Macquarie Research, Asia Oil&Petrochemicals Refining margin marched forward

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Asia Oil&Petrochemicals
Refining margin marched forward
Refining and petrochemical update
 Refining margin strengthened. Singapore gross refining margin climbed
27% WoW to US$9.1/bbl, as crude oil shed some of the previous gains on
concerns over demand loss following Japan’s earthquake and Libya’s talk of a
potential ceasefire.

 Petrochemical spreads generally improved, as petrochemical prices rose
on concerns of tight supply as a result of the Japan earthquake. Benzene and
PX were among the leaders in margin improvement, which we attribute to the
reported shutdown of JX Holdings’ and Mitsubishi’s Benzene units and JX
Holdings’ PX units. On the other hand, according to ICIS, Shell's 750K tons/yr
MEG plant in Singapore was shut due to a compressor issue (potentially for
10 days). As this represents about 3% of global capacity, if the shutdown is
prolonged, this could be positive for the MEG price.
Theme of the week – raising Asia refining margin forecast
 Given our view of global oil demand, stronger-than-expected year-to-date
margins and following recent supply disruptions in both Japan and the Middle
East/North Africa (MENA), we are increasing our Asian refining margin
forecasts. Our 2011E refining margin increases to US$6.7/bbl from
US$6.1/bbl, and our 2012E increases to US$7.0/bbl from US$6.4/bbl.
Country-specific developments and views
 Taiwan. According to our regional analyst, Japan’s disrupted refining capacity
could push Asian utilization rates above 90%. In addition, Japan’s extra
demand for power generation and rebuilding efforts should add to oil
consumption. These should be positive for Asia refining margins and hence
FPCC. FPC, NPC, and FCFC are likely to indirectly benefit through their
respective 25% stakes in FPCC. Meanwhile, the PX tightness is causing
some Chinese PTA makers to bring forward maintenance. NPC should benefit
from Shell’s MEG incident, while FCFC could be the PX/PTA beneficiary.
 Korea: The recent tragic events in Japan are likely to result in strength in fuel
oil demand, and coupled with the expected seasonal strength for diesel and
gasoline, we note Korean oil refineries' near term earnings should be further
boosted. For petrochemicals, we believe potential infrastructure replacement
demand in Japan will raise long term demand growth projections, leading to
petrochemical companies having potential earnings upside. We remain
positive on Korean oil refiners and petrochems, with particular interest in SK
Innovation (low complex) and Honam Petrochemical.
 Thailand: Given our higher refining margin and PX spread assumptions, we
have raised our earnings and target prices for PTT, Thai Oil, PTT Aromatics
and Esso Thailand. Thai Oil remains our preferred name in the Thai
downstream space while PTT Aromatics offers the highest gearing to rising
cotton prices and PX spreads as 42% of its profits are derived from the
aromatics chain.
 Japan: After the Japan earthquake on 11 March caused about one-third of its
refining capacity to be shut, margins in Japan were up again by 1.6yen/lt or up
27% last week despite the increase in crude oil price (1yen/lt). Kerosene
margin was up 10% WoW, diesel up 16% WoW and gasoline up the most,
73% WoW.