The petrochemical industry is facing opportunities for layout at the low point of the boom

Since the third quarter of 2022, the "ethylene-naphtha" price difference has been lower than 200 US dollars / ton for three consecutive quarters, at the bottom of history. The bottom of this round of petrochemical boom lasts for a long time and the price difference is low. We expect that with the gradual recovery of downstream demand, the industry's prosperity is expected to pick up. It is recommended to pay attention to the recovery of the boom and investment opportunities.

Currently in the bottom area of the industry boom. The "ethylene-naphtha" price difference is an important indicator to measure the prosperity of the petrochemical industry. Through this indicator, it can be shown that since the third quarter of 2022, the price difference has been lower than 200 US dollars / ton for three consecutive quarters, which is at the bottom of history. Historically, the price difference between ethylene-naphtha was lower than US$200/ton in several quarters such as 2Q01-1Q02 and 4Q08.

We believe that the petrochemical industry is highly cyclical. According to historical data, the petrochemical industry has experienced three rounds of high points since 2000 (2004-2006, 2010-2011, and 2016-2018). Before entering a high point, the profits of the petrochemical industry have experienced a round of troughs, such as 2001-2003, 2008, and 2011-2012. The current round of ethylene naphtha price spreads has fallen all the way since 18 years, and has now fallen to a low of nearly ten years.

The bottom of this round of prosperity is the same as the bottoms of previous times:

(1) The price difference between ethylene-naphtha is at a low level (less than $300/ton). From 1Q22 to 1Q23, the average price difference between ethylene-naphtha was US$224/ton, which was basically the same as the previous lows. The average price difference in 1Q01-4Q03 is US$197/ton; the average price difference in 4Q08-2Q09 is US$231/ton; the average price difference in 3Q11-3Q12 is US$277/ton.

(2) The oil price fluctuates and falls. Since the petrochemical industry has a strong positive correlation with oil prices, when oil prices fall, the business of the petrochemical industry will also be affected. From 1Q22 to 1Q23, the oil price dropped from a maximum of US$128/barrel to around US$80/barrel; from 4Q08 to 2Q09, the oil price dropped from US$95/barrel to US$69/barrel; in 3Q11-3Q12, the oil price dropped from a maximum of US$126/barrel to Around $110/barrel.

(3) Refining and chemical units have entered the capacity release period. We believe that petrochemical companies usually expand production capacity during the peak period of the petrochemical industry to meet growing demand. After a construction period of 2-3 years, with the release of production capacity and increase in supply, the tense situation between supply and demand has been improved, product prices and price differences have fallen, and the industry's prosperity has declined. According to BP energy statistics, in 2006, 2013-2014, and 2018-2019 after the high points of the previous rounds of prosperity, the growth rate of global refining capacity increased, with an average annual increase of more than 1 million barrels per day.

The difference between the bottom of this round of prosperity and the bottom of previous times:

(1) Long duration. We believe that the downward cycle of this round of business cycle began in 2019, but as of 2022, the profitability of the entire industry has not improved significantly, and the duration is significantly longer than the previous rounds, mainly because the disturbance of the epidemic since 2020 has affected the operating rate of equipment and downstream products. The demand has caused certain disturbances. In 4Q20-2Q21 when the epidemic situation was relatively mild, the backlog of demand in the early stage was released to a certain extent, which led to a short-term improvement in the industry's profitability. The price difference between ethylene and naphtha reached more than 400 US dollars / ton. Can make better profits.

(2) Ethylene-naphtha spread is lower. In this round of economic downturn, the price difference between ethylene-naphtha remained at less than US$200/ton, and the average price difference was lower than that of the previous two rounds of economic downturn.

Judgment on the follow-up business cycle: the price difference is expected to increase, and the business climate will gradually pick up. (1) Oil prices are relatively stable. We expect oil prices to be volatile in the next two years. (2) The price difference is at the bottom of history. At present, the ethylene-naphtha price difference has been lower than US$200/ton for several consecutive quarters, returning to the level around 2001. In the second half of 2022, the chemical business sector of listed refining and chemical companies will generally be in a state of meager profit or even a loss. We believe this will help eliminate outdated small production capacity, thereby promoting the improvement of the industry's supply and demand pattern. (3) Downstream demand is gradually recovering. With the optimization of epidemic prevention and control policies, we expect that downstream demand will gradually recover, which will also help the recovery of the industry's prosperity.