PKN Orlen has published an update of its model refining and petchem margins containing data for January 2013. According to the statement, the model refining margin increased to US$ 2.3/bbl in January from US$ 1.2/bbl in December while the Brent-Urals differential remained unchanged and averaged US$ 1.1/bbl in the same period. Petchem margins further improved and posted a robust € 744/tonne in January, or 4% higher than in December.
The improvement in PKN’s refining and petchem margins is in line with seasonality hence we see this latest update as neutral for the investment case. Also, the magnitudes of the quarter-on-quarter
increases are nothing to get excited about. The year-on-year readings are a mixed bag with the combined refining margin (i.e. model refining margin plus the Brent-Urals spread) down 39% but the petchem margins up 41%. While the former trend is broadly in line with our forecasts for full-year 2013, the latter is clearly better than initially expected. In our view, olefin margins remained the primary driver of this strength, which we see as unsustainable as the year progresses.
Indeed, we expect more than 2.0mt of ethylene capacity to come on line in the Middle East, Asia and US later this year, which should exert intense pressure on margins in the second half of the year. Also,
inventory/sales ratios of leading chemical players (PKN’s customers) stand at above-average levels, posing a near-term risk of potential destocking. We reiterate our Sell rating on PKN.