22 July 2013 12:14 [Source: ICIS news]
SINGAPORE (ICIS)--HSBC has upgraded its stock rating for South Korean producer Lotte Chemical to “overweight” from “neutral”, with a higher target price of won (W) 190,000 ($169) a share, the investment bank said on Monday.
“Lotte Chem is a pure-play integrated, naphtha-based chemical producer and therefore has significant leverage to improving naphtha margins,” HSBC said in a recent report.
HSBC’s previous target price for Lotte Chem stock was W170,000/share.
HSBC expects cracker margins to bottom out in the second half of the year, and should “show a normalisation in supply demand balances after two years of a downcycle” in 2014/15, the bank said.
HSBC said that the company should benefit from improving Chinese plastic demand, notwithstanding recent downgrades in the growth forecast for the world’s second-largest economy.
“On a rolling 12-month basis, plastics resin apparent consumption data recently reached 7%, compared with 3-4% over the past 12 months and the contraction witnessed in 2H11 [second half of 2011] through 1H12 [first half of 2012],” it said.
“While still below-trend GDP and lower than the historical average, demand is definitely showing signs of normalisation following two years of weakness that resulted in a margin squeeze for the NE [northeast] Asian exporters like Lotte Chemical,” HSBC said.
China, which is a major importer of petrochemicals and a major market for South Korea, reported a 7.5% GDP growth in the second quarter of 2013, slower than the 7.7% expansion recorded in the first quarter. For the full year, China is officially targeting a 7.5% GDP growth.
HSBC said that “the worst of supply wave is nearly done”, expecting “benign capacity additions” in the 18-24 months after the third quarter of this year, with only “one new firm world-scale ethylene cracker set to come on stream globally”.
Meanwhile, HSBC expects butadiene supply to tighten, as the market is “structurally capacity constrained because of the feedstock changes in the global ethylene chain, with next to no commercial on-purpose BD production set to come on stream for the time being”, it said.
BD’s recent price decline has been driven by a strong de-stocking cycle on operating rate cuts by downstream synthetic rubber producers.
“We believe that the price will start to move higher once inventories are completely digested. Current spot BD prices are close to naphtha costs, a scenario that is not sustainable. We see longer-term BD prices reverting to $2,000/tonne level on average, a price level at which on-purpose extraction projects are incentivised,” HSBC said.
Lotte Chemical's share price closed at W155,500 on Monday.
($1 = W1,121)
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