Petrochemical sector likely to face supply test

PETALING JAYA: The local petrochemical sector is poised to come under pressure with the potential oversupply of ethylene and propylene over the next couple of years.

Ethylene and propylene are fundamental raw materials in the petrochemical sector.

CGS International (CGSI) Research said it is reiterating its “underweight” stance on the sector, based on consultancy Chemical Market Analytics (CMA) expectations that the demand and supply balance in the ethylene and propylene value chains would worsen into 2027, which is the key sector de-rating catalyst.

Towards this end, the research house has also reduced its ratings for both Lotte Chemical Titan Holding Bhd and PETRONAS Chemicals Group Bhd (PetChem), on the back of continued polyolefin oversupply.

Additionally, the research house said Lotte Chemical Titan continues to burn cash, albeit at a reduced rate, despite shutting down one of its two naphtha crackers in Johor since late-2024.

It reduced its rating for the company with a target price of RM0.38.

“We expect the LINE naphtha cracker in Indonesia to incur cash operating losses in the current market environment,” CGSI Research added.

While reducing its rating for PetChem with a target price of RM3.40 per share, the research house said the company’s strong urea and decent methanol prices would support its overall earnings but expects the weakness of the olefins and derivatives business to pull down the group’s overall profitability in the research house’s forecast period.

CGSI Research believes the moves by China and South Korea to rationalise cracker capacity may fall short of incoming new capacities in China in 2025 to 2027.

As such, the oversupply in the ethylene and propylene value chains would likely worsen in the next two to three years, according to CMA data.

The research house hosted CMA for a conference call with investors on Sept 8, and during the event the consultancy, among other things, expressed scepticism over the extent to which China’s and South Korea’s moves to remove ageing cracker capacities can reverse its expectations of a worsening supply-demand balance in the ethylene and propylene value chains.

As background, China announced in July this year that the anti-involution policy, intended to curb excess competition within 10 industries in the country, will also include the chemicals industry.

According to CMA, China’s Industry and Information Technology Ministry (MIIT) will undertake assessments of petrochemical facilities in China that are above 20 years old against benchmarks for energy efficiency, carbon emissions intensity and operational and process safety and may shut down those facilities that fail the evaluation.

However, CMA pointed out that detailed implementation guidelines and threshold requirements on the evaluation criteria have not been disclosed by MIIT, as such, it is premature to assume large-scale petrochemical plant closures.

CMA currently estimates China’s ethylene capacity closures at 6,874 kilotonnes per annum (ktpa) versus 26,420 ktpa of new ethylene capacities starting up in 2025 to 2027.