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Thai petchems await China rebound

Diversified PTTGC is strong enough to wait for Chinese product demand but others may suffer

Better than expected Chinese industrial production in March raised hopes for a sharp recovery for downstream petrochemicals companies in the Asia Pacific region. But a Chinese recovery is far from assured and, if the Chinese economic recovery is sluggish, only the financially strongest product suppliers are likely to benefit.

The Thai government made a strategic decision to develop its domestic petchem industries in response to the 1970s oil shocks. The result today is that larger players such as PTT Global Chemical (PTTGC), a subsidiary of Thai NOC PTT, and SCH Chemicals, a unit of Siam Cement, have diversification and a strong parent on their side.

SCH has stated that its plan to invest in a petchem plant in Vietnam remains on track. Smaller, less diversified Thai players such as Indorama, VInythai and Styrolution may find the going tougher.

China’s return to work has been more gradual and subdued than official announcements, according to Michel Meidan of the Oxford Institute for Energy Studies. She says that its oil product demand could contract this year for the first time in 30 years.

China crisis

PTTGC is strong enough to be able to wait for Chinese demand, according to Athaphorn Arayasantiparb, an analyst at M Corp Review in Bangkok. He sees PTTGC as financially secure and notes that parent PTT has a credit rating on a par with local sovereign debt. “We do not actually think this is a financial crisis situation for PTTGC by any stretch.”

A Chinese rebound could lead to higher product prices in Q2 or Q3 of 2020 and indirectly benefit all petchem players

PTTGC’s products are used as feedstock for industries including packaging, automotive, construction materials and electronic equipment. Arayasantiparb argues that locked-down retail consumers turning to online purchases means that demand for packaging will increase rather than drop.

The company has set up subsidiaries in Vietnam and Indonesia to reduce reliance on China. But Chinese exposure of between 10pc and 20pc of sales means that PTTGC will “definitely” benefit from a rebound there, says Sittidath Prasertrungruang, head of research at Country Group in Bangkok.

China is a major importer of products such as paraxylene, glycol, high-density polyethylene and polypropylene. A Chinese rebound could also lead to higher product prices in Q2 or Q3 of 2020 and indirectly benefit all petchem players, Prasertrungruang says.

Patience needed

As a PTT subsidiary, PTTGC has ample access to gas-based ethane feedstock, which provides a higher ethylene yield more cheaply than alternatives. This gas supply agreement with its parent shields it from market volatility. PTTGC has also created its own ‘circular economy’, in which by-products from one unit are used as feedstock in another.

Thai brokerage Asia Plus Securities forecasts that PTTGC will report a first-quarter loss of 9bn baht ($280mn), which would be its largest ever. But it predicts a return to profitability in the second quarter, driven by its olefins business as plants resume operation. Full-year profit will be down 82pc, Asia Plus forecasts.

China is the world’s biggest net importer of polyethylene. According to Waraporn Wiboonkanarak, head of research at Thai brokerage Krungthai (KT) Zmico Securities in Bangkok, a wave of global polyethylene capacity additions will outpace growth in demand, meaning that excess supply in the global market will continue until 2022.

KT Zmico estimates that 8.1mn t/yr of new capacity additions will be made in 2020, 7mn t/yr in 2021 and 8mn t/yr in 2022. Alongside a contraction in demand, this will “extend the weak product cycle,” Wiboonkanarak says.

The brokerage predicts that PTTGC will be profitable again in the second quarter, through core operations will remain dampened by the olefins business.

PTTGC has the ability to ride it out, Prasertrungruang at Country Group says. The company is financially stronger than the industry average, with a debt-to-equity ratio lower than its Thai and Asian peers. That implies scope for debt financing if needed, he says.

Much of the heavy lifting on capex has already been done. It is likely to drop from 2021 after completion of projects in olefins, propylene oxide and polyols. Country Group cautions that a second wave of infections in China is the key risk to its positive stance on the company.

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