refining/chemical€¦ · - we are focusing on propane (lpg), propylene, and pp price trends as...

Refining margins rebounding; higher propane price may lead to naphtha spread recovery

Refining margins are rebounding. In particular, the previously weak gasoline margin is widening. Current forecasts

call for increasing margins thanks to US refiners’ regular maintenance, and even considering seasonality, US refiners’

utilizations are far lower than in the past. Furthermore, gasoline inventory has turned downward, due mainly to US

refiners’ continued gasoline production cuts, in addition to declining US refining utilizations. Instead of gasoline, US

refiners beefed up the production of middle distillates but their inventories remain low. In all, we expect refining

margins to continue to expand for the foreseeable future.

Propane merits our special attention. The price of US propane has turned around. Price volatility remains high but

we believe the price has bottomed out given the stabilizing US propane inventory. Besides, Aramco’s recent hike of

Asian propane CP by USD50/tonne to USD490/tonne should boost propane prices further. We believe higher

propane prices will naphtha prices recover. Propane prices rise in the winter on strong seasonality, driving NCCs to

opt for naphtha instead. Since 2H18 however, propane prices have collapsed, and NCCs’ naphtha demand faltered as

a result, which led to naphtha price weakness. As such, propane price hikes should help the naphtha spread to

recover going forward, and affect gasoline prices.

Meanwhile, middle distillate margins remain strong. Inventories in the US and Europe are stable, and demand is

likely to pick up further as the IMO’s 2020 sulfur cap comes into effect in 2H19. A further increase in middle distillate

margins could accelerate the recovery of refining margins for Korean refiners, since kerosene and diesel represent

over 50% of their refining earnings.

Refining/Chemical/Utility Kang Dong-jin +822-3787-2228 [email protected]

Major issues and conclusions - Refining margins rebounding, led by gasoline and naphtha; middle distillate margins still strong. - Korean refiners provide a great bargain-hunting opportunity considering widening refining margins and a

strong PX spread. - Whether the PE/MEG spreads will continue to expand remains to be seen. - We are focusing on propane (LPG), propylene, and PP price trends as they could lead to a peak-out of PDH

players’ profitability.

Industry and stock outlook - Refining margins to improve gradually, helping the refining sector to stage a rebound. - For chemicals, conditions may vary by product.

Refining/Chemical OVERWEIGHT

Sharp rebound of refining margins

Industry Note March 6, 2019

2

INDUSTRY NOTE

Fig 1. Utilizations at US refineries Fig 2. Refining margins rebounding sharply

70

75

80

85

90

95

100

1 2 3 3 4 5 6 7 8 9 10 11 12

2016 2017 2018 2019(%)

-9

-6

-3

0

3

6

9

12

15

2016 2017 2018 2019

Refining marginComplex refining margin

(USD/bbl)

Source: Bloomberg, Hyundai Motor Securities Source: Petronet, Hyundai Motor Securities

Fig 3. Middle distillate margins increasing Fig 4. Light distillate margins improving

6789

10111213141516

1.02 1.09 1.16 1.23 1.30 2.06 2.13 2.20 2.27

(USD/bbl)

-12-10

-8-6-4-202468

1.02 1.09 1.16 1.23 1.30 2.06 2.13 2.20 2.27

(USD/bbl)

Source: Petronet, Hyundai Motor Securities Source: Petronet, Hyundai Motor Securities

Fig 5. Aramco raises Asian CP by USD50/tonne in March Fig 6. US propane price bottomed out

0

200

400

600

800

1,000

1,200

1,400

12 13 14 15 16 17 18 19

Price gapNorth America spot LPG/Mont Belvieu LSTArab Gulf LPG posted price

(USD/tonne)

200

300

400

500

600

17.1 17.7 18.1 18.7 19.1

($/톤)

Source: Bloomberg, Hyundai Motor Securities Source: Bloomberg, Hyundai Motor Securities

(USD/tonne)

600

500

400

300

200

17.1 17.7 18.1 18.7 19.1

3

Kang Dong-jin +822-3787-2228 / [email protected] Refining/Chemical/Utility

Fig 7. Naphtha, propane prices move in line with each other Fig 8. US propane inventory gradually declining

-200

-150-100-50

050100150

200250300

0

200

400

600

800

1,000

1,200

1,400

09 10 11 12 13 14 15 16 17 18 19

Naphtha-LPG price gap (R)Naphtha C&F Japan spotArab Gulf LPG posted price

(USD/tonne) (USD/tonne)

Source: Bloomberg, Hyundai Motor Securities Source: EIA, Hyundai Motor Securities

Fig 9. US gasoline inventory falling Fig 10. US DFO inventory remains stable

190,000

210,000

230,000

250,000

270,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2015-2018 range2019 Average (2015-2018)2018

('000 bbl)

100,000

120,000

140,000

160,000

180,000


2015-2018 range

2019 Average (2015-2018)

2018

('000 bbl)


Fig 11. Europe’s fuel oil inventory down Fig 12. Europe’s gasoline inventory plunging

0

500

1,000

1,500

2,000


2015-2018 range

2019 Average (2015-2018)

2018

('000 bbl)

0

300

600

900

1,200

1,500


2015-2018 range2019 Average (2015-2018)2018

('000 bbl)


4

INDUSTRY NOTE

Fig 13. Europe’s gasoline inventory stable Fig 14. Singapore’s light distillate inventory remains high

1,000

1,500

2,000

2,500

3,000

3,500

4,000


2015-2018 range

2019 Average (2015-2018)2018

('000 bbl)

5,000

10,000

15,000

20,000


2015-2018 range

2019 Average (2015-2018)

2018

('000 bbl)


Fig 15. Singapore’s middle distillate inventory stable Fig 16. Heavy, sour Mars crude’s premium increasing

3,000

8,000

13,000

18,000


2015-2018 range2019 Average (2015-2018)2018

('000 bbl)

-10

-5

0

5

10

15

14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

(USD/bbl)


Fig 17. Western Canada heavy sour crude’s discount narrowing Fig 18. Midland discount nearing zero

-55

-45

-35

-25

-15

-5

5

15

14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

(USD/bbl)

-25

-20

-15

-10

-5

0

5

10

15

14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

(USD/bbl)


5


Chemical spreads partly improve but ethylene’s temporary price rise comes to an end; PE and

MEG spreads low vs. strong PX spread; US propylene price falls sharply while caustic soda

price rebounds

The price of ethylene fell by USD60/tonne WoW last week, despite naphtha price increases. We believe the rising ethylene prices have come to an end, because PE and MEG prices did not show a meaningful rebound.

Synthetic resin: PE prices rose but naphtha prices rose as well, keeping the spread improvement to a minimum. We

especially note the weakness of the PP spread. The PP spread slightly improved WoW last week but narrowed by USD30/tonne compared with two weeks earlier. The US propylene price sharply fell, making it USD130/tonne cheaper vs. Asian propane prices. The price of PP in the US, which used to trade at a premium of up to USD400/tonne over Asian PP prices, has now come down close to Asian PP prices. With propylene prices expected to remain weak as its US inventory hit a three-year high, a rise in PP prices appears unlikely. Coupled with Aramco’s CP increase, this could weigh on product prices at Asian PDH players. The narrowing PP spread is also an unfavorable factor for NCCs. Meanwhile, the ABS spread has recovered from the end of last year. PVC inventory remains low.

Chemical fiber: The PX spread remains strong. We believe the spread will remain over USD500/tonne given tight

supply in 1H19. In contrast, the MEG spread is still weak. The MEG spread improved by USD26/tonne WoW last week but we do not see it as a sustainable trend in the mid to long term considering its high inventory level and increasing capacity.

Others: The caustic soda spread is rebounding, from the bottom of USD296/tonne seen recently to USD356/tonne.

We believe the caustic soda spread will remain strong for the time being as the BIS certification issue is expected to be resolved in March.

Fig 19. Ethylene prices rebounded but US price weak Fig 20. HDPE spread

0

300

600

900

1,200

1,500

1,800

13.1 13.7 14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

USG Korea(USD/MT)

Source: Cischem, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

6

INDUSTRY NOTE

Fig 21. LDPE spread Fig 22. HDPE price trend: US vs. Korea

0

300

600

900

1,200

1,500

1,800

14.10 15.4 15.10 16.4 16.10 17.4 17.10 18.4 18.10

USG Korea(USD/MT)


Fig 23. US propylene inventory trend Fig 24. US propylene price sharply down

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

NWE USG Korea(USD/MT)

US Propylene pricesharply decline

Source: EIA, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

Fig 25. PP price trend: US vs. Korea Fig 26. Will PP spread continue to decline?

0200400600800

1,0001,2001,4001,6001,8002,000

15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

Korea(FOB) USG(FOB)(USD/MT)


7


Fig 27. ABS spread Fig 28. MEG spread


Fig 29. Caustic soda price rebounding Fig 30. PX spread remains strong

0

100

200

300

400

500

600

700

800

15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1

(USD/tonne)


Refiners offer a great entry point amid PX strength and stronger refining margins; for

chemicals, we like LG Chem, Hanwha Chem, Kumho Petro, and Lotte Fine Chemical

We expect negative sentiment on refining stocks to dissipate, considering the recovery of refining margins, rising oil prices, and the strong PX spread. The IMO’s 2020 sulfur cap regulation is an ongoing issue but will likely be implemented. We continue to recommend bargain-hunting refining shares. Meanwhile, chemical companies need to reduce exposure to PE, MEG and PP. Because of oversupply, we do not expect the PE/MEG/PP chains to rebound any time soon. We continue to present LG Chem (051910.KS, BUY) as our chemical sector top pick and Hanwha Chemical (009830.KS, BUY), Kumho Petrochemical (011780.KS, BUY), and Lotte Fine Chemical (004000.KS, BUY) as our stocks of interest. LG Chem, as the world’s biggest ABS producer, is set to enjoy a rebound of chemical earnings on the back of a recent ABS spread recovery. As for Hanwha Chemical, recovering PVC and caustic soda prices as well as its photovoltaic business will contribute to earnings growth. Kumho should benefit from favorable BPA market conditions. Its synthetic rubber business has bottomed out and an increased capacity for NB latex should help boost earnings.

8

INDUSTRY NOTE

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

18/07/17 BUY 240,000 -18.4 -15.8 18/07/30 BUY 240,000 -18.7 -15.0 18/08/21 BUY 240,000 -18.8 -15.0 18/09/11 BUY 240,000 -18.5 -15.0 18/09/17 BUY 240,000 -18.2 -13.1 18/09/28 BUY 270,000 -19.5 -16.5 18/10/22 BUY 270,000 -20.2 -16.5 18/10/26 BUY 270,000 -21.0 -16.5 18/11/05 BUY 270,000 -22.7 -16.5 18/11/23 BUY 270,000 -24.3 -16.5 18/12/14 BUY 270,000 -26.4 -16.5 19/01/08 BUY 240,000 -24.2 -21.5 19/02/01 BUY 240,000 -23.5 -20.0 19/03/06 BUY 240,000 - -



Average High/Low




Average High/Low

18/02/20 BUY 530,000 -14.0 -10.5 18/03/08 BUY 530,000 -16.7 -10.5 18/04/06 BUY 590,000 -29.3 -25.7 18/04/24 BUY 590,000 -29.9 -25.7 18/05/03 BUY 510,000 -28.6 -22.6 18/07/10 BUY 480,000 -28.6 -25.1 18/08/01 BUY 480,000 -33.0 -25.1 18/10/01 M.PERFORM 310,000 -14.1 -17.1 18/10/22 M.PERFORM 310,000 -14.4 -18.1 18/11/02 M.PERFORM 300,000 -5.1 -7.2 18/11/23 M.PERFORM 300,000 -7.0 -14.5 19/01/10 M.PERFORM 300,000 -6.1 -14.5 19/02/13 M.PERFORM 300,000 -4.1 -14.5 19/03/06 M.PERFORM 300,000 - -

0

50

100

150

200

250

300

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

SK InnovationTarget price

0

20 40 60 80

100

120

140

160

180

200

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

S-OilTarget price

0

100

200

300

400

500

600

700

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

Lotte ChemicalTarget price

9




Average High/Low




Average High/Low




Average High/Low

17/10/26 BUY 42,000 -25.2 -21.8 17/11/13 BUY 42,000 -26.6 -21.8 17/11/24 BUY 42,000 -25.5 -15.0 18/01/24 BUY 44,000 -22.7 -17.7 18/02/20 BUY 44,000 -23.0 -17.7 18/02/23 BUY 44,000 -24.0 -17.7 18/03/08 BUY 44,000 -29.7 -17.7 18/05/15 BUY 40,000 -42.9 -28.6 18/08/16 BUY 30,000 -38.5 -29.0 18/11/14 BUY 22,000 -10.8 -1.1 19/01/22 BUY 22,000 -8.2 3.2 19/02/15 BUY 22,000 -7.7 5.5 19/02/21 BUY 31,000 -24.3 -23.2 19/03/06 BUY 31,000 - -

0

100

200

300

400

500

600

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

LG ChemTarget price

0

20 40 60 80

100

120

140

160

180

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

Kumho PetrochemicalTarget price

0

5

10

15

20

25

30

35

40

45

50

17.03 17.06 17.09 17.12 18.03 18.06 18.09 18.12 19.03

(KRW ‘000)

Hanwha ChemicalTarget price

10

INDUSTRY NOTE

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • Hyundai Motor Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for

the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook.

• OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration.

• BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (January 1-December 31, 2018)

Rating Count % of rating category BUY

MARKETPERFORM SELL

147 12 0

92.45 7.55 0.0

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of Hyundai Motor Securities. • The information and statistical data contained herein were taken from sources believed to be reliable but in no way can be guaranteed and, therefore, final investment decisions should be

made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment de cisions.

refining/chemical€¦ · - we are focusing on propane (lpg), propylene, and pp price trends as...

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