Asia Oil and Petrochemicals- Weaker margins after the surge in previous week :: Macquarie Research,

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Asia Oil and Petrochemicals
Weaker margins after the surge in
previous week
Refining and petrochemicals update
 Singapore complex GRMs weakened, down by 10% WoW to average
US$10.1/bbl after having a big surge of the margin in a week before, up by
26% WoW. Except the marginal increase in gasoline margin, up 2.2% WoW,
margins for jet, diesel, and fuel oil were down 12% WoW, 14%, and 42%,
respectively. Moreover, the increase in Naphtha prices lowered the spreads of
petrochemicals, with large declines in Ethylene, Benzene and PX (down 12%
WoW, 49%, and 15%, respectively).
Country-specific developments and views
 Japan: Refining margin in Japan was down by Y1.6/lt, or 16% WoW, as
product selling price fell despite the increase of crude oil input cost. Among
the main products, gasoline spread was down by 14% WoW, kerosene
down by 13% WoW and diesel down by 18%. Refining margin is Y8.6/lt, or
Y1.6/lt (23%) above the trough of 9/Sep/11, but Y4.5/lt (34%) below recent
peak on 5/Aug/11.
 India: The Q2FY12 results season kick-started over the weekend with
India’s largest company Reliance Industries (RIL IN,OP,TP:Rs 1083)
announcing profits of Rs 57bn (flat QoQ, up 16% YoY), in line with
expectations. A 28% YoY rise in GRMs to US$10.1/bbl was the key driver.
A revival in domestic petrochemical demand, higher exports and a 2.4%
INR depreciation offset an 18% dip in gas volumes. RIL's US shale gas
production is rapidly ramping-up and is expected to contribute ~10% to
profits by FY14, and domestic CBM production plans (start from 2 years of
approval date; peak of 4mmscmd), are also taking shape.
 China: Following the RM300/t cut in gasoline and diesel prices on 9 October,
China refining GRM's more than halved w/w to average $2.3/bbl (-$3.0/bbl
WoW). We note that while China diesel cracks ($14.1/bbl, -$5.8/bbl
WoW) remain somewhat comparable with Singapore diesel cracks ($16.5/bbl),
gasoline ($4.1/bbl, -$5.2/bbl WoW) and fuel oil cracks (-$25.1/bbl, -$1.2/bbl
WoW) are c.$17/bbl and c.$25/bbl lower than its Singapore equivalent.
 Taiwan: Taiwanese petrochem sector has outperformed the Taiex by 12%
YTD. While being impacted by macro uncertainty, we expect the sector to
continue to offer relative outperformance given its lower beta, cheap
valuations and high dividend yields.
Outlook and Strategy
 We continue to like JX Holdings (5020 JP, Y469, O, TP: Y670) in Japan as a
top pick on the back of a pick-up in refining margins and strong seasonality
going into the winter. In India, we prefer the defensive Oil marketing
companies (OMCs) HPCL/BPCL. In Taiwan, our top pick is FPC (1301 TT),
and preferences go to FPC and NPC (1303 TT) over FCFC (1326 TT) due to
a better supply/demand outlook for PE and MEG compared with PTA.