Price hikes to rein in India subsidies.:Macquarie Research

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Price hikes to rein in India subsidies
Refining and petrochemicals update
 Rebound in petrochemical margins; GRMs remain strong: GRMs fell 6%
WoW but continued to be strong, maintaining US$10/bbl+ levels amid a
backdrop of crude prices pulling back slightly. Petrochemical margins, on the
other hand, rebounded across the board after a sustained fall for the past few
weeks, primarily due to Naphtha prices declining 4% WoW.
Theme of the week
 In India, an Empowered Group of Ministers (EGoM) is likely to meet this week
to discuss subsidized pricing of products. The projected FY12 subsidy has
bloated to US$36bn (>2x FY11, and 2% of GDP). Following the gasoline price
hike of Rs5/lt over the weekend, we expect announcement of Diesel/LPG
price hikes possibly accompanied by duty cuts on auto-fuels. A structural shift
to a targeted cash-based subsidy on cooking fuels may be on the cards.
While we believe that all oil PSUs (upstream & downstream) would gain from
a reduction in subsidies, downstream marketers would benefit the most. We
would recommend BPCL as the best play on this theme.
Country-specific developments and views
 Korea: We remain positive on the Korean oil refining and petrochemical
sector, but remain cautious on near term earnings visibility due to price cuts in
local gasoline and diesel prices. With strong 1Q11 earnings results coming to
an end, LG Chem and S-Oil are our preferred picks as near term earnings
downside should be offset by company-specific factors - I&E business
turnaround for LG Chem and PX capacity expansion for S-Oil.
 China: PetroChina management clarified that they had not heard from the
government or other official sources regarding a potential resource tax rate
hike, and believes that China will not introduce nationwide resource tax reform
in the near future. Further, the current 5% resource tax would continue to be
levied in the 12 western provinces in order to boost the local economies and
social development. Currently, China's windfall tax threshold on crude oil is
US$40/bbl. PetroChina is proactively lobbying the central government to raise
the threshold or combine it with other resource levies. If China does introduce
resource tax reform for the whole country, management believes the central
government would be very likely to lift the windfall tax threshold on crude oil to
offset companies' potential losses.
 Taiwan: Last Thursday a fire broke out at Formosa Group's 6th Naphtha
cracker complex. Only the utility pipes were affected while the plants did
not suffer physical damage. Though FPCC's Olefin #1 plant and FCFC's
Aromatic #1 plant were shut for safety reasons, the companies guided
that they should restart soon (within 1-2 weeks); hence we expect very
limited earnings impact. Given strong GRMs and recovering petrochem
spreads, investors could start to look for buying opportunities after another
5% pullback, or by end of June, whichever comes first.
Outlook and Strategy
 Among Asian stocks, we like PetroChina, PTTCH, Nan Ya Plastics, and RIL