Limited upside for PChem despite higher oil price

KUCHING: Petronas Chemicals Group Bhd (Pchem) is expected to benefit from the expected higher oil prices next year, but analysts believe that there is limited upside for the stock.

CIMB Investment Bank Bhd’s research arm, CIMB Research, noted that while it projected gasbased olefin producer PChem to benefit from high industry margin and rising oil price, it envisaged limited upside.

“We expect PChem’s earnings to remain solid in the financial year 2017 (FY17), driven by rising oil price and high, sustained olefins margins. However we think the upside from current level is limited given the currently high utilisation rate of over 90 per cent,” the research team said.

It noted that PChem’s fertiliser division remains a key risk to PChem’s earnings due to the persistent oversupply and weak demand.

With that, it pointed out that given PChem’s high exposure to ethylene and fertiliser, it believed that these industry trends offer limited upside for PChem’s margin expansion.

“We believe the outlook for the petrochemical industry is likely to improve in FY17. While ethylene upcycle is projected to continue into FY17, we anticipate margin recoveries for propylene and polyester but a continued downcycle for aromatics,” it added.

CIMB Research further explained, “After three years in a downcycle, we think the aromatics margin will remain weak in FY17 given that supply growth will exceed demand growth and the excess supply carried over since 2014 is projected to pressure the industry margin.

“The paraxylenenaphtha margin is expected to stay close to the breakeven level of US$250 per tonne and the benzene-naphtha margin of US$150 per tonne.”

Meanwhile, for the overall petrochemical sector, the research team noted that gas- based producers such as PChem should continue to see high margins for olefins given the expected flat high oil price in FY17F.