Asia chems stocks retreat on Wall Street plunge

22 October 2007 06:00  [Source: ICIS news]

By Florence Tan

SINGAPORE (ICIS news)--Asian oil and chemical stocks retreated together with the broader market on Monday on spillover sentiment from Wall Street’s sell-off on the anniversary of the 19 October 1987 crash.

Analysts, however, were not looking to downgrade their calls on chemical stocks as demand was expected to be strong even though a seasonal slowdown would occur in the fourth quarter.

Asian stock indexes fell on Monday following losses in the US market. The Dow Jones Industrial Average shed 366.94 points, or 2.6% on Friday - the 20th anniversary of Black Monday.

In Japan, chemical stocks fell in line with the Nikkei 225 which shed 3.2% on Monday morning.

“Today is a special day because the US market fell dramatically,” said Yu Okazaki, analyst from Nomura Securities.

He expected Japanese chemical stocks to rebound maybe later this week on good first-half earnings.

“For the second half, we still keep strong view for Japanese chemical makers,” he said, adding that demand would stay strong until the Beijing Olympics.

Shares of Korean majors such as LG Chem, LG Petrochemical and Hanwha Chemical fell 5-6% despite good third quarter results while Honam Petrochemical recorded the sharpest drop of 10% as investors took profit, JJ Kim, analyst at Woori Securities, said.

Taiwan chemical shares fell 2-3% across the board and the correction would provide a good buying point as they have become too expensive, Angela Hsiang, analyst from KGI Securities, said.

Chemical stocks were a safe haven for investors in the unstable global equity market as high crude oil prices will help sustain petrochemical prices, she added.

Demand was expected to slow in the fourth quarter compared with the previous quarter but China’s consumption was expected to pick up again in the first quarter, Hsiang said.

In the greater China region, the Hang Seng Index fell 2.5% while the Shanghai Composite sustained little losses. PetroChina’s share price rose 0.7% following its Shanghai initial public offering (IPO) launch on Sunday.

“While CNOOC (China National Offshore Oil Corp) should benefit the most [due to its full exposure to the higher crude prices], PetroChina seems to do best as investors forget about fundamentals,” Brynjar Eirik Bustnes, analyst at JP Morgan, said.

“Personally I do expect CNOOC to outperform due to its underlying production growth (10-12% compound annual growth rate until 2010) which justifies a premium valuation to PetroChina which doesn't have any growth (except low return natural gas production).”

The US economy slowdown has yet to have a visible impact on Asian chemical makers, the analysts said.

“Shin-Etsu, which makes polyvinyl chloride (PVC) in the US, is affected but that has already been reflected in its share price,” Okazaki said.

The impact on Taiwan’s Formosa Plastics Corp, which produces PVC in the US, was small as the bulk of its profits were from Asia, Hsiang said.

South Korean chemical companies were also indirectly exposed to the US economy as their customers looked at the country as the main market for their products, Kim said, but added that no impact was visible yet.

Despite the optimistic outlook for the chemical sector, Kim has advised investors to exercise caution as he expect prices to peak out in the fourth quarter this year or in the first half of 2008.

“A lot of people like chemical stocks. But prices went up so much and seasonal demand is slowing down. So I would advise investors to be a little cautious, he said.

He added that margins were expected shrink in the second half of 2008 compared with the first on increasing supplies in the Middle East.

By: Florence Tan
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