Demand Recovery Slow Paced

The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.

 

While capacity expansion plans have been trimmed down on both an oil price plunge and the hampering of global economic activities (amid Covid-19), demand for major products appears relatively solid, a factor which should induce a widening in product spreads. But, with demand recovery to be slow paced, refinery industry profitability is to continue weakening for now.

[Petrochemical] Supply to shrink in 2H20 on effects of decreased production costs in 1H20

Looking at the 1H20 petrochemical industry landscape, we believe that completion date schedulings are now being pushed back for most the planned ethylene and propylene capacity expansion projects in China. As of end-2019, the amount of planned new ethylene capacity was expected (based on total capacity of added facilities) to reach 5.9mn tons, but the forecast figure has now shrunk (by 47.2%) to 3.1mn tons. In addition to the low credence being given to current timing schedules for some Chinese capacity addition projects, the hampering of economic activities (amid Covid-19) is further boosting the chances of additional project delays being announced in 2H20.

Turning to North America, plans to construct new gas crackers have now mostly ceased, and the majority of the currently underway new gas cracker projects are being delayed. In 2H20, the North American chemical industry is expected to be under pressure of higher production costs as the supply of shale gas/oil is to decrease. Should the oil price (WTI) remain under the US$40 mark in 2H20, there will be in play the unprecedented possibility of ethylene production cost at ECC players exceeding that at NCC players.

Petrochemical product spreads have been comparatively solid on rising alternative demand for face mask filters and packaging materials. A lessened production cost burden amid reduced economic activity should also contribute towards propping up earnings. We suggest LG Chemical, SKC, and Lotte Chemical as our sector top picks.

[Refinery] Lengthy time will be needed before refined product demand recovers

The oil price collapse in March has eased the price discount on WTI as profitability at North American shale oil and gas players has deteriorated, leading to greater production drops than those being seen in other oil-producing regions. Saudi Aramco set the June North America OSP higher than the Asia OSP to reflect an expected decline in crude oil supply in the US.

Despite falling oil prices and adjustments to refining facility utilization rates, the complex refining margin is still negative due to tepid global demand (including both decreased shipping volume and reduced operations for aircraft and automobiles). Believing that demand will take a long time to normalize even after Covid-19 subsides, we maintain a Neutral rating on the refinery industry.

 

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