KUALA LUMPUR: Lotte Chemical Titan Holding Bhd (LCT) and Petronas Chemicals Group Bhd (PCG) are expected to remain under pressure due to petrochemicals' price dynamics, CGS-CIMB Research said.
The research firm said LCT is the weaker of the two companies as it is exposed to naphtha feedstock costs that remain high amid weakening selling prices for polyethylene, polypropylene and mono-ethylene glycol.
It added that in the third quarter (Q3) of 2022, LCT reported a significant quarterly loss amid low spreads and negative gross margins.
"Despite the negative gross margin in Q3 2022, LCT continued to produce to meet its customers' needs to maintain the business relationship," CGS CIMB Research said in a note today.
On the other hand, PCG continued to deliver robust quarterly profits in Q3 2022 (albeit sequentially lower for the second consecutive quarter) due to low ethane feedstock costs and exposure to historically-high urea prices (even though urea prices have dropped from their peaks).
CGS-CIMB Research said Southeast Asia polyethylene and polypropylene prices declined 30-37 per cent from their second quarter (Q2) of 2022 peaks in early-December 2022.
"The downward polyethylene price trajectory was caused by weakening global demand due to the inflation and cost-of-living crisis.
"Consequently, CMA is forecasting Southeast Asia polyethylene prices to decline 7-13 per cent year-on-year (YoY) in 2023, accelerating from the two to seven per cent YoY drop in 2022, and for Southeast Asia polypropylene prices to drop three to six per cent YoY in 2023, on top of the 10-11 per cent YoY drop in 2022," it said.
Meanwhile, it added that Southeast Asia mono ethylene glycol prices had seen a significant 32 per cent decline from the first quarter (Q1) of 2022 peak to US$480 per tonne in early December.
"Demand for monoethylene glycol by polyester producers in China has declined due to the cutbacks in polyester utilisation rates from the mid-80 per cent to the mid-70 per cent, according to CMA, on weak consumer demand in the US and Europe, pandemic-related controls in South China, and the transition to the off-peak season, causing polyester inventories to be above normal and polyester selling prices to be below cash production costs," it added.
CGS-CIMB Research has maintained its 'Underweight' call on the petrochemical industry.
"Upside risks to our underweight sector rating include the end of the Russia-Ukraine war that could cause naphtha costs to fall, benefitting LCT, or petrochemical plant utilisation cutbacks by high-cost producers that may help improve the demand-supply balance," it said.