2015 Asia Petrochemical Market Analysis

Date: 2015-08-25

Despite the market’s concerns regarding a sharp contraction in petrochemical spreads, spot spreads remain robust, while wehave yet to see any signs of a major correction. Given 4~8 weeks of cost lag, falling commodity prices nevertheless will hurt regional chemical companies’ profitability in the near term. However, with the strengthening US dollar, we expect Korean and Taiwan chemical companies’ near-term earnings to be protected and anticipate a limited decline in earnings, compared to a verystrong 2Q15. In Korea and Taiwan, LG Chem and Formosa Petrochemical should be the strongest beneficiaries of US dollar strength.

We believe the yuan depreciation will eventually be positive for the petrochemical sector as its intention is to stimulate the Chinese export market over time. In the near term, it is true that yuan weakness relative to the US dollar could place further pressure on commodity prices, and potentially slow down Chinese imports and overall demand for petrochemicals. But chemicals are intermediary commodities, which are used to manufacture final goods and eventually exported out. Current sentiment may seem bearish, but chemical spreads continue to be robust, while US dollar strength should help protect regional chemical companies’ fundamentals in the near term. Should yuan depreciation trigger export growth for China, this would be an additional positive for petrochemical fundamentals longer term as expansion plans for
major petrochemicals continue to be limited through 2018.

Given the ongoing volatility in the oil price and China RMB devaluation relative to the US dollar, petrochemical product prices were all down WoW, with ethylene leading the decline (-7.6% WoW). Product spreads also showed a modest downward trend, but QTD spreads continue to show resilience as we have yet to witness any major contraction. The ethylene-naphtha spread is an exception in that it has contracted, but we note that polyethylene (PE) and other ethylene derivative spreads are what matter to most chemical companies.

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