Macquarie Research,:: Chinese gas demand growth robust

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Asia oil and petrochemicals
Chinese gas demand growth robust
Refining and petrochemicals update
 Refining margin remains near all-time seasonal high. After rising 22%
QoQ, Singapore GRM remained flat WoW at US$9.2/bbl, which is close to its
seasonal all-time high. Diesel spreads at US$ 23.9/bbl remain particularly
strong.YTD GRM of US$7.7/bbl is well ahead of last year’s US$5 average and
our 2011E forecast of US$6.7/bbl.
 Petchem spreads weakened sharply from a week earlier. In particular, MEGnaphtha
spread fell a sharp 52% WoW to US$98/t from the previous week's
US$205/t. The magnitude of spread narrowing is less for PX-naphtha, but it
also lost 14% WoW to US$613/t. We remain positive on the MEG and
polyester chain on the back of strong prices of substitute, cotton. We believe
the temporary decline in margins is due to oil prices and inventory disruption.
Theme of the week
 Our China team, led by our regional Utilities analyst Adam Worthington,
recently raised their China gas demand volume target from 270bn m3 to
400bn m3 for 2020, leading to a ten-year CAGR of 15%.This is positive for
one of our regional top picks, PetroChina, which has the maximum reserves
of gas in the country, and is also building most of China’s gas pipelines.
Country-specific developments and views
 Korea: Unexpected price cuts announced by SK Innovation last week should
cap share price trends for the time being despite expectations of strong 1Q11
earnings. Among Korean refiners, we prefer S-Oil given its dividends, PX
capacity expansion and least exposure to price cuts. Despite weak MEG
spread trends in the short term, we prefer Honam Petrochemical among
Korean petrochems and expect 1Q11 earnings to trigger earnings upgrades.
 India: We expect our sector top-pick RIL to report 5% QoQ and 15% YoY
profit growth in 4QFY11E, on the back of an increase in refining margins.
We anticipate GRMs of US$9.5/bbl for 4Q11 vs US$9 for 3Q11 and US$7.5
for 4Q10. While QoQ petrochem margins would also be higher, these gains
would be partially offset by a ~5% dip in KGD6 gas production and a
prolonged 6-week maintenance shutdown of the FCC unit at its domesticfocused
refinery.
 Thailand: Last week’s Thai downstream performance was driven by laggards
PTTAR, IRPC and PTT. An absence of major corporate news left the focus
on earnings. With GRMs remaining above US$9/bbl and crude prices rallying
19% during 1Q11, earnings optimism remains high. We are less concerned
on recent signs of weakness in PX given still relatively low consensus
expectations. Our preferred stocks remain PTT, Thai Oil and Esso Thailand.
 Taiwan: Formosa Group reported very strong 1Q11 preliminary results, which
were driven by solid petrochem performance and strong contribution from
Formosa Petrochemical's refining business. However, we believe the Group's
pre-results outperformance has at least partially factored into the positives.
We would not chase the stock on strong earnings but would wait for any share
price pullback to accumulate. Nan Ya Plastics remains our top pick.
Outlook and Strategy
 Among Asian stocks, we like PetroChina, PTTCH, Nan Ya Plastics, and
Reliance Industries.