Asia Oil and Petrochemicals
GRMs bounce on refinery shut-in
Refining and petrochemicals update
The Singapore benchmark refining margin surged a material $2.7/bbl w/w to
$12.8/bbl assisted by stronger gasoline (+$4.2/bbl w/w, $21.8/bbl) and diesel
(+$2.4/bbl w/w, $19.1/bbl) cracks, in-turn due to tighter near-term product
balances as Shell’s Singapore refinery (500kb/d) remained shut-in following
the fire that broke out on 28 September. In terms of petchem product spreads
(over naphtha) – ethylene was up 12% w/w, PTA up 11% whilst spreads for
other products remained broadly flat.
Country-specific developments and views
China refining margins take another hit - the NDRC cut gasoline and diesel
prices by RMB 300/t on 9 October. This move brings down our China refining
margin benchmark by $2.5/bbl to $2.8/bbl versus $5.3/bbl as of last week. We
estimate the industry needs $4.0/bbl to break even at the EBIT level. Sinopec
was down 4.4% and Petrochina down 1.0% on Monday following this news.
India: We conducted our annual independent investor e-survey on RIL, and
discovered that while portfolios continued to be materially underweight on RIL
with the backdrop of upstream issues and the CAG report, the mindset of
investors has shifted from a neutral to positive since the last edition,
increasing the gap between investors’ mindset and their portfolio position on
India’s largest listed company. With the BP-RIL deal complete, company
managements have expressed confidence in a ramp-up in KGD6 production
in 2 years, by which time gas pricing is expected to rise significantly beyond
the current US$4.2/mmbtu. After underperforming for the past 3 years, the
stock has just begun to outperform the Indian markets (by 6% q/q), and has
been an excellent defensive since August 2011 whilst regional refining and
petrochemical pure-play peers have declined 20-60% (Link to report). RIL is
expected to report flat q/q earnings this weekend, as production declines at
KGD6 are offset by expanding GRMs.
Shell/Pulau Bukom: According to media reports, RD Shell has begun a
partial restart of CDU1 (210kb/d) at its Singapore refinery. (Reuters)
Outlook and Strategy
India: 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
petro-retail business. Japan: JX Holdings (5020 JP, ¥431, Outperform, TP:
¥700) is a top pick on the back of a pick-up in refining margins and strong
seasonality going into the winter. Thailand: our preferred low risk names in
refining and petrochemicals remain PTT Chemical/ PTT Aromatics. Taiwan:
FPC and NPC are preferred picks on relatively resilient margins of PE, PVC
and MEG.
GRMs bounce on refinery shut-in
Refining and petrochemicals update
The Singapore benchmark refining margin surged a material $2.7/bbl w/w to
$12.8/bbl assisted by stronger gasoline (+$4.2/bbl w/w, $21.8/bbl) and diesel
(+$2.4/bbl w/w, $19.1/bbl) cracks, in-turn due to tighter near-term product
balances as Shell’s Singapore refinery (500kb/d) remained shut-in following
the fire that broke out on 28 September. In terms of petchem product spreads
(over naphtha) – ethylene was up 12% w/w, PTA up 11% whilst spreads for
other products remained broadly flat.
Country-specific developments and views
China refining margins take another hit - the NDRC cut gasoline and diesel
prices by RMB 300/t on 9 October. This move brings down our China refining
margin benchmark by $2.5/bbl to $2.8/bbl versus $5.3/bbl as of last week. We
estimate the industry needs $4.0/bbl to break even at the EBIT level. Sinopec
was down 4.4% and Petrochina down 1.0% on Monday following this news.
India: We conducted our annual independent investor e-survey on RIL, and
discovered that while portfolios continued to be materially underweight on RIL
with the backdrop of upstream issues and the CAG report, the mindset of
investors has shifted from a neutral to positive since the last edition,
increasing the gap between investors’ mindset and their portfolio position on
India’s largest listed company. With the BP-RIL deal complete, company
managements have expressed confidence in a ramp-up in KGD6 production
in 2 years, by which time gas pricing is expected to rise significantly beyond
the current US$4.2/mmbtu. After underperforming for the past 3 years, the
stock has just begun to outperform the Indian markets (by 6% q/q), and has
been an excellent defensive since August 2011 whilst regional refining and
petrochemical pure-play peers have declined 20-60% (Link to report). RIL is
expected to report flat q/q earnings this weekend, as production declines at
KGD6 are offset by expanding GRMs.
Shell/Pulau Bukom: According to media reports, RD Shell has begun a
partial restart of CDU1 (210kb/d) at its Singapore refinery. (Reuters)
Outlook and Strategy
India: 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
petro-retail business. Japan: JX Holdings (5020 JP, ¥431, Outperform, TP:
¥700) is a top pick on the back of a pick-up in refining margins and strong
seasonality going into the winter. Thailand: our preferred low risk names in
refining and petrochemicals remain PTT Chemical/ PTT Aromatics. Taiwan:
FPC and NPC are preferred picks on relatively resilient margins of PE, PVC
and MEG.
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