Fuel oil cracks turn positive:: Macquarie Research,

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Fuel oil cracks turn positive
Refining and petrochemicals update
 Singapore Complex GRMs continued to be strong, picking up 7% WoW to
average US$10.1/bbl. Fuel oil cracks have jumped into the green on the back
of Shell’s 0.5mbpd Singapore refinery being shut due to fire. ~US$17/bbl
cracks for gasoline, diesel and jet-kero have kept refining margins high, in an
environment where crude prices are sliding. Spreads of base petrochemicals
expanded (Polymer Chain: Ethylene was up 22%, Polyester chain: PX was up
11% WoW), due to a 4% correction in Naphtha prices.
Country-specific developments and views
 China: After three consecutive weeks of negative margins, China GRM's saw
a small rebound and ended the week at $1.8/bbl (+$2.8/bbl w/w) - assisted by
stronger diesel and gasoline cracks (both up c.$4.5/bbl w/w). We highlight that
while China gasoline cracks were up on a w/w basis, these still remain
c.$13/bbl below gasoline cracks in Singapore. In addition, we note that the
Chinese refiners require $4/bbl to break even at the operating line.
 Japan: Refining margin in Japan was up again by ¥0.4/lt, or 5% WoW, as
product selling prices rose slightly despite the decline in crude oil input
costs. Among the main products, gasoline spread was up by 6% WoW,
kerosene up by 3% WoW and diesel up by 2%. Refining margin is ¥8.0/lt,
or ¥3.4/lt (74%) above the trough of 4/Mar/11, but ¥5.8/lt (42%) below the
recent peak on 6/May/11. We think that JX’s share price looks very attractive
here as we do not expect a collapse in refining product demand, and margins
should be firm going into the winter supported by seasonal pickup in demand
for kerosene from the private sector and heavy fuel from power plants.
 Taiwan: Formosa Group announced its preliminary 3Q11 pre-tax profit, which
declined 76% YoY and 38% QoQ on average. Excluding the one-off impact of
impairment loss of Nan Ya Tech (NYT, 2408 TT, not rated) holdings and lower
investment income from FPCC due to fire, pre-tax profits of FPC, NPC and
FCFC increased 1.3% YoY and 23% QoQ on average. While FPC's recurring
pre-tax profit is roughly in-line with market expectations, FCFC's is 20% below
market expectations due to weaker PTA margins. We believe most of the
negatives should already be in the share prices. As all of FPCC's plants will
re-open in mid Oct, and we expect its profits to improve in 4Q11. While we
believe FPG will inevitably be influenced by macro uncertainty, we expect it to
offer relative outperformance on lower beta and high dividend yield.
Outlook and Strategy
 In volatile markets, we are positive on countercyclical Indian public sector oil
refiners HPCL/ BPCL as plays on subsidy alleviation through a fall in crude
prices, and longer term strategic shift away from the subsidy-ridden petroretail
business. JX Holdings in Japan is a top pick on the back of a pick-up in
refining margins and strong seasonality going into the winter. In Thailand, our
preferred low risk names in refining and petrochemicals remain PTT
Chemical/ PTT Aromatics. Taiwanese stocks FPC and NPC are preferred
picks on relatively resilient margins of PE, PVC and MEG.