Petrochemical outlook: NCB Capital expects improvement in demand

Updated 30 June 2014
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Petrochemical outlook: NCB Capital expects improvement in demand

Despite the volatility in the global economy during the first half of 2014, NCB Capital, the GCC’s major wealth manager and the Kingdom’s largest asset manager, continues to believe that improvement in demand, mainly from advanced economies, and higher operational efficiencies will drive the sector’s 2014 and 2015 expected growth.
Iyad Ghulam, equity research analyst at NCB Capital, said: “We believe the anticipated improvement in the United States and the European economies will support growth in the second half of 2014. The increase in industrial production, auto sales and positive GDP growth outlook are set to increase petrochemical demand in the coming quarters.
“We expect the total net income of the ten stocks under coverage to increase by 11.7 percent YoY to SR38.3 billion in 2014 and 14.8 percent YoY to SR43.9 billion in 2015, against 2.9 percent growth in 2013. This growth will be driven by earnings from Petrochem and Kayan, and higher margins.
The sector margins are expected to increase by 50 bps YoY to 22.5 percent. “However, our 2014 estimates were revised lower by 6 percent due to weak Q1, 2014 results and delay in new startups.”
NCB Capital downgrades advanced petrochemicals to neutral from overweight with a revised PT of SR49.8. “The stock gained 59 percent since we upgraded it to overweight in March 2013, outperforming the TASI by 21.4 percent. It is currently trading at a 2015 P/E of 12.1x, in-line with the sector average,” explained Ghulam. “Although we remain positive on the company’s earnings and dividend outlook, we believe the stock offers limited upside at the current levels.”
NCB Capital remains overweight on SABIC, SIIG, Yansab and Tasnee, and neutral on the remaining stocks under coverage. “Our top picks are Tasnee and SIIG,” highlighted Ghulam. “Increasing operating margins of industrial and petrochemical segments, and the attractive valuation (2014 P/E of 11.7x vs. sector average of 14.7x) are Tasnee’s key positives. Also, Petrochem’s improving operational efficiency is expected to increase SIIG’s 2015 net income by 37.3 percent indicating, an attractive 2014 P/E of 11.9x.”
The global economy was mixed in H1, 2014. The US economy was impacted by severe winter conditions during Q1 2014 but started to improve in Q2, 2014. Slow growth, low inflation and the Ukrainian tension have impacted the performance of the European economy, which in turn forced the ECB to implement new monetary measures. NCB Capital expects the global economy to improve in H2, 2014 driven by the continuous support of the Fed and the ECB.
According to the IMF’s April 2014 report, the global GDP is expected to grow by 3.6 percent in 2014 and 3.9 percent in 2015, higher than 3 percent recorded in 2013.
Despite the reduction in the IMF growth estimates for 2014, NCB Capital says it believes that higher employment, credit policies easing, increasing home prices and improving capital market are expected to help the US economy to expand in the next quarters. Moreover, the euro zone economies are expected to recover supported by rising exports, investments and the recent measures implemented by the ECB.


Asia’s refining profits slump as Mideast exports surge

Updated 55 min 50 sec ago
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.