PetChem set for gradual recovery


PETALING JAYA: Early last week, Malaysia’s leading integrated chemicals producer Petronas Chemicals Group Bhd (PetChem) released its results for the fourth quarter (4Q23) and full year 2023 (FY23).

While still a solid year, the final three months were disappointing if the group’s lofty standards were anything to go by, especially since it is the chemical arm of national oil and gas titan Petroliam Nasional Bhd (PETRONAS).

To recap, PetChem saw 4Q23 net profit plunging 76.7% year-on-year (y-o-y) to RM112mil, while for the whole of 2023, the picture was not much better as net earnings also dived 73% y-o-y to RM1.7bil from RM6.3bil the year before.

The group said the subdued showing was attributable to its reduced plant utilisation rate due to maintenance activities as well as lower profit spread and sales volumes.

Going forward, analysts are nevertheless unanimous that 2024 should turn out to be a better year for the chemicals giant.

Reporting that PetChem’s FY23 results have attained only 78% of the market’s and its own expectations, MIDF Research said the group’s operational outcomes are primarily affected not only by global economic conditions but also by petrochemical product prices that are closely linked to crude oil prices, on top of the aforementioned utilisation rate of its production facilities.

“Those factors aside, movements in foreign exchange rates also affect operations. Production activities for PetChem also relies on regular maintenance and repair operations as well as sufficient feedstock and utility supply,” the research house observed.

At the same time, it is expecting product prices for olefins and derivatives (O&D) to stabilise in the near term, although fertiliser and methanol (F&M) products may see a decrease in pricing due to off-planting season and abundant methanol supply.

Last Monday, PetChem chief executive and managing director Mazuin Ismail said that O&D and F&M slowdowns due to plant interruptions were a primary challenge for the group in 2023.

As such, it is understandable that he is anticipating O&D prices to be steady, moving forward, especially on returning supply following the group’s regional plant maintenance.

Echoing PetChem’s view on its specialties division, MIDF Research added: “Specialties are expected to recover on demand improvement, although the end market for specialty chemicals remains volatile.”

Overall, the research outfit is anticipating a slower growth for petrochemicals going further into 2024, in particular after taking into account the risks to the sector, which includes volatile crude oil and feedstock prices as well as global economic uncertainty that could affect demand.

“Furthermore, changes in governmental regulations and subsidies, on top of a shift to greener products and processes, could also affect industry growth,” it said.

Nevertheless, on a brighter note, it is projecting a better performance for PetChem in the second half of the year (2H24), following an expected improvement in local and regional consumer spending for petrochemical products, as well as the increased demand for specialty chemicals.

Meanwhile, Kenanga Research analyst Lim Sin Kiat is of the opinion that while PetChem’s 2023 had been below expectations, its earnings have bottomed out and the group is poised for a gradual recovery.

His forecast is partly based on the resurgence in polyolefin prices, which he said have rebounded to around US$1,000 per tonne since the beginning of 2024, following a low of US$900 per tonne in the final quarter of last year.

In a research report published last Tuesday, Lim said: “The future recovery of polyolefin prices is closely tied to the economic recovery in China. Additionally, the specialty chemicals division experienced its lowest spreads last year in our view, with initial signs of recovery emerging since the onset of 2024.”

While maintaining a “market perform” call on PetChem, he still sees the company positively due to the aforementioned signs of the bottoming of polyolefin prices that are supported by crude prices and the group’s specialty chemicals division seeing through a tough 2023, with 2024 potentially being a year of progressive recovery.

“Moreover, PetChem has superior margins compared to its peers due to a favourable cost structure.

“On the other hand, the upside to its earnings and hence share price is capped by the limited upside to its product prices amid a tepid global economic outlook, particularly in China,” he noted.

PetChem’s Mazuin remarked that the chemical industry itself is cyclical in nature and is expectant of a change in the current downturn, especially as demand for the group’s products catches up with supply.

Always preferring to look on the bright side, the jovial CEO commented that the group had successfully resolved most of its operational challenges and is strategically positioned to seize business opportunities as the market rebounds.

Incidentally, MIDF and Kenanga Research have placed their respective target prices of RM7.18 and RM6.88 on the counter.

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