The industry is suffering from weakening average selling prices amid sluggish global growth and ample downstream capacity, said Maybank IB Research.
PETALING JAYA: Petrochemical players are struggling to “find a bottom” as steep margin compressions continue to weigh down the industry, according to Maybank Investment Bank (Maybank IB) Research.
Moving into the second half of 2023 (2H23), challenges remained for the petrochemical players and the research house is “neutral” on the prospects.
The industry is suffering from weakening average selling prices (ASPs), amid sluggish global growth and ample downstream capacity, it said.
It is noteworthy that ASPs have reverted to their post-pandemic mean, after 12 months of outsized and decade-high gains.
In its second half 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.
Core net profit forecast for both companies remained unchanged.
“We opine that both PetChem and Lotte will continue to face significant growth headwinds in 2H23.
“Despite markedly lower ASPs year-on-year, PetChem is unlikely to post a loss-making quarter in 2H23 owing to competitive feedstock procurement from its parent.
“Lotte, meanwhile, is likely to stay in the red for the remainder of the year as spreads are still well below break-even despite the management’s best attempts to streamline operations,” it said.
The earnings of PetChem and Lotte were disappointing in the first quarter of 2023 (1Q23), as both companies continued to be on a downward trajectory.
PetChem’s earnings in 1Q23 were below the forecast of Maybank IB Research and the consensus expectations as the group had to contend with lower plant utilisation, higher operational expenditure (opex) and tepid regional demand across the board.
On the other hand, Lotte suffered its fourth consecutive quarterly loss in 1Q23 despite the management’s best attempts to rein-in cost pressures, as declining margin spreads and a hefty RM43.5mil loss at its US associate exacted a heavy toll on the group’s performance.
The group registered expectedly lower turnover, down by 5% quarter-on-quarter.
This was caused by marginally lower sales volumes, declining blended ASPs and a weakened US dollar.
However, on a positive note, the group registered positive earnings before interest, tax, depreciations and amortisation (Ebitda), thanks to lower feedstock costs from waning regional cracker demand, a 332% increase in reversal of inventory write-downs as well as operational rationalisation.
Looking ahead, Maybank IB Research opined that the ASPs in the petrochemical industry have yet to find a bottom.
On the back of a sequentially weak 1Q23, key fertilisers and methanol product prices plummeted even further in 2Q23 to two-year lows from slowing agricultural end-demand and easing European natural gas prices.
In 2Q23, the prices of urea, ammonia and methanol dropped by 56% year-on-year (y-o-y), 79% y-o-y and 23 y-o-y.
Meanwhile, the ASPs of the olefin and derivatives (O&D) have remained equally lacklustre due to a subdued crude oil market.
Moreover, decelerating aggregate demand in China and the United States, the world’s two largest economies, have likely curtailed a foreseeable 2023 recovery for downstream petrochemicals, with the challenging operating environment acting as a natural stabiliser in remedying the supply woes that sent ASPs soaring in late-2021 and throughout much of 2022.
“If persistently tight supply was the industry norm in the 15 months spanning 4Q22 through 4Q23, oversupply and excess inventory will likely characterise the regional downstream market for the remainder of 2023.
“To exacerbate the domestic industry’s woes, the O&D market will be further pressured with Pengerang Integrated Complex’s impending commercial operation date in 4Q23 as Lotte could see its domestic premium completely erode by 1H24,” Maybank IB Research said.
Within PetChem’s specialties space, easing opex pressure and modest demand recovery in isolated product categories such as lube oil and resins had helped buffer Ebitda margins and mitigate the shortfall in the group’s bottom line.
However, inflation remained the primary barrier for growth across its broader product portfolio of diversified specialty chemicals, with the prospect of a 2H23 recovery looking bleak.
