KUALA LUMPUR (Feb 16): Petrochemical selling prices may fall from the second quarter of 2021 (2Q21) onwards as winter-related supply disruptions are resolved and substantial new capacities are commissioned, according to CGS-CIMB Research.

In a note today, the research house said for ethane-based products, the potential negative impact on Petronas Chemicals Group Bhd’s (PCG) top line could flow through directly to the bottom line and its share price may be derated accordingly.

On the balance of probabilities, Lotte Chemical Titan Holding Bhd’s (LCT) core net profit should also be negatively impacted if naphtha cost remains stable or continues to increase, noted CGS-CIMB.

“In the latter scenario, LCT may see margin compression from the pincer action of lower revenue and higher cost. Sector upside risks include the possibility that the commissioning of new capacities may be delayed, and demand growth for petrochemicals is better than expected due to improving global GDP (gross domestic product) growth,” said CGS-CIMB analyst Raymond Yap.

CGS-CIMB, however, reiterated its "underweight" call on the petrochemical sector.

At the time of writing today, shares in PCG had risen 23 sen or 3.04% to RM7.79, valuing the group at RM62.32 billion, while LCT shares were five sen or 2.15% higher at RM2.38, bringing it a market capitalisation of RM5.49 billion.

Yap noted that petrochemical selling prices had continued to do well in 1Q21 due to higher naphtha feedstock prices.

“While the petrochemical price rally in 2H20 (the second half of 2020) benefitted both PCG and LCT, their earnings outlook will diverge from 1Q21.

“PCG benefits from higher selling prices without being burdened by higher naphtha cost as it buys ethane feedstock at fixed prices, while its methane feedstock cost moves in tandem with its methanol and urea selling prices (thus ensuring spread protection). However, petrochemical price spreads against naphtha have narrowed in 1Q21 versus 4Q20, with LCT likely to see its core net profit impacted from 2Q21,” added the analyst.

Yap said the current trends suggest that LCT’s share price is at risk of a derating, but the research firm may have to wait longer for its "reduce" call on PCG to be actualised.