Refining margin firm but petrochem margins continue to fall::Macquarie Research,

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Refining margin firm but petrochem
margins continue to fall
Refining and petrochemicals update
 GRMs robust; Petchem margins dip: Singapore complex GRM was
maintained at US$8.6/bbl, up 2% WoW, which leaves QTD GRM at
US$8.8/bbl (+115% YoY, +18% QoQ). Due to strength in feedstock prices
(naphtha), petrochem margins dipped 2~8% WoW across the board. MEG
prices/margins continue to fall as polyester inventory levels in China are high
while buyers remain sidelined, according to local news flows.

Country-specific developments and views
 Korea: Although we remain positive on overall Korean oil refining and the
petrochemical sector outlook, near-term earnings catalysts are in doubt as a
result of voluntary price cuts in local gasoline and diesel prices by Korean oil
refiners (for 2Q11), while Korean petrochem players are experiencing margin
weakness. In the near term, we believe LG Chem has the best earnings
catalyst, driven by a turnaround in its I&E business, while we prefer S-Oil
among Korean oil refiners thanks to PX volume expansion (+900ktpa) from
mid April, which should offset any downside in petrochem divisional earnings.
 Japan: Last week, the largest refiner, JX Holdings (5020, ¥561, OP, TP ¥700),
announced an upward revision to its operating and recurring profit forecast for
FY3/11 on the back of higher refining margins and oil inventory gains. The
revision happened despite significant output disruption at the Kashima and
Sendai refineries after the earthquake. It is the fourth revision by the company
in FY3/11. Although refining margins softened during the past couple of
weeks due to lower diesel and kerosene spreads, we remain positive on the
outlook for JX profits. We believe the market is too negative on the refining
sector in Japan, missing the positive impact of restructuring, and that the
consensus for FY3/12 will have to be revised up. We reiterate our Outperform
rating on JX Holdings with a ¥700 target price.
 India: Reliance Industries reported a Q4FY11 profit of Rs53.8bn (growth of
14% YoY and 5% QoQ) in line with expectations; but GRMs of US$9.2/bbl (up
+0.2/bbl from Q3) were below estimates due to an FCC shutdown for 6
weeks. Sharply rising cotton prices boosted polyester profits, which has driven
up overall petrochem EBIT by 8% QoQ despite maintenance shutdowns at
several petrochemical capacities.
Outlook and Strategy
 Among Asia stocks, we like S-Oil, PetroChina, PTTCH, Nan Ya, and RIL.