Thai Petrochemical: New projects starting up at the right time.
■ We believe new ethylene capacity is well spread out during 1Q-3Q21F while strong ethylene derivative demand should continue to support ethylene price.
■ Global ethylene capacity addition looks slim post 2022F on limited expansion by US producers and potential delay of some ASEAN projects.
■ SCC and PTTGC, which have new capacity coming onstream in 2021F, should benefit from ethylene price strength in 2021F, in our view.
New ethylene supply in 2021F is well spread out We expect 8.7mt of new ethylene capacity additions globally in 2021F. Unlike 2020 when new capacity additions were concentrated in 1Q20 and 4Q20, we believe the startup schedule is well spread out during 1Q-3Q21F.
We also believe some ethane-based projects in China may not be able to ramp up production in 2021F. Despite a sharp increase in naphtha costs, ethylene-naphtha spread remains at healthy levels, thanks to continued strong derivative demand in Asia, particularly for polyethylene (PE) and polyvinyl chloride (PVC), as the demand for food and consumer product packaging remains strong during the new wave of Covid-19 cases.
Coal-based and methanol-based producers should also remain at a cost disadvantage, enabling naphtha crackers to gain market share, especially when export cargoes from ethane-based plants in the US remain limited. Long-term ethylene demand-supply looks more balanced Post 2022F, global ethylene effective capacity addition looks slim at 4-5mtpa vs. over 10mtpa during 2021-2023F. The projects under construction and that are likely to start up during 2024-2025F are mainly naphtha crackers in China and ASEAN (Vietnam and Brunei) while US ethane-based projects are unlikely to weigh on the ethylene market, reflecting limited new investments during the past few years.
We also see potential delays in Indonesia-based projects which have not yet reached final investment decisions. A key risk to our assumptions is more naphtha cracker projects by Chinese producers which are able to shorten the construction cycle to less than 4 years.
Thai-based naphtha cracker projects onstream just in time Both SCC and PTTGC started their additional ethylene capacities of 300ktpa and 500ktpa, respectively, in Mar 21, which we believe is the perfect time to reap the benefits of ethylene price strength.
In addition, SCC’s Long Son Petrochemical (LSP) project in Vietnam should be able to start production in 2023F when global ethylene demandsupply looks more balanced. We estimate that LSP should achieve 11.0% project IRR. Reiterate Add on SCC and PTTGC Asian integrated PE/polypropylene (PP) spread reached US$662/t in Apr 21, up from US$591/t in 4Q20, supported by strong demand and limited arbitrage cargoes from the US.
According to IHS Markit, it would take over 9 months for US producers to recover the lost production, assuming that average utilisation rate is 95%. Apart from PE/PP price strength, SCC should also benefit from the strong PVC spread while PTTGC should also leverage the strong phenol, Bis-phenol A and acrylonitrile spreads. We reiterate Add on both SCC and PTTGC. We upgraded IRPC to Hold from Reduce on potential refinery stock gains. We maintain Neutral on the Thai chemical sector.
– By CIMB Bank Research
