PETALING JAYA: The petrochemicals sector is experiencing strong industry demand amid a tight supply situation – fuelling healthy margins, according to Maybank Investment Bank (IB) Research.
In an industry research report, Maybank IB Research said the first quarter of the year is exceptionally strong due to many petrochemical producers in the Middle East undergoing prolonged shutdowns, hence tightening global supply.
Additionally, China producers were stocking up ahead of Chinese New Year, and the China government’s air pollution curb had led to the closure of many local producers that utilise older technology, thus forcing substitution via imports.
The research house pointed out that prices of all major petrochemicals have risen this year and the latest global Purchasing Managers Index (PMI) is on firm growth territory.
However, Maybank IB Research said that naphtha price volatility would be a primary risk, particularly for Lotte Chemical Titan Holding Bhd (LCT), as the group only uses naphtha as its feedstock, sourced primarily from the Middle East.
“Naphtha prices have risen since November 2017 in tandem with the rise in crude oil prices.
“Petrochemical prices have tracked the rise in naphtha prices as well but there is some degree of lag.
“The volatility in naphtha price will likely eat into some of LCT’s margins as it is very difficult to pass on entirely the price volatility to customers.
“Petronas Chemicals (PetChem) is largely unaffected because it uses natural gas as its primary feedstock,” said Maybank IB Research.
LCT is the research house’s sole “buy”, but its earnings are more volatile to the average selling price-input cost spread volatility.
Although PetChem is a “hold”, Maybank IB Research did not rule out the share price overshooting the research house’s target price on the potentially strong first quarter of this year and the signing of the joint venture between Saudi Aramco and Petroliam Nasional Bhd that is due to be finalised by the end of the quarter.