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Chemical Sector

- - - - - Chemicals Petrochemical PVC margins PX-PTA

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#1
Mansoor

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    Chemicals


    PVC margins on the rise, up a massive 42% MoM amid oil decline



    Petrochemical margins (ex. PX-PTA margins) improved during Aug-15 amid decline in oil prices (down 16% MoM). Both PSF and PVC margins rose 28% and 42% MoM, respectively during Aug-15. However, PX-PTA margins shrank by 22%. We see this as a positive for ICI and EPCL, while negative for LOTCHEM. To recall that, EPCL is producer of PVC and Ethylene is the raw material to produce PVC. ICI is producer of PSF for which PTA and MEG is raw material. Paraxylene (PX) is raw material of PTA and LOTCHEM is the producer of PTA.

    Oil prices decline 16% MoM to USD 43/bbl

    Average monthly crude prices (WTI) fell 16% MoM to USD 43/bbl, mainly as a consequence of soft demand from China, the largest oil importer. Depreciation of the RMB added fuel to the fire of investors’ woes, heightening perceptions that all was not right in the mammoth economy, thereby resulting in the slide in oil prices further. Though there was a recovery seen in oil recently, soft employment data from the US resulted in lower expectations of chances of Fed rate hike, which would have otherwise led to a stronger USD i.e. costlier oil imports. In addition, a great degree of consensus exists in the US in favour of the Iran deal, which would add yet more supply to oil market. This, we believe will further add to PSF and PVC margins as oil keeps its sliding trend.

    PSF margins up 28% MoM to USD 340/ton

    PSF margins increased by a massive 28% MoM (up 47% YoY) to USD 340/ton during Aug-15, at the highest since Jan-15. This is mainly due to decrease in PTA (12% MoM) and MEG (15% MoM) prices. With the decrease in crude oil prices (16% MoM), there has been a corresponding decrease in PTA and MEG prices.

    PVC margins up due to decreased Ethylene prices

    PVC margins increased by 42% MoM (up 25% YoY) to USD 378/ton due to decrease in Ethylene prices by 24%. PVC price also decreased by 4% to USD825/ton.

    PX-PTA margins shrank amid decreased PTA prices

    PX-PTA margins were down 22% (down 32% YoY) to USD80/ton, lowest since Feb-15. Declining margins were witnessed on the back of 12% dip in PTA prices; however PX prices also declined 10.2% MoM. The price decline of PTA is triggered by lacklustre demand. The fall in PTA prices is further corroborated by weaker PX and MEG rates. In addition, Ningbo Petrochemical (located in China) is likely to commence production at its
    new PX plant adding a potential 1.6mn/tpa to an already burgeoning PX supply scenario.

    Outlook and recommendation

    Currently, we have a HOLD recommendation for LOTCHEM with our Dec-15 target price of PKR 7.8/share, offering an upside potential of 9% from the last closing. For EPCL, we will revert soon with our investment case and target price.




    AHL Research
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    #2
    Mansoor

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    PVC & PTA margins increased by 9% & 3% MoM respectively




    Petrochemical margins (ex- PSF margins) improved during Sep-15, despite a recovery in oil prices, which rose 6.1% MoM (WTI). PVC and PTA margins increased by 8.7% MoM and 3.4% MoM, respectively during the month. Conversely, PSF margins were down by 4% MoM due to lacklustre demand for polyester (cotton prices fell 4.4% MoM, a natural substitute of polyester). The latest monthly figures are positive for LOTCHEM, however negative for ICI.



    Exhibit: Petrochemical Margins

    (USD/ton)

    Sep-15


    Aug-15


    MoM


    3QCY15


    2QCY15


    QoQ


    PSF Margins

    302


    313


    -3.5%


    295


    199


    48.4%


    PVC Margins

    411


    378


    8.7%


    351


    190


    84.7%


    PTA Margins

    83


    80


    3.4%


    88


    123


    -28.1%


    Source: Bloomberg, Yarn Market Association, AHL Research


    Despite short term gains in crude oil price, we retain our bearish view

    Oil prices rose 6.1% MoM in Sep-15 due to rising uncertainty in the global political climate, with the recent attacks by Russia on Syria exacerbating the upwards trend in oil. Despite the recent momentum, we believe that the odds are heavily stacked in favour of oil prices retaining their bearish gloom in FY16 (our expectations of USD 50/bbl. for Arab Light Crude for the year). Reasons for our view include (i) increased oil production by US, (ii) insipid demand from China, (iii) Iran’s re-entry following lift off of sanctions, and (iv) continued reluctance from OPEC (Saudi Arabia) in cutting supply in the fear of losing market share.



    Bearish demand sentiment kept PSF margins down

    PSF margins were down 3.5% MoM (down 2.5% YoY) to USD 302/ton due to lower decline in MEG and PTA by 4.9% and 4.6% MoM, respectively. This was triggered by sluggish PET and polyester demand similar to observed in the previous months.

    Ethylene (Soft Buying + Sufficient Product Availability + Weaker Downstream Demand) = Higher PVC Margins

    PVC margins have increased by 8.7% MoM (up 42.9% YoY) to USD 411/ton during Sep-15 attributable to drop in Ethylene prices by average 12% MoM to USD 779/ton. Soft regional buying sentiment, sufficient product availability and weaker downstream demand kept the ethylene prices on lower side. However, in the last week Sept’15 ethylene prices went up by 4.4% WoW to USD 830/ton on the back of bullish regional buying sentiment and higher downstream prices led by news of scheduled plant maintenance shutdown. In addition, PVC prices were also down during the start of month due to weaker demand but gained momentum in the last week and increased by 1.3% to USD 810/ton. Average prices remained down 3% MoM to USD 804/ton during Sep-15.



    Lower PX Prices = Higher PTA margins

    PTA margins are up by 3.4%MoM (down 26.2% YoY) to USD83/ton during Sep-15. This is primarily due to 6% MoM decline in Paraxylene (PX) prices to USD 746/ton. PTA prices were down during the start of month but garnered momentum towards end of the month. However, average monthly prices were down by 5% MoM to USD 575/ton. In addition, Artland plans to resume production of its PTA plant. The plant was shut down in April-2014 (capacity of 0.7mn tons per annum) on account of bearish market fundamentals. Thus, PTA prices may remain upwards sticky, in our view.





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    PSF/PVC margins contract on MoM, PTA margins see massive jump!



    Petrochemical margins (ex- PTA margins) decreased during Oct-15, attributable to higher oil prices, up 1.8% MoM (WTI). PSF (USD 249/ton) and PVC (USD 335/ton) margins decreased by 18% MoM and 19% MoM, respectively during the month. Conversely, PTA margins were up by massive 36% MoM to USD 112/ton. The latest monthly figures are positive for LOTCHEM, however negative for ICI.


    Exhibit: Petrochemical Margins

    (USD/ton)

    Oct-15


    Sep-15


    MoM


    Oct-14


    YoY


    PSF Margins

    249


    302


    -17.5%


    417


    -40.2%


    PVC Margins

    335


    411


    -18.5%


    307


    9.0%


    PTA Margins

    112


    83


    35.7%


    114


    -2.0%


    Source: Bloomberg, Yarn Market Association, AHL Research




    Bearish demand sentiment kept PSF margins down

    PSF margins were down 18% MoM (down 40% YoY) to USD 249/ton due to higher PTA prices (USD 611/ton) which rose 6% MoM. Moreover, there was a 3% MoM decline in PSF prices to USD 1,110/ton. However, the drop in margins was muted by lower MEG (USD 664/ton) prices, down 4.8% MoM. The decline in MEG prices was mainly due to weaker downstream product demand.

    Ample product availability + Sluggish buying = Low Margins

    PVC margins dropped by 19% MoM (up 9% YoY) to USD 335/ton during Oct-15 attributable to increase in Ethylene prices by average 17% MoM to USD 910/ton. Ethylene prices were on the higher side due to tighter product availability. Also, sluggish regional buying led to an oversupplied market, keeping the PVC prices on lower side.

    Stronger buying pushed up prices and margins

    PTA margins were up by a massive 36%MoM (down 2% YoY) to USD112/ton during Oct-15. This is primarily due to 6% MoM increase in PTA prices to USD 611/ton. PTA prices were up due to a rise in futures prices, lead by strong buying. In addition, the prices of PX also increased by 1.3% MoM to USD 756/ton.




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    Petrochemical margins in the red
    Petrochemical margins shrank during Nov-15, attributable to lower oil prices, which ended down 7.3% MoM to average USD 42.9/bbl (WTI). PSF margins stood at USD 247/ton, PVC at USD 257/ton and PTA at USD 107/ton. The latest monthly figures are negative for both LOTCHEM and ICI.
    Exhibit: Petrochemical Margins
    (USD/ton)

    Nov-15

    Oct-15

    MoM

    Nov-14

    YoY

    PSF Margins

    247

    249

    -1.1%

    392

    -37.1%

    PVC Margins

    257

    335

    -23.4%

    357

    -28.2%

    PTA Margins

    107

    112

    -4.9%

    111

    -3.5%

    Source: Bloomberg, Yarn Market Association, AHL Research
    Shrinking end-product (PSF) prices off-set gains from cheaper inputs PSF margins fell marginally by 1% MoM (down 37% YoY) to USD 247/ton as higher PTA prices (USD 615/ton) (up 1% MoM) pushed up input costs. Moreover, there was a 2% MoM decline in PSF prices to USD 1,085/ton. However, the drop in margins was dulled by lower MEG prices (USD 599/ton), down 9.8% MoM. The decline in MEG prices was mainly due to weaker downstream product demand. PVC margins remain dull MoM due to rising Ethylene prices PVC margins plunged by 23.4% MoM (down 28.2% YoY) to USD 257/ton during Nov-15. The diminution in margins is mainly on the back of the rise in Ethylene prices, up 10% MoM to USD 997.5/ton; coupled with decline in PVC prices, down 4% MoM to USD 760/ton. PVC prices were down due to abundant product availability coupled with bearish buying in major Asian market, mainly in China. Higher Paraxylene prices kept PTA margins in check PTA margins dwindled by 5% MoM (down 4% YoY) to USD 107/ton. Albeit, PTA prices were up by a meagre 1% MoM, prices of Paraxylene witnessed a 2% MoM growth to USD 770/ton; net effect of change in prices in the value chain kept the margins down. World supply expected to add to the glut Reliance Industries Limited (RIL) is likely to commence operations of its PX plant; likely to begin production in 2QCY16 (Production Capacity: 2.2mn ton/year). While, Ningxia Baota Chemical Fibber Co. is likely to commence operations of its new PTA plant (production capacity 1.2mn ton/year) in CY18.
    AHL Research
    **********


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