This article first appeared in The Edge Malaysia Weekly on July 29, 2019 - August 4, 2019

PETROCHEMICAL products, which are used in a wide range of consumer and industrial goods, are facing price pressures due to a slowing global trade — the result of a long, protracted trade war between the US and China — and weaker economic growth in major markets.

For Petronas Chemicals Group Bhd (PetChem), this has led to lower revenue and profitability.

However, commercial head Shamsairi Ibrahim is unperturbed and confident in the group’s strategy to sweat its assets and concentrate more on specialised and differentiated chemicals, which will put it in a better position to weather the challenges over the next two decades.

“There will be pressure on price, but you must look at your production in order to stay ahead of the game. You need to sweat your assets to optimal levels, observe the market and innovate to add value for your customers.

“We used to have barely 80% plant utilisation. Today, our utilisation rate is more than 90%. This [increasing production efficiency and product innovation] gives us the resilience to face the challenges from the global trade and [tough] economic environments,” says Shamsairi.

Product price pressures and lower sales volume contributed to the near 11% plunge in PetChem’s share price over the last 12 months, and 16.6% year to date to close at RM7.60 last Friday. The group’s profitability fell in the first quarter ended March 31 as revenue went down 16.6% y-o-y to RM4.13 billion, and operating profit dropped 31.4% to RM1.26 billion.

The group aims to raise the contribution of specialised and differentiated chemicals to 25% of its overall volume by 2037, from a mere 2% at present.

Thus, it has identified at least 20 growth investment opportunities in derivatives and specialty chemicals, which will involve a capital expenditure of about US$12 billion (RM49.3762 billion) over the next two decades.

This includes eight projects to produce the C5+ chain of petrochemicals, six projects in the methane chain, three projects in the propylene chain, two projects in the ethylene chain and one project in the butadiene chain.

C5+ chemicals are needed in the production of synthetic rubber, which are used in the automotive sector for making tires and rubber goods. It is also used in manufacturing adhesive components in the packaging and construction industry as well as specialised chemicals in electronics and consumer goods.

These investments will not only be in Malaysia as PetChem is also looking at mergers and acquisitions of foreign companies in chemicals and petrochemicals to expand its specialised and differentiated product portfolio.

As a start, the completion of the isononanol plant in the Pengerang Integrated Complex (PIC) is among the first steps in realising the group’s target, says Shamsairi. The plant, which will start commercial operation in the fourth quarter of this year, will increase PetChem’s total production volume by 14% to 14.6 million tonnes per annum.

Aside from the plant in PIC, PetChem acquired a 100% interest in Netherlands-based speciality chemicals producer Da Vinci Group BV for €163 million (RM747.207 million), in an effort to increase the contribution of specialised chemicals to its overall portfolio.

“The acquisition is a strategic entry point for PetChem’s speciality chemicals portfolio. It will accelerate the realisation of PetChem’s vision to create value by diversifying its product portfolio,” said group managing director/CEO Datuk Sazali Hamzah in a statement announcing the acquisition in March.

The rationalisation of its markets will help PetChem weather the challenging global environment, says Shamsairi. PetChem has increased its sales in the Southeast Asian region over the years, and the region now accounts for about 70% of its volume, including domestic sales.

“I think what we have done right is to rationalise our markets. Previously, we were heavy in Australasia, but today as we can see, sales to Asean countries makes up about 70% of our volume,” Shamsairi said last Thursday during a trip to PetChem’s plant in PIC.

“Asean is a growing market with a growing purchasing power and we are right in the location where the consumption growth is strong. We are also close to India, whose economy has been growing fast. So, this gives us the opportunities to look at what we are doing and to capture those growing markets,” he says.

Analysts covering PetChem are still cautious over its future earnings and share price movements. Out of the 22 analysts observing the counter, six have a “buy” call while 12 have a “hold” call. Four recommend investors to “sell”.

Among the most bullish are Macquarie with a target price of RM10.50, MIDF Amanah Investment Bank Bhd (RM10.43), Morgan Stanley (RM9.89) and Nomura and KAF Seagroatt & Campbell (RM9.60).

AmInvestment Bank’s Alex Goh is the latest to issue a report on PetChem, with a “hold” call and a target price of RM7.80. He says the group is currently trading at a reasonable FY2020F EV/Ebitda of eight times, which is near its three-year average of 8.5 times.

“While crude oil prices are currently flattish in 1QFY2019, visibility remains clouded given its inherent volatility that is exacerbated by geopolitical tensions and economic growth concerns. We caution that the group’s product prices have a strong correlation to crude oil prices,” says Goh in the July 26 report.

However, he expects PetChem’s 2QFY2019 results, which will be announced on Aug 13, to be stronger on a quarterly basis, as minimal turnaround and maintenance activities during the quarter indicate that the group’s plant utilisation rates could remain above 90%, similar to 1QFY2019.

Nevertheless, he foresees that the group’s 3QFY2019 average plant utilisation could subsequently drop below 80% (versus 79% in 3QFY2018), owing to turnaround activities for the main olefin cracker plant in Terengganu and the Sabah Ammonia and Urea (SAMUR) plant.

The turnaround activities for the main cracker plant, which has a capacity of 600,000 tonnes of ethylene and 900,000 tonnes of propylene, could last between 40 and 60 days while the ongoing maintenance schedule for the SAMUR plant could range between 30 and 40 days, he says.

“However, plant utilisation is subsequently expected to rebound in 4QFY2019 in the absence of substantive maintenance activities, which should enable the group to achieve its targeted utilisation levels of above 90%, similar to 92% in FY2018,” Goh says.

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