Refinery margins remain high - Refining and petrochemicals update  ::Macquarie Research,

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Refinery margins remain high
Refining and petrochemicals update
 GRMs remain strong at near US$11/bbl. Singapore complex GRM was
US$10.8, down slightly 1.7% WoW while remaining high (+97% YoY, +14%
QoQ). The strong margin is mainly supported by increasing gasoline and
diesel spreads while fuel oil spread turned negative again after a short-lived
positive spread last week, and Naphtha spread remained in negative territory.
 Petrochemical spreads over naphtha generally declined last week except
for Benzene, due to Naphtha price increases. However, PE and MEG margins
(over ethylene) continued to trend up, rising 5-6% WoW, thanks to improving
pricing power. PVC margins remained high, while PTA margins (over naphtha)
declined ~10% WoW. Looking at PTA over PX margins, the margin decline is
even sharper at 20% WoW to only US$55/t last week, as PX prices increased
on tight supply while PTA selling prices failed to pass on higher costs.
Country-specific developments and views
 Taiwan: Most of FPCC’s capacity that was shut due to fire will restart this
week, including three refinery plants and Olefin #1, according to management.
We believe the actual impact will only be in single digits for 2011E, as some
will be offset by recent higher than expected refinery margins. Spot Asian
refinery margins increased 17% to a US$10/bbl average for July-Aug 11 from
the average for 2Q11. FPCC expects refinery margins to remain high for the
remainder of the year and also petrochem demand to recover in 4Q11.
 Japan: Refining margin in Japan was down again by ¥3.6/lt, or 33% WoW, as
product selling prices dropped despite the increase in crude oil input costs.
Among the main products, gasoline spread was down by 40% WoW,
kerosene down by 18% WoW and diesel down by 21%. Refining margin is
¥7.3/lt, or ¥2.7/lt (59%) above the trough of 4/Mar/11, but ¥6.5/lt (47%) below
the recent peak on 6/May/11.
 India: Upstream is not dead in India! Regulatory paralysis and perceived
diminished upstream prospects in India had reduced investor interest.
Nevertheless, BP completed the acquisition of a 30% stake in 21 of RIL's
blocks for a steep US$ 7.2bn. We have valued RIL's entire upstream at USD
9bn. Hence USD 7.2bn cash for a 1/3rd stake is a material value realisation.
Besides derisking its upstream business, BP's significant expertise could also
eventually turn around RIL's volume decline.
Outlook and strategy
 Amid a volatile stock market, we like Indian public sector refiners HPCL/BPCL
as plays on the robust Indian domestic demand. We also like GS Holdings in
Korea and PTTAR/PTTCH in Thailand. We also believe it’s a good
opportunity to buy Formosa Group names in Taiwan as they were over-sold
on the fire in July. Top picks are FPC and NPC on their exposure to PE/PVC
and MEG respectively.