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Indian PSU refiners offer safer havens
Refining and petrochemicals update
Last week, GRMs continued their northward climb to average US$9.8bbl as
LPG and FO cracks rose, partially due to a sharp decline in crude prices.
Petrochem margins benefitted slightly from the 3% WoW decline in naphtha
prices and a mild increase in product prices across the board. Margins in
general are down 5-15% QoQ, but are up 30-60% YoY.
Country-specific developments and views
India: Sliding crude, recently raised retail prices, and a political consensus
being built around curtailment of subsidies on petro-products are positive for
the Oil Refining and Marketing trio of IOCL, BPCL and HPCL. We believe
these are safer havens in falling markets, especially due to the leverage to
domestic demand. Dual pricing of diesel and targeting of LPG subsidies are
subsidy-reducing measures discussed in parliament last week. Our top pick is
HPCL due to its upcoming high complexity Bhatinda refinery in central India,
which has a 7 year income tax holiday and sales tax deferral benefits too.
Taiwan: Formosa Group and the government may settle the first wave of
plant shutdowns early this week resulting from several fires at Formosa
facilities over the past year. While details have not been announced, we
believe that plants directly connected to previous fires may be shut down
first. Based on this assumption, Formosa Plastics (FPC) would have the
least exposure because none of its plant shutdowns have been due to
fire. After the recent sharp market correction, we expect the Formosa
Group’s performance could gradually pick up, as it could be a target for
government market stabilization measures amid the recent market turmoil.
Japan: Refining margins in Japan are ¥13.3/lt (up by ¥5/lt, ie 56% WoW)
or ¥8.7/lt (189%) above the trough of 4/Mar/11, but ¥0.5/lt (4%) below the
recent peak on 6/May/11. We expect refining margins to remain strong in
Japan due to supply discipline and additional capacity reductions as well as
seasonal recovery in demand. JX Holdings is a fairly defensive stock to own
in our view, as domestic refining industry margins are less dependent on
global demand and are driven by domestic restructuring and post-quake
demand from power utilities.
Outlook and strategy
In falling markets, we would recommend Indian public sector oil refiners
HPCL/BPCL as plays on the robust Indian domestic demand, subsidy
alleviation through a combination of fall in crude prices and regulatory
intervention, and longer-term strategic shift away from the subsidy-ridden
petro-retail business. We also like GS Hldgs, PTTAR, PTTCH, FPC and NPC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian PSU refiners offer safer havens
Refining and petrochemicals update
Last week, GRMs continued their northward climb to average US$9.8bbl as
LPG and FO cracks rose, partially due to a sharp decline in crude prices.
Petrochem margins benefitted slightly from the 3% WoW decline in naphtha
prices and a mild increase in product prices across the board. Margins in
general are down 5-15% QoQ, but are up 30-60% YoY.
Country-specific developments and views
India: Sliding crude, recently raised retail prices, and a political consensus
being built around curtailment of subsidies on petro-products are positive for
the Oil Refining and Marketing trio of IOCL, BPCL and HPCL. We believe
these are safer havens in falling markets, especially due to the leverage to
domestic demand. Dual pricing of diesel and targeting of LPG subsidies are
subsidy-reducing measures discussed in parliament last week. Our top pick is
HPCL due to its upcoming high complexity Bhatinda refinery in central India,
which has a 7 year income tax holiday and sales tax deferral benefits too.
Taiwan: Formosa Group and the government may settle the first wave of
plant shutdowns early this week resulting from several fires at Formosa
facilities over the past year. While details have not been announced, we
believe that plants directly connected to previous fires may be shut down
first. Based on this assumption, Formosa Plastics (FPC) would have the
least exposure because none of its plant shutdowns have been due to
fire. After the recent sharp market correction, we expect the Formosa
Group’s performance could gradually pick up, as it could be a target for
government market stabilization measures amid the recent market turmoil.
Japan: Refining margins in Japan are ¥13.3/lt (up by ¥5/lt, ie 56% WoW)
or ¥8.7/lt (189%) above the trough of 4/Mar/11, but ¥0.5/lt (4%) below the
recent peak on 6/May/11. We expect refining margins to remain strong in
Japan due to supply discipline and additional capacity reductions as well as
seasonal recovery in demand. JX Holdings is a fairly defensive stock to own
in our view, as domestic refining industry margins are less dependent on
global demand and are driven by domestic restructuring and post-quake
demand from power utilities.
Outlook and strategy
In falling markets, we would recommend Indian public sector oil refiners
HPCL/BPCL as plays on the robust Indian domestic demand, subsidy
alleviation through a combination of fall in crude prices and regulatory
intervention, and longer-term strategic shift away from the subsidy-ridden
petro-retail business. We also like GS Hldgs, PTTAR, PTTCH, FPC and NPC.
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