On the uptrend


It had in early March upgraded companies within the sector, namely Petronas Chemicals Group Bhd (PCG) and Lotte Chemical Titan Holding Bhd (LCT) from “reduce”to an “add” on expectations of improved margins from better average selling prices of products.

PETALING JAYA: With the continuous price rise of polymer, which is produced by petrochemical companies for usage in a broad range of industries, CGS-CIMB Research has upgraded the sector to an “overweight” from “underweight” previously.

It had in early March upgraded companies within the sector, namely Petronas Chemicals Group Bhd (PCG) and Lotte Chemical Titan Holding Bhd (LCT) from “reduce”to an “add” on expectations of improved margins from better average selling prices of products.

Potential catalysts for the sector, said CGS-CIMB, include stronger results for both companies where its FY2021 core net profit forecasts are 40% above consensus.

“Polymer prices in South-East Asia and spreads against naphtha continued to rise week-on-week last week on the back of global shortages post the United States’ Winter Storm Uri, ” it pointed out in a report.

According to the research house, polymer price increases have more than covered any increase in naphtha costs, even after Opec+ decided on March 4 to substantially retain its March production cuts into April.

The prices of naphtha, a key feedstock for the petrochemical industry, is correlated with crude oil as it is generally produced during the refining of crude oil.

CGS-CIMB notes that while the US polymer plants are restarting, there are some hiccups.

“In February, consultancy IHS noted that US polyethylene (PE) plants ran at 65-69% operating rates, while US polypropylene (PP), plants were at 52% only due to Uri’s impact and at end-Feb, PE inventory days in the US fell 5-8 days to circa 35 days, while PP inventory days fell to a record low of 20 days, which was lower than Oct 2020’s 26.5 days in the aftermath of Hurricane Delta, ” it said.

It added that IHS does not expect US PP inventories to rise to above 30 days until May.

Where the two key producers are concerned, the research house said that PCG is enjoying higher polymer and monoethylene glycol (MEG) selling prices after Winter Storm Uri, while its ethane feedstock costs remain fixed. This will likely lead to very strong results for the first half of financial year 2021, as low US inventories may only be resolved in June.

As for LCT, the price spreads over naphtha continue to rise despite higher oil and naphtha prices, ensuring stronger quarterly profits for the group in the first quarter of FY21, and likely also for 2Q21 forecast.

It has a target price of RM9.20 for PCG and for LCT sees it moving up to RM2.86.

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