Macquarie Research:: Asia oil and petrochemicals- Refining margin kept its strength

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Asia oil and petrochemicals
Refining margin kept its strength
Refining and Petrochemicals update
 GRMs pulled back slightly but remained healthy. Singapore Gross
Refining margin retreated by 2.3% WoW to US$7.4/bbl last week, but
remained well above our regional analyst’s 2011 forecast of US$6.1/bbl. The
margin resilience was mainly supported by solid middle distillate margin,
which could be attributed to constructive US DOE data showing a 3.1mb/d
reduction in middle distillates inventory. Meanwhile, gasoline spread was
slightly weaker with US gasoline inventory increase a modest 0.2mb/d.

 Petrochemical margin generally advanced. MEG continues to be among
the leader group, with margin up 11% WoW. We believe the approaching
heavy turnaround of MEG plants in ME was tightening up the supply, which
supported the price strength. SM also saw margin improve by 17% WoW, as
limited new supply additions coupled with ~2m tonr/yr expansions of
downstream styrenics plants in China resulted in upward pressure on price.
Country-specific developments and views
 Taiwan: We raised Nan Ya Plastic’s EPS to NT$7.3 and TP to NT$100 last
week. At cotton price of US$2/lb and strong oil price, we believe the polyester
chain should continue to see upward trend in price. In addition, the coming
MEG plants turnaround in ME could take out ~2–3% of regional effective
supply, which could further add to MEG tightness. Our top pick in Taiwan’s
petrochem space remains Nan Ya Plastic for its MEG/polyester exposure. We
also reiterate Outperform on Formosa Chemical and Fiber for its PX/PTA and
SM strength.
 Korea: Despite last week's weakness on Korean oil refiners as a result of
temporary kerosene price cut, we remain positive on Korean oil refineries
considering limited fundamental impact and improving sector outlook.
Ongoing strength in PX spread further supports our view of Korean oil refiners
and we continue to like GS Holdings, SK Innovation and S-Oil. Among Korean
petrochems, Honam Petrochemical is a standout as we expect upside from its
exposure in MEG.
 Thailand: The key themes for Thailand's downstream include: 4Q results,
merger announcements, paraxylene prices and continued strength in refining
margins. We expect to see a near-term announcement related to the merger
of two PTT group affiliates (PTTCH and PTTAR) over the coming days. Thai
Oil, Esso Thailand and parent company PTT are our preferred names.
Outlook and Strategy
 The refining and petrochemical margin strength supports our positive view on
the oil refining and chemical sectors. We believe integrated downstream
players should benefit from the refining margin strength, with Thai Oil, SK
Innovation, and Reliance Industries as our preferred names. Among the
chemical space, we like polyester players as they benefit from substitution
demand from spiking cotton prices. Our top picks here are Honam
Petrochemical, Nan Ya Plastics, PTT Aromatics, and Reliance Industries.