Macquarie Research, Asia Oil and Petrochemicals- Medium-term prospects brighten

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Asia Oil and Petrochemicals
Medium-term prospects brighten
Refining and Petrochemicals update
 Refining margins stay firm and remain above our $5.9/bbl forecast despite an
8% pullback from the previous week. This supports our optimism for the sector.
Middle distillates are still key drivers and continue their multi-week uptrend.
 Petrochemical margins also remain strong with key spreads posting
double-digit gains WoW. In particular, we expect the PX spread could
continue its upward trend, supported by 140-year high cotton prices (PX is
raw material for polyester which is the key substitute for cotton). We also
believe a heavy turnaround schedule of MEG facilities in the Middle East
could lend support to the MEG spread for the rest of 2011.

Theme of the week
 We hosted an exclusive investor interaction with Dr Fesharaki (Chairman,
FACTS Global Energy) and team, focusing on crude oil, the refining industry
and LNG prospects. While excess refining capacity continues to plague the
industry, they predict a resurrection of GRMs for 2011–14 as the next wave of
additions is expected in 2015–16. High complexity refiners like RIL hold the
aces in the backdrop of an unbalanced West (with excess crude and substantial
refining capacity) and a thirsty East-of-Suez region (with high demand and
increasing refineries). Curtailment of total 7 mbpd of low-complexity capacity by
2015 is needed to keep utilisation above 80% and maintain reasonable
margins. Japan may shut ~1.3mbpd by 2013 to achieve the same.
Country-specific developments and views
 Thailand: The share price momentum of Thai refiners slowed markedly over
the last week. PTT, a holding company and the largest refiner in Thailand by
effective capacity, played catch up and outperformed its listed subsidiaries.
Key near term drivers for major downstream names are: 4Q10 results due out
over the next 5 weeks and recently updated Macquarie oil price forecasts.
Our preferred names at current price levels are PTT and ESSO Thailand.
 Taiwan: We recently raised our EPS forecast and Target Price for Formosa
Group companies on the back of a strong refining and petrochemical business
outlook. The continual margin strength in MEG (+40% WoW), PX (+23%
WoW) and PTA (+5% WoW) this week supports our positive view on the
upstream polyester chain and our preference on Nan Ya Plastic (1303 TT,
OP) and Formosa Chemical & Fiber (1326 TT, OP). We also like Formosa
Plastic (1301 TT, OP) for its robust specialty chemical and EVA business.
Meanwhile, given Formosa Petrochem’s (6505 TT, UP) high valuation vs
regional peers, we would also recommend investors to buy into the 3
companies to participate in its strong refining business outlook.