Low prices to weigh on PetChem earnings

KUALA LUMPUR: Petronas Chemicals Group Bhd’s (PetChem) earnings for the second half of 2023 will likely be weighed down by low petrochemical prices.

According to CGS-CIMB Research, the petrochemical company, which is due to release its results for the third quarter of 2023 (3Q23), is expected to register lower core earnings, as compared to the numbers in 2Q23.

Further, the brokerage said PetChem’s 4Q23 might not be as strong as hoped.

“The average polyethylene (PE), monoethylene glycol and methanol prices in 3Q23 were still lower than in the immediate preceding 2Q23.

“In our view, this could be the main reason why PetChem’s 3Q23 core net profit may end up lower than in 2Q23,” it explained.

“While urea prices averaged higher quarter-on-quarter (q-o-q), we think the uptick is unlikely to be sufficient to compensate,” it added.

Besides that, CGS-CIMB Research said wider commissioning losses at the Pengerang refining and petrochemicals complex in Johor could also be a reason for the anticipated weak 3Q23 results.

PetChem reported commissioning losses of RM100mil in 1Q23, which narrowed to RM70mil in 2Q23.

CGS-CIMB Research said these losses could widen in 3Q23 and 4Q23, as PetChem was said to be alternating between starting up and shutting down, citing Chemical Market Analytics’ report.

This could be very costly, it said, because the upstream refinery and naphtha cracker were still not yet stabilised.

“Not helping PetChem’s 3Q23 results was the unplanned shutdown of Labuan Methanol Plant No. 2 for one month in 3Q23 due to mechanical problems,” it added.

Given the weak European economy, CGS-CIMB Research said PetChem’s ongoing specialty chemical losses would likely continue into 3Q23.

On the 4Q23 prospects for PetChem, CGS-CIMB Research noted that although PE, methanol and urea prices averaged higher in October 2023 than during 3Q23, demand weakness and ample supply, as well as the moderating crude oil prices, caused PE and urea prices to drop on Oct 27 week-on-week (w-o-w).

“This is the first w-o-w drop since mid-2023, and may mark the reversal of the short-lived and weak price uptrend since mid-2023,” it said.

CGS-CIMB Research said PetChem’s fertilisers and methanol (F&M) division would likely have to wait until 4Q23 to see recovery in its plant utilisation rate.

The brokerage noted that the group’s F&M division saw its average utilisation fall from 97% in 1Q23 to 73% in 2Q23 due to methane gas supply issues caused by pipeline maintenance.

CGS-CIMB Research reiterated a “reduce” call on PetChem’s shares, with an unchanged target price of RM6.85, based on a target price-to-book value of 1.33 times.