APIC ’16: Asia chem firms’ earnings may stay buoyant on strong margins

SINGAPORE (ICIS)–Higher margins may continue to lift the earnings of petrochemical companies in Asia throughout the year, as prices of feedstock naphtha remains comparatively low despite recent gains.

Naphtha prices were assessed on 13 May at $401.50/tonne CFR (cost and freight) Japan, down by more than 30% around the same time last year, according to ICIS data.

Most chemical makers in Asia use naphtha as feedstock for production. With naphtha largely tracking the weakness in upstream crude market, petrochemical players in the region were reaping benefits from lower raw material costs.

On 19-20 May, Singapore will be hosting the 37th Asian Petrochemical Industry Conference (APIC) with the theme “The New challenge: Promoting Flexibility, Innovation and Efficiency to drive Sustainable Growth”.

APIC – the biggest forum of petrochemical industry players in Asia – has attracted more than 1,100 delegates as of 17 May from across the world, according to this year’s organiser, Singapore Chemical Industry Conference (SCIC).

“The global feedstock environment has evolved with the 2014 decline in the global oil prices and this decline has also affected the use of alternative feedstocks to produce olefins. This in turn, has led to the need for petrochemical companies to relook at their feedstock options,” SCIC chairman Tay Kin Bee said in a statement posted on SCIC’s website.

“Innovation in the manufacturing processes is key to many companies who strive to be competitive in a dynamic climate,” Tay said.

In the first quarter of 2016, strong margins boosted the financial results of the region’s petrochemical firms even as overall sales declined due to lower product prices.

Long term investments in downstream and specialty projects are expected to shore up margins further, according to analysts, citing that such diversification strategy makes the companies less prone to fluctuations in the crude oil market.

PETRONAS Chemicals Group (PCG) reported a March-quarter net profit of Malaysian ringgit (M$) 671m in the first quarter of this year, down slightly from the M$672m in the same period in 2015, as lower sales were offset by a slight increase in EBITDA (earnings before interest, tax, depreciation and amortisation) margins to 36.4% from 35.6%.

Revenue from its olefins and derivatives business revenue rose by 7.6% year on year to M$2.2bn in January to March 2016, with profit up by 26.6% year on year, given a 3.1-percentage point jump in margins to 20.5%.

In the notes accompanying its financial results, PCG said that market for the olefins and derivatives business is expected to be stable this year given the tight supply in the region while its fertiliser and methanol business would be weighed down by weaker demand and prices.

“We are still positive on PCG for its long-term growth story, which will be driven by the high profile RAPID [Refinery and Petrochemical Integrated Development] project by 2020,” Malaysia-based Kenanga Research said in a note.

In Thailand, PTT Global Chemicals reported a one-percentage point year-on-year increase in first-quarter margins to 12%, but the company’s overall earnings declined 16% due to lower production caused by a planned turnaround at its cracker, and a heavy inventory loss from the sharp decline in crude prices for the period.

Its aromatics business posted an EBITDA margin of 14% in the first three months of the year, up from 13% in the same period of 2015, while its olefins and derivatives unit realised an EBITDA margin of 20%, up from 19% in the previous corresponding period.

“We expect PTTGC’s earnings to remain weak in the second quarter of this year due to the 63-day planned shutdown of the refinery. Current gross refining margins remains weak at similar levels as the first quarter but overall run rates for crackers and polyethylene (PE) plants should pick up and mitigate the shutdown impact,” said Naphat Chantaraserekul, an analyst with Thailand-based brokerage Krungsri Securities.

“The recent increase in oil prices should also help to widen PE margins, but is not sufficient to offset the refinery shutdown,” he added.

Krungsri Securities forecasts a 4% increase in PTTGC’s 2016 sales to Bt421.4bn, with a net profit of Bt25.4bn, Chantaraserekul said.

Another Thai producer – Siam Cement Group (SCG) – had a strong first-quarter performance of its petrochemical operations. The segment posted an 82% surge in net profit Bt8.98bn although sales were flat at Bt47.8bn.

Its chemicals unit posted a 72% jump in EBITDA to Bt11.5bn in the first quarter, backed by a three-percentage point increase in margins to 24%.

SCG enjoyed wider petrochemical margins as the decline in the prices of high density polyethylene (HDPE) and polypropylene (PP) were not as strong as in the feedstock naphtha market, according to Chantaraserekul.

The HDPE-naphtha margin in the March quarter grew by $51/tonne year on year to $759/tonne, while the PP-naphtha margin increased by $35/tonne to $589/tonne quarter on quarter, he said.

 “The chemical business will remain SCG’s key earnings driver and would more than offset the impact of slow cement demand,” Chantaraserekul said.

In Indonesia, Chandra Asri Petrochemical – the sole cracker operator in the country – delivered a strong performance in the first quarter, aided by higher chemical margins and higher sales volumes following the recent expansion of its cracker.

Its March-quarter net profit soared to $35.4m from $2.8m in the same period of 2015, with net revenues barely up at $358.9m.

Its gross profit margins nearly quadrupled to 14.7% from 4.7% over the same period, “reflecting strong chemical margins aided by supply/demand dynamics and lower feedstock costs”, mainly naphtha, the company said.

Sales volumes were up about 24% year on year at 451,000 tonnes.

In China, Sinopec’s chemicals segment had a 49.3% year-on-year increase in March-quarter operating profit to yuan (CNY) 4.58bn, partly due to low raw material costs.

The company’s ethylene output in January to March 2016 grew 2.0% year on year to 2.82m tonnes, with chemical sales volumes up by 6.7% at 15.6m tonnes.

PetroChina’s refining and chemicals division, meanwhile, swung into a net profit of CNY14.7bn from a loss of CNY5.07bn in the same period last year.

In South Korea, LG Chem posted a 37.3% year-on-year increase in net profit for the first three months of the year to won (W) 338.1bn, backed by improved margins at its petrochemical business, even as sales slipped by 0.8% to W4,874bn.

In Japan, Mitsui Chemical reported a 33% jump in net profit for the fiscal year ending March 2016 to yen (Y) 23bn on strong petrochemical earnings, even though sales declined by 13% to Y1,344bn.

For the rest of the year, overall consumption of petrochemicals will depend on how the region’s economy will fare, with eyes focused on the key market of China, which continues to show signs of weakness.

China is world’s second biggest economy and is a major importer of petrochemicals in Asia.

In the long term, chemical companies in Asia are expected to chase higher margins by embarking on downstream specialty projects, analysts said.

Malaysia’s PCG, for example, is bringing its integrated Aroma Ingredients Complex project in Gebeng, Pahang in October this year. The 50,000 tonne/year specialty plant at the site produces citral, citronellol and L-menthol aroma ingredients for the fragrance and flavour industries.

It also has Sabah Ammonia Urea (Samur) project in eastern Malaysia that has 1.2m tonne/year urea capacity.

The two projects should start contributing to the company’s earnings late this year, analysts said.

“PCG is also now viewed as a growth company, with a series of plant commissioning in the pipeline all the way to 2019,” said Chong Long Choo, an independent Malaysia-based equity researcher.

“All these new projects will bring it up in the value chain and ensures strong demand with decent margins,” he said.

Thailand’s PTTGC, meanwhile, is currently studying a new naphtha cracker that has flexibility in feedstock usage. The cracker, which is expected to produce 500,000 tonnes/year of ethylene and 261,000 tonnes/year of propylene, is expected to come on stream in 2020.

By Pearl Bantillo and Nurluqman Suratman

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

Top Image: Natasha Pilapil

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