Since Hurricane Harvey has pervaded global consciousness, Engro Polymer’s stocks have taken a hit. Significantly affecting United States’ petrochemical hub along its Gulf coast, the storm has decreased approximately 50-60 percent of US ethylene production. The resultant expectations of declining PVC-ethylene margin seem to have driven EPCL’s share price down.
While the market and its analysts, such as Foundation Securities, are of the view that EPCL’s stock should be approached with caution, this column is of the view that current market conditions may become an opportunity for increased profitability for Engro Polymer.
The basis of market expectations that drove down EPCL’s market prices is US’s position in the global petrochemical market. The US is among the largest ethylene producers in the world, contributing to 18 percent of global ethylene production in 2016. Other large producers include China and the Middle East that contributed 15 percent and 19 percent, respectively to global ethylene production.
Given the importance of the US in the global petrochemical market, one can be excused for reasoning that a rise in US’s ethylene prices due to decreased supply will have an adverse affect on Engro Polymer’s profitability. However, PBS data and industry sources indicate that the bulk of ethylene imports originate from Asia, and hence, the rise in ethylene prices may not decrease EPCL’s margins.
In the case of ethylene, industry sources say, each region has its own demand and supply conditions that set the price. And Asia has been experiencing an ethylene oversupply this year ever since a series of cracker turnarounds have increased production in Middle East Asia. Furthermore, regional capacity has increased due to investments in India and China. Therefore, it is possible that EPCL will continue to have stable ethylene prices.
On the other hand, Engro Polymer’s PVC prices are linked to international prices. Since the US is also a major player in the downstream ethylene products, Hurricane Harvey’s devastation may raise global PVC prices.
Engro Polymer is the sole producer of PVC in Pakistan. With its monopolistic position and rising international prices, EPCL is in a position to raise prices. On the other hand, regional demand and supply of ethylene may result in stable cost of production. As a result, EPCL might find itself in a position to enjoy a higher bottom-line and increased profitability, contrary to market expectations that has sent EPCL on a nose dive since Harvey landed on American shores!