Asia oil and petrochemicals :Refining margin slightly weaker:: Macquarie Research,

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Asia oil and petrochemicals
Refining margin slightly weaker
Event
 The key theme last week was China’s interest rate hike. While we believe
near-term demand impact is limited, we caution investors of the negative
impact on Chinese oil producers from appreciating RMB impact.
Impact
 China interest rate hike. We believe the tightening measures were made
possible by a solid macro environment (3Q10 GDP up 9.6%), and it should
have little near-term effect on China’s crude and product demand. However,
the implication on RMB appreciation could have a negative impact on China’s
Oil producers and refiners whose revenues are based in US$ and costs in
RMB. We believe the impact on natural gas producers should be muted in the
near term, as natural gas prices are regulated in RMB in China.
 Refining margins slightly weaker. Singapore GRM was down slightly to
US$5.8/bbl from US$5.9/bbl in the previous week on gasoline and middle
distillate weakness. Prices for downstream oil products dropped in the
beginning of last week following China’s rate hike, but gradually recovered the
loss through the week as concerns over demand slowdown faded.
 Petrochemical spreads rose across the board. The margin improvement
was due to the ease of ethylene and naphtha prices following FPCC (6505
TT)’s restart of #1cracker. PX continued the price uptrend (up 8% WoW), due
to regional plant outages. LDPE/HDPE prices were also up by 4%/3% WoW.
LDPE supply was tight as many producer swung productions to EVA
(particular solar applications), resulting in reduction in LDPE supply.
Outlook
 In Taiwan, we are still positive on petrochemical companies due to solid
fundamental outlook. The ethylene price correction from FPCC’s (6505 TT)
restart of #1 cracker would benefit ethylene derivative players such as FPC
(1301 TT). For FCFC (1326 TT), the company can benefit from PX/PTA to
naphtha margin expansion given that PX price showed strong rebound from
limited supply in the short term. FPC and FCFC outperformed TWSE by 12-
13% in the past month. Given such strong performance, we suggest investors
not to chase high, but wait for pull-back to accumulate both names.
 Based on robust refining margin trend and strength in the Korean Won, we
maintain our positive view on Korean oil refineries. Recovering PX margin
should add momentum heading into 4Q as we believe weak aromatics during
3Q have been the main reason for operating profit falling below street
expectations. In petrochemicals, we are most positive on Hanwha Chem in
the near term, given robust earnings, while we prefer LG Chem for 2011 story.
Our top pick in the sector is S-Oil.
 Japan refining margin has firmed further by Y0.5/lt (7%), or US0.2/bbl during
the past week as most product prx increased faster than crude oil inputs. The
margin is still about 33% below the most recent peak reached in July, but
about 40% above the most recent trough.