Petrochemical Industry: Significant Differentiation of Petrochemical Intermediates is Expected

Due to the decrease of US inventory mainly from reduced imports and the recovery of demand being limited to gasoline and not yet reflected in inventories, the international oil price has lost upward momentum above $80 per barrel and will oscillate and consolidate around this level in the near future.

Although China has seen a growth of over 10% in oil consumption, most countries have not seen significant growth in oil consumption, especially the US, the world's largest oil consumer. EIA data shows that in the past four weeks, the daily supply of finished oil has approached 18.8 million barrels, a decrease of 4.5% compared to the same period last year.

As the northern hemisphere has entered the winter heating season, the increase in heating oil consumption can offset some of the decrease in the use of fractionated fuel oil. In addition, major oil-consuming countries such as China, the US, and India have recently stepped up their strategic oil reserves, making it difficult for the international oil price to fall below $70. Therefore, we predict that the international oil price will oscillate and consolidate around $80 in the near future.

There will be a significant differentiation in the prices of petrochemical intermediates

The prices of petrochemical intermediates are strongly related to the international oil price. In the previous period, the international oil price rose significantly, leading to a overall increase in the prices of petrochemical intermediates, including benzene aromatics, ethylene, and propylene. We predict that due to the significant differences downstream of petrochemical intermediates, their prices will be more differentiated.

With the growth of pharmaceutical demand and the recovery of synthetic fiber consumption, and the fact that aromatics closely follow the fluctuations of international oil prices, the probability of an upward trend in aromatics is relatively high. The downstream of olefins has grown with the recovery of the real estate industry, but the reaction is slightly slower, so we expect prices to rise for a period of time. Alcohol will experience a rebound after being oversupplied and a sufficient supply, and ketones will continue to rebound due to insufficient supply, but acetic acid is difficult to be optimistic about in the future due to the decrease in demand for textiles and the increase of new production capacity.

The valuation of petrochemical intermediates and key companies

The absolute valuations of the two large groups, China National Petroleum and China Petrochemical, show that the A-share prices are currently low (H-share is more valuable for investment). Although the significant lag of the adjustment of finished oil prices has a negative impact on the valuation of the refining of the two groups, we believe that the government will not slow down the market-oriented pace of finished oil prices in the future.

The current international oil price is just entering the best profit zone for China National Petroleum and China Petrochemical. With the advancement of exploration technology, China's oil and gas fields have entered a period of high discovery, and the rapid growth of the two group's reserve replacement rate. Hence, companies with high reserve replacement rates should be valued higher. Therefore, we believe that the results of absolute valuations should be considered more when giving investment recommendations for the petrochemical industry.