken for downstream products, as demand was thin during China’s October holiday last week. PE and PP spreads shrank 2.6% and 2.7%, respectively. PX spread improved 8.1%. However, pressure from new capacity addition remains, as Shanghai Petrochemical’s 600ktpa PX plant has kicked off production last week. ABS spreads slid 3% on sustained slow buying activity. The market is hoping that Christmas demand for toys and electrical applicants would stimulate demand for ABS.

Outlook
■ In the Taiwan space, the weak refining margins and reduction of operating rate confirms our Underperform rating on FCFC and FPCC. We reiterate our Outperform rating on Nan Ya Plastics with emphasis on the benefit from its Tech portfolio. Its performance during the past month continues to stand out from the regional peers.

■ Last week's margin decline confirms our cautious view on the Korean oil refining and petrochemical sector. Earnings season will kick off starting from 13 October (Tuesday this week) with LG Chem. We believe Korean oil refining and petrochemical companies earnings should generally improve QoQ but think most of positives are already in the share prices. We think investors will more focus on 4Q outlook as margins are continuously declining from September, and expect the profit-taking to continue after the earnings releases. We expect Korean oil refining and petrochemical stocks to remain under downward pressure during 4Q.

To see the full report: ASIAN OIL & PETROCHEMICALS