Margin pressure is weighing on petrochemical players

PETALING JAYA: Petrochemical players are struggling to “find a bottom” as steep margin compression continues to weigh on the industry, according to Maybank Investment Bank (Maybank IB) Research.

Moving into the second half of 2023 (2H23), challenges remained for petrochemical players and the research house was “neutral” on prospects.

The industry is suffering from weakening average selling prices (ASPs), amid sluggish global growth and insufficient downstream capacity, it said.

Notably, ASPs have returned to their post-pandemic mean, after 12 months of outsized and decade-high gains.

In the second half of the 2023 outlook, Maybank IB Research said it has a “hold” call on Petronas Chemicals Group Bhd (PetChem) and a “sell” call on Lotte Chemical Titan Holding Bhd.

The core net profit forecast for both companies remained unchanged.

“We are betting that both PetChem and Lotte will continue to face significant growth in 2H23.

“Despite significantly lower year-over-year ASPs, PetChem is unlikely to post a loss-making quarter in 2H23 due to competitive feedstock procurement from its parent.

“Lotte, meanwhile, is likely to remain in the red for the rest of the year as spreads are still below break-even despite management’s best attempts to streamline operations,” it said.

PetChem and Lotte earnings were disappointing in the first quarter of 2023 (1Q23), as both companies continue to be on a downward trajectory.

PetChem’s 1Q23 earnings were below Maybank IB Research’s forecast and consensus expectations as the group had to contend with lower plant utilization, higher operating expenditure (opex) and warm demand in the region as a whole.

Lotte, on the other hand, suffered its fourth consecutive quarterly loss in 1Q23 despite management’s best attempts to contain cost pressures, as margin declines spread and a hefty RM43.5mil loss at its US associate took a toll on the group’s performance.

The group registered an expected lower turnover, down 5% quarter-on-quarter.

This was caused by slightly lower sales volumes, lower mixed ASPs and a weaker US dollar.

However, on a positive note, the group registered positive earnings before interest, taxes, depreciations and amortization (Ebitda), thanks to lower feedstock costs from the weakening of regional cracker demand, a 332% increase in the reversal of inventory write-downs as well as operational rationalization.

Looking ahead, Maybank IB Research opined that ASPs in the petrochemical industry have yet to find a bottom.

On the back of a consecutively weak 1Q23, key prices of fertilizers and methanol products fell further in 2Q23 to two-year lows from slowing agricultural end-demand and easing natural gas prices in Europe.

In 2Q23, prices of urea, ammonia and methanol decreased by 56% year-on-year (yoy), 79% yoy and 23 yoy.

Meanwhile, olefin and derivatives (O&D) ASPs remained lackluster due to the weak crude oil market.

Furthermore, lower aggregate demand in China and the United States, the world’s two largest economies, has likely reduced the foreseeable recovery in 2023 for downstream petrochemicals, with the challenging operating environment acting as a natural stabilizer in resolving the supply problems that raised ASPs in late 2021 and most of 2022.

“If continued tight supply is the industry norm for the 15 months spanning 4Q22 to 4Q23, oversupply and excess inventory will likely characterize the regional downstream market for the rest of 2023.

“To exacerbate the domestic industry’s woes, the O&D market will be further stressed with the impending commercial operation date of the Pengerang Integrated Complex in 4Q23 as Lotte may see its domestic premium fall completely in 1H24,” said Maybank IB Research.

Within the PetChem specialties space, easing opex pressure and moderate demand recovery in isolated product categories such as lube oil and resin helped buffer Ebitda margins and ease the group’s bottom line shortfall.

However, inflation remained a key constraint for growth in its broader product portfolio of diversified specialty chemicals, with prospects of a recovery in 2H23 looking dim.

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