Market and product

Thailand conglomerate Siam Cement Group (SCG) may post weaker earnings in the last three months of 2016 compared with the strong showing in the September quarter, as its chemicals operations will be weighed down by higher costs of feedstock naphtha and lower production volumes, analysts said.

Prices of naphtha - the main feedstock for petrochemical production at most Asian crackers - have had solid gains so far in October, depressing product spreads, Nomura Global Markets Research said in a note.

According to ICIS data, naphtha prices in Asia have gained 13.5% over a four-week period to $454/tonne CFR (cost and freight) Japan on 28 October. (Please see price graph below)

“We think this could remain an issue near term as naphtha markets find a balance. This could normalise in the first half of 2017, and we remain positive on product spreads in the full-year [2017],” it said.

In the third quarter of 2016, SCG posted a 57% year-on-year surge in net profit to Thai baht (Bt) 14.1bn, supported by strong performance in its core chemicals business, even as overall revenues fell by 5% to Bt105bn.

Its chemicals segment posted a 74% year-on-year surge in third-quarter profit to Bt11.9bn, which accounted for 85% of the group’s earnings for the period.

SCG's strong chemicals performance can be mostly attributed to healthy margins for its polyethylene (PE) and polypropylene (PP) products, said Naphat Chantaraserekul, an analyst at Thailand-based brokerage Krungsri Securities.

“This lifted [third-quarter] chemical EBITDA [earnings before interest, tax, depreciation and amortization] margin by 5 percentage points [year on year] to 26%,” he said.

For the first nine months of this year, SCG's overall net profit grew by 28% year on year to Bt43.6bn, even as revenue slipped by 3% to Bt323.8bn.

In the fourth quarter, however, the group’s chemical production will be hit by the scheduled 40-day shutdown of its Map Ta Phut cracker, which has an 800,000 tonne/year ethylene capacity, from early November, analysts said. The cracker is operated by SCG subsidiary Rayong Olefins Co (ROC).

For the whole of 2016, SCG’s net profit is projected to grow by 18% to Bt53.7bn, with EBITDA up by 6% at Bt85.0bn and sales rising by 5% to Bt461.3bn, according to Chantaraserekul.

SCG’s net profit will continue to grow next year, logging a 4% growth to Bt55.7bn, with EBITDA projected to rise 10% to Bt93.5bn and sales up 5% at Bt485.3bn, he said.

Chemicals will remain as SCG’s key earnings driver next year, buoyed by an expected improvement in spreads for its polyvinyl chloride (PVC) and butadiene (BD) products, Chantaraserekul said.

Nomura said that SCG may be looking at another solid year of earnings as its cement and building materials business unit – which has been especially weaker in the first nine months of this year – is expected to benefit from higher earnings contributions from overseas capacity.

SCG has a cement plant in Laos that is scheduled to commence production by the end of next year, according to the company’s website.

“We expect domestic demand [for cement and building materials] to pick up next year as construction starts for mass transit projects approved this year, and driven by demand for residential property located alongside new mass transit lines,” said Chantaraserekul.

Construction in Bangkok – the Thai capital – of three new rail route extensions, which will add about 57 kilometres to the city’s current rail network, is expected to start next year, according to Thai media reports.