PetChem to gain from improved feedstock price spreads

The feedstock price is driving petrochemical prices on an uptrend in recent weeks and months


PETRONAS Chemicals Group Bhd (PetChem) is expected to get a boost in earnings from the increases in feedstock prices which are driving petrochemical prices on an uptrend in recent weeks and months.

CGS-CIMB Securities Sdn Bhd analyst Raymond Yap stated that the higher feedstock costs have the potential to lower the spreads against petrochemical selling prices and because of this, PetChem has a highly advantaged cost position because it purchases ethane gas feedstock at fixed prices while its methane gas feedstock is paid based on its selling prices of methanol and urea.

“As a result, the strong selling prices of polymers, monoethylene glycol (MEG), methanol and urea in the second half of 2021 will flow down to PetChem’s net profits without being eroded by high feedstock costs,” Yap noted in a report on the company last week.

The only exception is for PetChem’s production of aromatics, which uses naphtha feedstock purchased at spot prices, have plummeted to historically low levels but this is not a major part of PetChem’s overall product portfolio.

Prices of petrochemicals in the fourth quarter (4Q) are the highest they have been this year, likely ensuring very strong quarterly results for PetChem, Yap added.

He stated that the market is such due to several factors that have driven the prices up including stronger crude oil prices as OPEC+’s cautious pace of production increases has not kept up with the demand recovery leading to five consecutive quarters of destocking.

The price spread between naphtha and crude oil has also widened due to competition for naphtha as petrol blending feedstock and due to the very high prices for alternative feedstock such as liquefied petroleum gas.

Natural gas prices have also surged this year due to the demand recovery in Asia and the low inventories in Europe that were initially caused by the very long winter that stretched into April-May 2021, which was made worse by the slack in Russian gas pipeline deliveries, he noted.

Coal prices have also been strong due to China’s clampdown on coal production earlier in the year on environmental and safety concerns and China’s ban on the import of Australian coal and an extended monsoon in Indonesia.

Naphtha is a key feedstock for many petrochemical operations in Asia and Europe while natural gas and coal are feedstocks for the production of methanol, ammonia, urea and MEG.

Looking forward to 2022, Yap stated that the market expects the selling price to fall to more moderate levels from the highs in 2021 as petrochemical supply may exceed demand growth and as natural gas

and coal prices look set to fall from 2Q22F onwards with potentially more energy supply available on the market on the horizon.

“If OPEC+ plays its cards right, crude oil and naphtha prices may still average higher in 2022F in comparison with this year, while this may reduce the margins of PetChem upcoming Pengerang plants, the profitability of its Kertih plants will see robust support,” Yap wrote.

CGS-CIMB Securities maintained its ‘Add’ call on PetChem with a raised target price of RM9.88 from RM9.50 as the chemical group is significantly advantaged by the fact the higher energy and feedstock prices only have a limited impact as it continues to enjoy fixed ethane feedstock prices while methane feedstock prices fluctuate in step with the selling prices of methanol and urea that are produced by PetChem from methane.

“However, PetChem’s upcoming Pengerang plants may have missed the opportunity for very strong profits in 2021 given that they will only be operational from early next year,” Yap added.