The Petroleum Institute of Thailand said an oversupply of petrochemicals was expected, and this would erode the earnings of Thai operators.

"The new supply [expected] from Iran will be the main factor in determining whether an oversupply situation will happen," said the institute. "If the Iranian project is delayed, the oversupply will not occur."

It said the Thai petrochemical industry remained competitive against foreign operators, because of its low operating costs.

However, Capital Nomura Securities is bearish about the petrochemical sector, saying its cycle has begun a downward trend, with one significant sign of this being a decrease in the average spread.

Nevertheless, it recommended that investors buy PTT Chemical (PTTCH) stock and fixed a fair price of Bt97 per share.

"PTTCH is [in a better position] than its competitors, because it can flexibly choose its raw material - natural gas or naphtha - for the sake of the lowest capital cost. It also has various businesses to create more value and decrease the revenue fluctuation that may derive from the core petrochemical business," said Capital Nomura.

Far East Securities said, "A big player from the Middle East, such as Iran's Arya Sasol, which can produce up to 1 million tonnes, has postponed operations from this year's second quarter to early 2007. This has [resulted in a decrease of] at least 17 per cent in the olefins supply predicted by the Chemical Market Associates earlier this year."

The firm said another major factor influencing the market was the olefins price, which, following along with higher oil prices, has remained above US$1,000 (Bt37,800) per tonne. Its current price is $1,230 per tonne.

Far East Securities predicted PTTCH's normalised profit would be Bt3.77 billion for the previous quarter, a quarter-on-quarter growth of 2 per cent. However, it said PTTCH's net profit would drop 6 per cent to Bt3.9 billion.

Also, PTTCH plans to produce 150,000 tonnes for the government's mega-projects this year, which is expected to contribute profits of around Bt340 million this year and Bt680 million next year. The country's political turmoil has resulted in an uncertain outlook for the mega-projects and at least a lengthy delay.

The broker said, however, that PTTCH had a low-risk financial structure and strong cash flow, so it would be able to handle the downward trend in the petrochemical sector.

"PTTCH's interest-bearing debt per equity is around 0.33, while its net interest-bearing debt per equity is as low as 0.08. As a result, PTTCH plans a $500-million debenture issue this year, so as to maintain its interest-bearing debt per equity at a level not lower than 0.6."

Far East Securities revised its fair value for PTTCH stock to Bt84.50 a share this year and Bt91.50 next year.

Kim Eng Securities (Thailand) was of a similar opinion. It recommended investors buy PTTCH's stock with a fair value of Bt98 per share.

"Although many olefins factories will resume operations again in the second half of this year after a halt for repairs, PTTCH will still be able to obtain a profit of Bt13.87 billion for the entire year. The current price is trading at a price-per-equity ratio of 6.8," said the broker.

Siriporn Chanjindamanee

The Nation