Event:
Regulation & promotion plan of petrochemical industry has been passed at Executive Meeting of the State Council.
Our Analysis and Estimation:
1) Promotion plan can hardly change the periodic decline of petrochemical industry.
In 2008, international oil price plummeted drastically and financial crisis largely overspread which turned around petrochemical cycle once and for all and brought unprecedented challenges for the industry.
2) Differentiations among sub-sectors are great due to different influences.
Sub-sectors like Chlor-Alkali, Calcined Soda and Methanol have been seriously influenced by the financial turmoil, and they can hardly see prominent rebound by the promotion plan. However, with relatively stable demand, fertilizer and pesticide are less impacted by the financial crisis and their resurgences will be promoted by elimination of backward production facilities and limitation on riskiest pesticide.
3) With little export rebates, feature of petrochemical plants determines greater export difficulty.
Petrochemical plant needs an overall operation; water, electricity and labor can not be decreased in case of lessened output, thus demand reduction brings large impact on overall industry.
4) Promotion plan can hardly change the overall decline of petrochemical industry in Q1 2009.
Drastic plummet of international oil price and overspreading financial crisis in 2008 bring unprecedented challenges for the industry, and global economic recession sharply reduces demand on petroleum and chemical products; this will directly impact their domestic export quantity and price.
5) Earnings of PetroChina Company (601857) and China Petroleum & Chemical Corporation (600028) gradually assimilate.
Earnings of PetroChina Company (601857) and China Petroleum & Chemical Corporation (600028) are estimated at Rmb0.13 and Rmb0.14 separately in Q1 2009, thus their earnings gradually assimilate.
Investment suggestion:
Global recession resulted from the financial crisis of America sharply decreases demand on petroleum and chemical products, which is direct concussion on exported quantity and price of domestic petroleum and chemical products. Moreover, in 2009, large-scale petrochemical plants are gradually put into use in Middle East; it will also impact the domestic market. As a result, even though promotion plan of petrochemical industry will promote short-term price rebound in petrochemical products, its strength is of limit and we maintain “Neutral” rating for the industry.