Capacity Increases Drive Earnings Pressure: Petkim is a Turkish commodity chemical producer, making predominantly polymers from naphtha, which places the company between the second and third quartiles of the global cost curve, APA-Economics reported.
Following a decrease in oil and naphtha prices since end-2014 as well as growing demand for petrochemical products, the naphtha-ethylene spread has remained favourable. However, we forecast that the increase in global ethylene and polymer production, mainly in the US and Middle East on the back of cheap gas, will pose a threat to Petkim's petrochemical margins over the next three years.
Positive FCF to Continue: In line with the Fitch oil price deck, we expect that oil prices will remain below USD60/bbl in the long term. This, coupled with the improved cost structure following the planned commissioning of STAR refinery, should allow Petkim to continue to generate positive cash flows as the market moves from top-of-cycle conditions towards a mid-cycle level.
Petkim expects to save USD70 million annually on logistic costs after the refinery is commissioned. We view the improved cost structure as positive for the credit profile.
Petkim sells approximately 64% of its products to the domestic market, with the remaining 36% exported mainly to Europe.