The nation’s petrochemical industry is expected to continue facing the problem of slowing demand growth and accelerating supply growth next year, leading to more downside risks for earnings outlooks, analysts said.
Based on research conducted by analysts at Yuanta Securities Investment Consulting Co (元大投顧) and KGI Securities Investment Advisory Co (凱基投顧), the spreads of most petrochemical products — or the price gaps between raw materials and petrochemical products extracted from them — were below market expectations in the first half of the year, indicating worse-than-expected supply-and-demand dynamics around the world, and posing a potential risk to product prices and earnings.
“We expect more downside risks for the market’s earnings forecasts [for companies] during the period from the second half of 2019 to 2020, mainly due to a likely lower oil price range, a boost to supply from upcoming capacity expansion and weak demand,” Yuanta analyst Leo Lee (李侃奇) said in a report on Thursday last week.
The price of crude oil has become bearish since May because of rising supply from US output and weaker downstream demand amid the US-China trade dispute and recent US-India trade tensions, Lee said.
Based on IHS Markit’s forecast that US crude oil output next year would expand to 13.5 million to 14.5 million barrels per day, compared with 12 million barrels in the first half of this year, crude prices will be under pressure, Lee said, adding that this might lead to a lack of inventory gains, or even inventory losses, for Taiwan’s petrochemical industry from the second half.
In addition, capacity expansion in the US and China over the next few years would likely outgrow demand and therefore affect the spreads of the most profitable petrochemicals such as ethylene and paraxylene, he said.
“The petrochemical upcycle during 2015-2018 driven by limited supply-side additions has ended,” Lee said.
The upcycle peaked in the fourth quarter of last year and entered a downcycle at the start of this year, he said.
KGI analyst Tom Hsu (許家源) said that downstream demand from plastic-processing manufacturers has turned conservative amid the US-China trade dispute, which was especially evident in early May.
As a result, KGI has revised downward the spreads for most petrochemical products by between 10 and 55 percent to reflect the worsening supply-demand imbalance, as well as the weakening macro outlook and rising inventory level, Hsu said in a report dated June 18.
“Ethylene, monoethylene glycol and paraxylene will be the petrochemical products that see the biggest declines in spreads this year, followed by purified terephthalic acid next year,” he said.
Regarding Formosa Plastics Group’s (FPG, 台塑集團) four major units, Yuanta and KGI said they are more conservative on Formosa Petrochemical Corp (台塑石化), Formosa Chemicals & Fibre Corp (台灣化纖) and Nan Ya Plastics Corp (南亞塑膠) during this industry downturn, while remaining neutral toward Formosa Plastics Corp (台塑).
KGI said it is positive about Grand Pacific Petrochemical Corp (國喬石化), a supplier of styrene monomer and acrylonitrile butadiene styrene, and Taiwan Fertilizer Co (台灣肥料), which produces chemical products such as industrial urea, liquid ammonia, nitric acids and sulfuric acids, on the grounds of a relatively stable outlook for their product supply and demand.
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