The Asian petrochemical market has been bearish due to a surge in oil prices (affect cost) and China’s heightened credit risk (affects demand), in the run-up to major macroeconomic events in June. 

We expect capacity expansion projects (affect supply) to be delayed until after 2017. That being said, upon the easing of the macroeconomic issues, chemical spreads should widen and petrochemical players’ valuation merit should increase on solid quarterly earnings.

Polymer product (including PE, PP, and PVC) spreads widening in Asia Spreads for polymer products (PE, PP, and PVC) have been expanding in Asia since June. Over January~early April, refining and chemical spreads widened. Over mid-April~end May, chemical spreads narrowed.

Thus far in June, polymer product prices have remained steady or slightly climbed amid naphtha price corrections. This in turn indicates that: 1) demand for petrochemical products remains solid; 2) higher raw material prices (naphtha and oil) negatively impacted the supply side (over April~May). With both Canada and Nigeria normalizing their oil supply, oil and naphtha prices should slip, in turn leading to a widening in polymer spreads.



Petrochemical market tends to improve once macro events actually occur

The petrochemical market in China tends to weaken when uncertainties arise prior to major macro events, but then tends to improve once these uncertainties ease.

Due to the credit issues faced by China, its petrochemical market tends to remain subdued at times when oil price volatility stemming from global macro events is expected. For instance, over the months prior to the US FOMC meeting in Dec 2015, petrochemical product prices fell while spreads narrowed. 

However, after the US Fed raised its federal funds rate at the meeting, petrochemical product spreads expanded. In the same vein, with the June FOMC meeting and ‘Brexit’referendum approaching, the petrochemical market in China is weak. But, the market should recover once the macro events actually occur.

When China’s credit risk heightened in Nov 2015 and in Apr 2016, we witnessed a decoupling of PE and PP prices by region. 

In detail, while PE and PP prices in China fell, the prices of these products rose in North America and Europe. Meanwhile, we point out that narrowing of spreads in Asia since April is attributable to a temporary demand decline in China, and is not related to oversupply stemming from capacity expansion.

Chemical product demand to rise y-y in 3Q16

In 3Q16, chemical product demand in Asia should rise thanks to: 1) the fact that regular maintenance shutdowns at ethylene production facilities in Asia (which in the past tended to take place in 1Hs) will concentrate in July and August this year; 2) easing uncertainties related to the above-noted macro issues after June; and 3) the tendency for trading to pick up from two weeks prior to the end of Ramadan (Jun 6~Jul 5). 

We offer Lotte Chem and KPIC as our top picks for the petrochemical sector, and Hanwha Chem as our second-preferred pick.


Source: NH Investment & Securities  www.nhwm.com