Macquaire: Petrochem supercycle in the offing -Refining and petrochemicals update

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Asia oil and petrochemicals
Petrochem supercycle in the offing
Refining and petrochemicals update
 GRMs still strong; petchem margins expand due to naphtha weakness:
Singapore complex GRMs fell 7.5% WoW but remained above US$7/bbl,
indicating continuing strength, primarily derived from high distillate cracks,
which are boosted by seasonal demand. Naphtha cracks fell sharply to
US$1bbl (down 63% WoW), which pushed up margins for nearly the whole
petrochemicals pack. Margins for polyesters PX and PTA continued to
expand, while MEG jumped 12% WoW and 17% QoQ from two-year lows.

Theme of the week
 Asia petrochemical – entering super cycle: Based on our analysis of
supply/demand, we believe that petrochemical margin trends will remain
robust at least until 2013. As we near the termination of major capacity
additions while demand remains firm, we believe that the long-awaited super
cycle is about to start. In addition, we are selectively positive on polyester
plays in Asia, with MEG being the standout. We expect MEG spreads to
nearly double in 2011, driven by lack of capacity expansion for the next two
years, coupled with heavy regular maintenance shutdowns.
Country-specific developments and views
 Korea: Robust oil refining margin and rising crude oil price trends are positive.
Furthermore, with expanding polyester chain spreads such as PX and MEG,
we continue to like oil refineries and petrochemical names. SK Innovation and
Honam Petrochemical are our top oil refining and petrochemical picks.
 India: The recent fall in RIL’s price post results (due to concerns on its
upstream ramp-up) have rendered the stock cheap, with a P/BV of <2x and an
EV/EBITDA of <9x, which are near five-year lows. With GRMs expected to
remain strong and the petchem cycle strongly supportive, RIL remains a top
pick. The commissioning of the high-complexity 120kbpd Bina refinery today
is expected to boost BPCL’s (which is a 50% JV partner in the same) earnings.
 Thailand: Thai downstream stocks continued a sell-off that started last week,
despite refining margins holding up above US$7/bbl and paraxylene spreads
remaining above the US$700/t level. We attribute this pullback to some profittaking
and look to consensus EPS upgrades following the upcoming release
of 4Q10 results for share price support.
Outlook and Strategy
 We expect chemical stocks to remain strong despite their already-significant
outperformance. Integrated downstream plays such as RIL are also doubly
leveraged to the cyclical recovery, due to GRMs going from strength to
strength. With our view of a super cycle from 2011, coupled with our
preference for polyester plays, we recommend Honam Petrochemical, Nan Ya
Plastics, PTT Chem and Reliance Industries as key sector picks