Asia Oil and Petrochemicals Refining margin remains firm :: Macquarie Research,

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Asia Oil and Petrochemicals
Refining margin remains firm
Refining and petrochemicals update
 GRMs robust; Petchem margins mixed: Singapore complex GRM was
maintained at US$8.2/bbl, up 6% WoW, driven by overall price strength in
light and middle distillates. This leaves QTD GRM at US$8.8/bbl (+115% YoY,
+18% QoQ). Petrochemical margins were mixed last week, with polyethylene
spreads down 3~8% WoW, while MEG spreads showed another week of
rebound (+39% WoW) to US$234/ton. PVC margins also remained firm, at
US$550/tonne (+3% WoW), which implies 36% YoY and QoQ growth.
Country-specific developments and views
 Korea: We believe 2Q11 earnings to be largely the bottom for Korean oil
refiners and petrochems. Nevertheless, our views on the sector remain bright
as we expect strength in both oil refining and petrochemical margins to
continue. In the near term, we believe Hanwha Chemical has the best
earnings catalyst, driven by sequential margin increase in PVC, which
generates 80% of its EBITDA.
 Taiwan: Formosa Group posted a ~10% MoM decline in aggregated May
sales, largely reflecting softer chemical prices. Going into June, we may
continue to see MoM decline due to the May fire and the subsequent
government order to shut down MEG, BPA, and VCM plants. From local
news, the actual timing of the shutdown of MEG plants (total capacity: 1.75m
tonnes/yr, 100% of NPC’s MEG capacity) is still uncertain (final deadline of
the government is 20 June), while 3 BPA plants (total capacity: 330K
tonnes/yr, 78% of NPC’s BPA capacity) should be shut down by 15 June. The
main beneficiaries of the MEG plant shutdown would likely be OUCC (1710
TT, Not-rated) and China Man-Made Fiber (1718 TT, Not-rated), and the
beneficiary of the BPA plant shutdown would be TPCC (4725 TT, Non-rated).
 India: Cairn India indicated to the government that its Rajasthan production
can increase to 300kbpd (240kbpd claimed earlier) and recoverable reserves
to 1.65bboe (vs 0.7bboe approved), provided policy actions and
increased capex/technology are applied. This could yield more than US$22-
25bn vs the US$2.1bn the government would gain from imposing the disputed
royalty in Rajasthan as cost-recoverable, which we believe the government is
supporting as a precondition to the Vedanta group’s potentially destabilising
takeover. Cairn India is being squeezed due to the Vedanta group having
taken a definitive step towards acquiring a controlling stake through the Sesa
Goa open offer (8.4%) and taking over Petronas's stake (10.1%).
 Japan: We continue to like JX Holdings (5020, ¥527, OP, TP ¥700) as we
believe the market is too negative on the refining margin outlook and is
missing the positive impact of industry restructuring and capacity reductions in
Japan’s refining industry. We attended a meeting with JX president Takahagi,
and left reassured that the industry has changed for the better, there is more
discipline on the supply side, and the capacity reductions will continue despite
fears that the government policy aimed at reducing overcapacity will change
following the earthquake.
Outlook and Strategy
 Among Asian stocks, we particularly like S-Oil, Hanwha Chemical and PTTCH.