Indonesia Petrochemicals: Spread should hold up amidst economic recovery
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We reiterate Overweight rating on the Indonesia petrochemical sector. We believe that chemical spreads on the olefin chain will hold up well in 2021 amidst improving demand, on the basis of a global economic recovery and limited supply expansion due to logistical and mobility constraints. BRPT remains our top pick in the sector given it: 1) is an indirect beneficiary from the high chemical spread that should translate in higher earnings from TPIA, and 2) has a resilient geothermal business that should provide earnings support for the consolidated income statement.
Stabilizing spreads going forward. We continue to expect spreads in petrochemical products to hold up in 2021, primarily driven by: 1) a post-COVID economic recovery globally which should translate to higher spending in consumer goods, and then translate into higher consumption of chemicals, 2) social restrictions as a result of a high number of COVID cases in major countries which will still hold back construction of petrochemical projects as well as result in delivery constraints, and 3) we also believe Naphtha prices should remain stable due to relatively low refinery margins and low oil prices.
New capacity not a threat for now. Whilst there has been news headlines that some projects will start construction and COD in 4Q 2020-2022, we still believe that there will be limited supply expansion in 2021, especially with the spike of COVID cases in late 2020 and the reintroduction of some social and travel restrictions in early 2021. We expect that projects like RAPID in Malaysia could see another delay in starting up due to mobility and travel constraints that result in difficulties for experts to travel to the locations. In addition, petrochemical spreads held up quite well in January 2021, which translates to relatively low concerns about capacity expansion.
Upping our spread assumptions. With the recent widening of spreads, which has been higher than we estimated, we revise up our spread assumptions, particularly for polypropylene and butadiene. We believe spreads will remain elevated through 1H21 and gradually decline to mid-cycle once plant utilization improves and construction of new plants restart. We upgrade our Butadiene spread by USD220/mt-USD310/mt for 2020E-22E. We believe the auto consumption recovery in China will significantly increase demand for Butadiene. We also upgrade our polypropylene spread assumptions by USD30/mt-USD87/mt for 2020E-22E, as we expect higher consumption in hygiene related product globally going forward.
Maintain Overweight on the sector. Given the potential demand recovery post-COVID and the ongoing delay of petrochemical plant expansions, we set our PE prices at USD1,001/mt and Naphtha at USD356/mt, and maintain our OVERWEIGHT view on the sector. We maintain our BUY call on BRPT IJ and downgrade TPIA IJ to HOLD. We also changes our estimates and target prices (see table on page 3). Risks to our call: 1) faster-than-expected supply expansion, 2) slower demand recovery, and 3) significant increase in oil prices.