Asian petchems 2009 profits may have peaked in Q2 – analysts

08 July 2009 07:16  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS news)--Second-quarter earnings for Asian petrochemical companies would definitely be better but these may well be the peak this year given a still hazy outlook on global economic recovery, analysts said on Wednesday.

The quarterly earnings reporting season in the region will kick off soon.

Spikes in crude values and delays in start-ups of plants in China and the Middle that pushed chemical prices higher have helped earnings in the April-to-June period, they said.

But with more capacities coming on stream from China and the Middle East in the second half amid weak demand, it may be impossible for companies to perform better than the second quarter, analysts said.

“We believe the second-half outlook for petrochemical businesses [could] slow down on lower petrochemical [prices] and a narrower margin spread due to new supplies in the region,” said Kitichan Sirisukarcha, a Thailand-based analyst at brokerage Kim Eng Securities.

Crude jumped to more than $70/bbl (€50.4/bbl) in recent weeks before retracing its steps back to $60/bbl levels as optimism over recovery was being overshadowed by continued flows of gloomy data from around the world.

PTT Aromatics and Refining and Thai Oil, two of the four petrochemical subsidiaries of Thai oil and gas giant PTT, may have performed better in the past quarter given the strong crude gains, which allowed them healthy margins for aromatics, said Kim Eng’s Kitichan

Expectations were similar for South Korean petrochemical companies, analysts said.

“Demand was much stronger than expected due to China’s stimulus package and the weakening of the Korean Won,” said Kim Jae Joong from Woori Investments and Securities.

Kim was expecting petrochemical players LG Chem to post a 7% quarter-on-quarter increase in earnings, while Honam Petrochemical could post a stronger 11% rise in June quarter profits.

China has remained a major consumer of petrochemicals, something that South Korea was able to take advantage of as the weakness of the won made its exports more competitive.

In China, state-owned oil giants Sinopec and PetroChina should have continued benefitting from the government’s implementation of a new fuel pricing mechanism in the second quarter, analysts said.

The government’s new pricing formula that took effect on 18 December 2008 allowed a more frequent adjustment of domestic fuel prices in China, depending on how crude behaved in the international market.

“I am expecting an approximate 10% quarter-on-quarter improvement in Sinopec’s second quarter net profit despite a weaker gross refining margin,” said Wang Aochao, an analyst with UOB Kay Hian.

Sinopec reported a first quarter net profit of yuan (CNY)11.2bn.

Saudi petrochemical giant SABIC would likely report a sharp decline in profits in the April-to-June period from the record Saudi riyals (SR)7.54bn profits it made in the same period last year, when strong production volumes and sales were accompanied by high prices.

“I am expecting a near 60% year-on-year drop in SABIC’s second quarter net profits to SR3.1bn,” said Laurent-Patrick Gally, an analyst at UAE-based investment bank Shuaa Capital.

But companies in the Gulf Cooperation Council (GCC) of Arab states like SABIC have a natural advantage over other petrochemical players given direct access to competitively priced feedstock gas, analysts said.

“GCC producers would gradually gain market share as others lose theirs,” said Gally, citing that SABIC’s long-term prospects remained bright.

In the second half of the year, everything would depend on how crude would fare and on the strength of demand with additional capacities becoming available, analysts said.

China has had to hike fuel prices three times this year between March and end-June due to strong crude values.

“The current prices of fuel at the pump stations are already higher than last year’s peak. So the government may start hesitating to increase pump prices again even if crude goes up further,” said Grace Liu, an analyst with Guotai Junan Securities.

“As soon as crude hits the $80-130/bbl band, [Sinopec and PetroChina] are going to start feeling the pinch,” she added.

Spikes in energy prices would push up business costs and prolong the recovery process of world economies from a deep recession, analysts said.

($1 = €0.71 / $1 = SR3.75 / $1 = CNY6.84)

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By: Bohan Loh
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