Petrochemical Industry: Falling Oil Prices Offer Attractive Investment Opportunities – BusinessKorea
Posted: March 20, 2020 at 3:44 am
The author is an analyst of NH Investment & Securities. He can be reached atys.hwang@nhqv.com. -- Ed.
Time to pay close attention to petrochemical industry
Although petrochemical firms earnings are to be sapped by weakened demand, we view the sector as offering attractive investment opportunities amid falling oil prices. NCC cost competitiveness has recovered to its highest level since 2016, and oversupply concerns are expected to fade gradually.
Petrochemical players cost competitiveness to strengthen
As of Mar 18, the Asian naphtha price (CFR Japan) has slid to US$241/ton, the lowest level witnessed since May 2003. The US ethane price (Mont Belvieu) has fallen sharply to US$0.10/gallon. The YTD naphtha-based production cost to produce a ton of ethylene has fallen US$308 more than that for ethane-based production. Due to sluggish demand, prices for PE, MEG, and PVC produced at NCCs (naphtha-based production) and ECCs (ethane-based production) have also been declining, but product price spreads are set to expand in the case of products produced at NCCs.
Saudi Arabia and UAE have announced that they will up their crude oil production in April, and there is no scheduled OPEC+ meeting to adjust oil production. Accordingly, oil supply should continue to exceed demand for now. If oil prices remain below production costs, US shale gas/oil producers are likely to reduce their shale gas/oil and ethane gas supply, given that US shale gas/oil producers financial conditions are weak.
Oversupply concerns to dissipate
Up until recently, the amount of planned capacity expansion for ethylene over 2020~2022 had been about twice the expected rise in demand, leading to oversupply fears. By type of raw material, gas (eg, ethane and propane) takes up around 80% of the planned capacity addition. Since it is difficult to increase shale gas/oil output at the current oil price level, production cuts are inevitable when low oil prices are prolonged. This situation is to lead to climbs in ethane prices, in turn notably upping the possibility of canceling or postponing much of the current gas-based facility expansion plans.
About 80% of Chinas ethylene expansion plans are based upon ethane gas. Of particular note, the cost competitiveness of Chinese ECCs is likely to be lower than that for Koreas NCCs, since most of the projects in China are based upon shale gas as a raw material.
Demand at worst point, but good investment chances are coming
We believe that global demand for petrochemical products has now reached its lowest point. Although individual companies have lowered their cracker utilization rates by 10~20% pts, and although 1.1mn tons worth of production at Lotte Chemical Daesan NCC and 1.5mn tons worth of production at RAPID Cracker in Malaysia have been suspended amid troubles, these efforts should barely be sufficient to offset the decrease in demand. We foresee that after three to six months of adjustment of facility utilization rates to deal with a rapid change in demand, supply-demand conditions will be balanced this summer. Against this backdrop, we view domestic petrochemical players such as LG Chemical, Lotte Chemical, and KPIC as warranting investor attention, believing that good buying opportunities will emerge amid the current market landscape.
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Petrochemical Industry: Falling Oil Prices Offer Attractive Investment Opportunities - BusinessKorea
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