Saudi refineries with 1mn bpd capacity suspend operations; petrochemical supply to tighten

Iran’s attack on Saudi Aramco facilities has worked to heighten the volatility of not only oil prices but also major

chemical and petrochemical products.

Last week the complex refining margin improved by USD1.5/bbl to USD8.8/bbl. Kerosene and diesel margins

remained mostly unchanged but gasoline, naphtha, and bunker C oil saw their margins increase significantly. We

expect refining margins to remain high, although they may correct somewhat, fatigued by a rally. Saudi Arabia said

that it would be able to normalize the desulfurization facilities in Abqaiq (5.7mn bpd capacity) by the end of the

month. Until then, it would utilize the inventory to keep crude exports smooth. To maintain its crude exports, Saudi

Arabia said it would stop supplying crude oil to its refineries with a capacity of 1mn bpd. As a result, the supply of

petrochemical products should tighten considerably for the time being. Saudi Arabia exports 2mn bpd of

petrochemical products. It also exports 500K bpd of gasoline, which is massive compared to the gasoline production

capacity of China-based Hengli’s recently built facility, which is less than 100K bpd. As such, we expect the gasoline

margin to remain strong for the foreseeable future. How it moves after September depends on how fast the Abqaiq

facilities normalize.

Fig 1. Refining margin trends by region Fig 2. Singaporean refining margin trend

0

5

10

15

20

25

30

15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1 19.7

Dubai crack Sin refining margin

Brent crack ROT refining margin

WTI crack USG refining margin

(USD/bbl)

0

2

4

6

8

10

12

14.1 15.1 16.1 17.1 18.1 19.1

(USD/bbl)

Source: Datastream, Hyundai Motor Securities Source: Datastream, Hyundai Motor Securities

Refining/Chemical/Utility Kang Dong-jin +822-3787-2228 dongjin.kang@hmsec.com

Major issues and conclusions - Refining margins for naphtha, gasoline and bunker C oil are widening sharply after the attack on a Saudi

Aramco oil processing facility and oilfield - To maintain crude oil supplies, Saudi Arabia suspended operations of its refining facilities with a capacity of

1mn bpd; petrochemical supply to tighten further as a result - Chemical products’ prices rebounded on the supply shortage of feedstock at chemical facilities in Saudi

Arabia but raw material price increases were marked, meaning narrower spreads; need to monitor how quickly the Saudi Arabian facilities normalize

Industry and stock outlook - Refining margins to remain strong, and the IMO 2020 effects to be reflected from 4Q19, which is positive

for refiners; our top pick is S-Oil (010950.KS, BUY) and our stock of interest SK Innovation (096770.KS, BUY) - Most chemical spreads weaken, with the exception of ABS and BPA which benefitted from tight supply; our

top picks are LG Chemical (051910.KS, BUY) and Hanwha Chemical (009830.KS, BUY) on the favorable turn in photovoltaics market conditions

Refining/Chemical OVERWEIGHT

Refining margins rise after Saudi oil attacks

Industry Note September 24, 2019

2

INDUSTRY NOTE

Fig 3. Saudi Arabia’s petrochemical exports

Source: Reuters, Hyundai Motor Securities

Fig 4. Complex refining margin trends Fig 5. Gasoline/naphtha margin trends

-9

-6

-3

0

3

6

9

12

15

2016 2017 2018 2019

Refining marginComplex refining margin

(USD/bbl)

-10

-5

0

5

10

15

20

25

30

14.01 14.07 15.01 15.07 16.01 16.07 17.01 17.07 18.01 18.07 19.01 19.07

Gasoline/Crude oil Naphtha/Crude oil(USD/bbl)

Source: Petronet, Hyundai Motor Securities Source: Petronet, Hyundai Motor Securities

Fig 6. Kerosene/diesel margin trends Fig 7. Bunker C oil margin trends

0

5

10

15

20

25

14.01 14.07 15.01 15.07 16.01 16.07 17.01 17.07 18.01 18.07 19.01 19.07

Kerosene/Crude oil Diesel/Crude oil(USD/bbl)

-20

-15

-10

-5

0

5

10

14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1 19.7

(USD/bbl)

Source: Petronet, Hyundai Motor Securities Source: Petronet, Hyundai Motor Securities

0

500

1,000

1,500

2,000

2,500

18.4 18.5 18.6 18.7 18.8 18.9 18.10 18.11 18.12 19.1 19.2 19.3 19.4 19.5 19.6

Gasoil/diesel Gasoline Kerosene

('000 BPD)

3

Kang Dong-jin +822-3787-2228 / dongjin.kang@hmcib.com Refining/Chemical/Utility

Fig 8. Utilization rate at Chinese teapot refineries Fig 9. Utilization rate at Chinese state-run refineries

40

45

50

55

60

65

70

75

16.1 16.7 17.1 17.7 18.1 18.7 19.1 19.7

(%)

50

55

60

65

70

75

80

85

16.1 16.7 17.1 17.7 18.1 18.7 19.1 19.7

(%)

Source: Bloomberg, Hyundai Motor Securities Source: Bloomberg, Hyundai Motor Securities

Fig 10. Refining margins and spreads

Dubai Brent WTI Vs. Brent Vs. WTI Gasoline Naphtha Kero Diesel B-C Gasoline Naphtha Kero Diesel B-C

07.05 62.5 63.8 57.6 -1.3 4.9 72.1 55.1 77.3 76.8 63.7 6.0 9.7 -7.4 14.9 14.3 1.207.12 64.3 65.7 59.3 -1.4 5.1 75.8 57.3 79.1 78.7 68.8 6.6 11.4 -7.1 14.7 14.3 4.507.19 63.3 63.8 57.0 -0.4 6.4 75.4 55.6 78.4 78.3 66.5 6.7 12.1 -7.7 15.0 14.9 3.107.26 62.8 63.4 56.2 -0.6 6.6 72.2 54.6 78.4 78.2 65.6 6.5 9.4 -8.2 15.6 15.4 2.808.02 62.8 63.2 56.6 -0.4 6.2 71.9 54.9 78.7 78.3 65.3 6.6 9.0 -7.9 15.9 15.5 2.508.09 58.3 58.2 53.3 0.1 5.0 69.7 50.3 73.7 73.6 55.1 6.2 11.4 -8.0 15.4 15.3 -3.208.16 58.5 59.2 55.3 -0.8 3.2 70.6 50.0 74.4 74.6 49.8 6.1 12.1 -8.5 15.9 16.1 -8.708.23 59.5 59.9 55.6 -0.4 3.9 70.1 50.6 74.7 74.0 52.4 5.3 10.6 -8.9 15.2 14.5 -7.108.30 58.9 60.0 55.2 -1.1 3.7 69.8 49.7 74.3 73.8 56.2 5.9 10.9 -9.3 15.4 14.9 -2.809.06 57.7 60.0 55.8 -2.3 2.0 68.0 49.5 73.9 73.6 53.5 6.3 10.2 -8.3 16.2 15.9 -4.309.13 59.9 61.3 56.2 -1.4 3.7 73.0 52.1 76.8 76.0 59.3 7.3 13.1 -7.8 16.9 16.1 -0.609.20 64.4 65.2 59.3 -0.7 5.1 81.1 58.4 81.3 80.4 71.5 8.8 16.7 -6.0 16.9 15.9 7.1

(wow, %) 7.5% 6.3% 5.6% N/A 37.5% 11.1% 12.0% 5.9% 5.7% 20.6% 20.7% 27.3% N/A -0.1% -1.2% N/A

Dubai PremiumCrude OilUSD/bbl

Product Price Product Margin (Spot)ComplexRefining Margin

Source: Petronet, Hyundai Motor Securities

Fig 11. Prices and spreads of major chemical products

Ethylene Propylene

EthyleneHDPE(Film)

LDPE LLDPE PVC MEG -NAPHHDPE(Film)

LDPE LLDPE PVC MEG Propylene PP PO AN -NAPHPP

-NAPHPO

-Prop.

AN-Prop,AMNA

07.08 507 745 998 973 948 880 545 238 491 466 441 373 215 331 890 1,053 1,388 1,638 383 546 498 56307.15 537 765 1,013 993 953 880 525 228 476 456 416 343 176 324 910 1,068 1,388 1,533 373 531 478 43607.22 501 810 1,023 1,003 958 880 545 309 522 502 457 379 219 311 920 1,073 1,388 1,548 419 572 468 44007.29 504 820 1,013 998 938 855 543 317 509 494 434 352 215 311 915 1,058 1,380 1,548 412 554 465 44508.05 491 858 978 983 898 855 540 367 487 492 407 365 221 311 925 1,053 1,423 1,598 435 562 498 48408.12 451 898 958 978 883 855 523 447 507 527 432 405 230 290 915 1,038 1,483 1,623 465 587 568 51208.19 462 870 958 978 878 855 540 409 496 516 416 394 240 275 925 1,038 1,538 1,643 464 576 613 51908.26 468 855 948 963 868 885 543 387 480 495 400 417 238 275 925 1,033 1,568 1,653 457 565 643 52909.02 467 845 918 923 843 885 543 379 451 456 376 419 239 271 915 1,018 1,465 1,653 449 551 550 54009.09 462 840 878 868 808 885 553 379 416 406 346 424 253 271 905 993 1,443 1,653 444 531 538 54909.16 471 845 888 868 798 885 558 375 417 397 327 415 252 285 915 983 1,473 1,653 445 512 558 53809.23 531 835 908 883 818 870 603 305 377 352 287 340 258 285 905 998 1,500 1,653 375 467 595 549

(wow, %) 12.8% -1.2% 2.3% 1.7% 2.5% -1.7% 8.1% -18.7% -9.6% -11.3% -12.2% -18.1% 2.4% 0.0% -1.1% 1.5% 1.9% 0.0% -15.7% -8.8% 6.7% 2.0%

USD/MT NaphthaSpread (Naphtha) Caustic

Soda

Spread

SPOT SpreadSPOT SpreadPropyleneEthylene

USD/MT BD SPOT Spread Benzene SPOT Spread Toluene SPOT Spread Xylene SPOT Spread

BD BD Benzene SM ABS ABS MDI CLPM BPA Toluene TDI PX PTA PET

-NAPH -M C4 Benzene MDI SM ABS CPLM Phenol BPA -NAPH -NAPH -A,B,S -NAPH -Benzene Benzene -Benzene Toluene TDI -NAPH -Toluene Benzene PX PTA PET -NPTH -PX -PTA, EG07.08 1,085 578 477 653 1,973 1,063 1,420 1,480 918 1,185 146 556 198 913 1,320 828 533 633 1,825 126 1,193 653 828 800 990 321 254 10107.15 1,115 578 480 685 1,973 1,073 1,450 1,480 903 1,165 148 536 245 913 1,288 795 480 653 1,825 116 1,173 685 855 768 1,020 318 203 16607.22 1,100 599 465 693 1,973 1,033 1,440 1,480 918 1,165 192 532 256 939 1,280 788 473 655 1,825 154 1,170 693 825 750 980 324 206 13507.29 1,100 597 493 685 1,878 1,020 1,430 1,480 913 1,170 182 517 252 927 1,193 795 485 660 1,985 157 1,325 685 820 720 955 317 179 13708.05 1,125 635 519 660 1,958 1,025 1,400 1,480 898 1,175 170 535 201 910 1,298 820 515 660 2,015 170 1,355 660 815 705 955 325 167 15108.12 1,175 725 627 640 1,948 985 1,370 1,480 893 1,140 190 535 177 920 1,308 840 500 645 2,023 195 1,378 640 775 685 890 325 174 11008.19 1,175 714 634 640 1,905 983 1,340 1,480 898 1,080 179 521 143 879 1,265 840 440 643 1,978 181 1,335 640 775 685 880 314 174 9408.26 1,250 782 704 668 1,905 988 1,340 1,480 908 1,060 200 520 123 872 1,238 813 393 660 1,908 192 1,248 668 765 670 880 297 165 10609.02 1,225 759 679 675 1,835 975 1,340 1,450 928 1,045 209 509 135 874 1,160 775 370 653 1,830 186 1,178 675 765 655 860 299 150 9909.09 1,250 789 704 690 1,803 1,018 1,340 1,400 908 1,075 229 556 107 879 1,113 710 385 663 1,780 201 1,118 690 755 655 850 294 157 8609.16 1,250 780 685 690 1,760 1,015 1,340 1,405 903 1,075 220 545 108 870 1,070 715 385 665 1,768 195 1,103 690 755 655 850 285 157 8409.23 1,225 695 617 735 1,718 985 1,440 1,460 978 1,175 205 455 229 910 983 725 440 688 1,768 157 1,080 735 805 665 890 275 134 100

(wow, %) 2.0% 12.2% 10.9% -6.1% 2.5% 3.0% -6.9% -3.8% -7.7% -8.5% 7.3% 19.8% -52.8% -4.4% 8.9% -1.4% -12.5% -3.3% 0.0% 23.9% 2.1% -6.1% -6.2% -1.5% -4.5% 3.6% 17.2% -15.9% Source: Cischem, Hyundai Motor Securities

4

INDUSTRY NOTE

Fig 12. HDPE spread Fig 13. LDPE spread

Source: Cischem, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

Fig 14. MEG spread Fig 15. PP spread

Source: Cischem, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

Fig 16. BPA spread Fig 17. ABS spread

Source: Cischem, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

5

Kang Dong-jin +822-3787-2228 / dongjin.kang@hmcib.com Refining/Chemical/Utility

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

19/01/22 BUY 140,000 -29.5 -29.0 19/01/29 BUY 140,000 -27.0 -25.0 19/02/15 BUY 140,000 -26.8 -22.1 19/03/06 BUY 140,000 -29.2 -22.1 19/04/03 BUY 120,000 -21.8 -19.5 19/04/24 BUY 120,000 -21.7 -19.5 19/04/25 BUY 120,000 -25.8 -19.5 19/05/31 BUY 120,000 -27.6 -19.5 19/07/03 BUY 120,000 -27.5 -19.5 19/07/09 BUY 120,000 -26.9 -19.5 19/07/25 BUY 130,000 -30.6 -27.6 19/08/16 BUY 130,000 -30.0 -25.3 19/09/03 BUY 130,000 -28.1 -21.5 19/09/24 BUY 130,000 - -

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

18/12/14 BUY 530,000 -34.5 -32.4 19/01/04 BUY 530,000 -33.9 -30.2 19/01/22 BUY 530,000 -32.9 -28.5 19/01/31 BUY 530,000 -32.3 -28.3 19/02/15 BUY 530,000 -31.0 -25.6 19/03/06 BUY 530,000 -30.5 -25.6 19/04/22 BUY 530,000 -30.5 -25.6 19/04/25 BUY 530,000 -31.6 -25.6 19/05/31 BUY 530,000 -31.7 -25.6 19/06/04 BUY 490,000 -29.4 -26.8 19/07/16 BUY 490,000 -29.0 -26.2 19/07/25 BUY 490,000 -31.4 -26.2 19/09/16 BUY 490,000 -31.5 -26.2 19/09/24 BUY 490,000 - -

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

18/03/08 BUY 44,000 -33.1 -28.8 18/05/15 BUY 40,000 -42.9 -28.6 18/08/16 BUY 30,000 -38.5 -29.0 18/11/14 BUY 22,000 -10.8 -1.1 19/01/22 BUY 22,000 -8.2 3.2 19/02/15 BUY 22,000 -7.7 5.5 19/02/21 BUY 31,000 -24.4 -23.2 19/03/06 BUY 31,000 -26.9 -23.2 19/04/04 BUY 31,000 -28.2 -23.2 19/05/09 BUY 31,000 -29.2 -23.2 19/05/31 BUY 31,000 -29.4 -23.2 19/06/28 BUY 31,000 -30.3 -23.2 19/08/08 BUY 26,000 -32.5 -27.9 19/09/24 BUY 26,000 - -

0

20 40 60 80

100

120

140

160

180

200

17.09 17.12 18.03 18.06 18.09 18.12 19.03 19.06 19.09

(KRW ‘000)

S-OilTarget price

0

100

200

300

400

500

600

17.09 17.12 18.03 18.06 18.09 18.12 19.03 19.06 19.09

(KRW ‘000)

LG ChemicalTarget price

0

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15

20

25

30

35

40

45

50

17.09 17.12 18.03 18.06 18.09 18.12 19.03 19.06 19.09

(KRW ‘000)

Hanwha ChemicalTarget price

6

INDUSTRY NOTE

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

18/07/10 BUY 480,000 -28.6 -25.1 18/08/01 BUY 480,000 -33.0 -25.1 18/10/01 M.PERFORM 310,000 -14.1 -17.1 18/10/22 M.PERFORM 310,000 -14.4 -18.1 18/11/02 M.PERFORM 300,000 -5.1 -7.2 18/11/23 M.PERFORM 300,000 -7.0 -14.5 19/01/10 M.PERFORM 300,000 -6.1 -14.5 19/02/13 M.PERFORM 300,000 -4.0 -14.5 19/03/06 M.PERFORM 300,000 -3.7 -14.5 19/04/05 M.PERFORM 330,000 -13.9 -19.4 19/05/07 M.PERFORM 310,000 -17.0 -22.7 19/07/22 M.PERFORM 280,000 -16.2 -22.5 19/08/06 M.PERFORM 250,000 -8.1 -13.2 19/09/24 M.PERFORM 250,000 - -

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

0

50

100

150

200

250

300

17.9 17.12 18.3 18.6 18.9 18.12 19.3 19.6 19.9

(KRW'000)

SK InnovationTarget price

Average High/Low

18/12/14 BUY 270,000 -34.4 -32.4 19/01/08 BUY 240,000 -24.2 -21.5 19/02/01 BUY 240,000 -23.4 -20.0 19/03/06 BUY 240,000 -22.6 -18.5 19/03/22 BUY 260,000 -28.2 -25.6 19/04/22 BUY 260,000 -28.0 -25.6 19/04/24 BUY 260,000 -27.9 -25.6 19/04/26 BUY 260,000 -30.9 -25.6 19/05/31 BUY 260,000 -33.3 -25.6 19/07/09 BUY 250,000 -31.1 -29.2 19/07/29 BUY 250,000 -31.2 -29.2 19/07/30 BUY 250,000 -34.7 -31.4 19/08/16 BUY 250,000 -34.3 -30.8 19/09/24 BUY 250,000 - -

0

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400

500

600

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17.09 17.12 18.03 18.06 18.09 18.12 19.03 19.06 19.09

(KRW ‘000)

Lotte ChemicalTarget price

7

Kang Dong-jin +822-3787-2228 / dongjin.kang@hmcib.com Refining/Chemical/Utility

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • Hyundai Motor Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for

the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook.

• OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration.

• BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (July 1, 2018-June 30, 2019)

Rating Count % of rating category BUY

MARKETPERFORM SELL

148 18 0

89.16 10.84

0.0

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of Hyundai Motor Securities. • The information and statistical data contained herein were taken from sources believed to be reliable but in no way can be gua ranteed and, therefore, final investment decisions should be

made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment decisions.