OREANDA-NEWS. March 14, 2016. Fitch Ratings says Thailand's naphtha-based petrochemical producers will continue to benefit from lower oil prices in 2016, compared with gas-based producers, whose margins have been squeezed.

The margins of naphtha-based chemical producers have improved as a result of low oil prices, and thus naphtha prices, but most gas-based operators' margins have narrowed because gas prices have not fallen as much as that for oil and naphtha, and petrochemical product prices are still largely linked to naphtha prices.

Naphtha prices have dropped sharply by about 43% in 2015, but Thailand's average pooled gas price has declined by only 13%. Prices of olefins and polyolefin products have fallen by 20%-40% and 20%-25%, respectively, following the drop in naphtha costs.

The EBITDA margin of The Siam Cement Public Company Limited's (A(tha)/Stable) chemical business, the largest naphtha-based producer in Thailand, increased to around 20% in 2015 from about 8% in 2014. In contrast, that of PTT Global Chemical Public Company Limited's (AA(tha)/Stable) olefins and derivative business, the largest gas-based producer in Thailand, dropped to about 24% from about 26%.

Fitch expects polyolefin spreads (to naphtha) to remain strong for Thai producers in 2016, although new capacity coming on-stream will likely put some pressure on the spreads, especially for polypropylene.

The trend is similar in India with the two predominantly naphtha-based petrochemical operators - Reliance Industries Ltd (RIL, BBB-/Stable) and Indian Oil Corporation Ltd (IOCL, BBB-/Stable) - benefiting from the lower feedstock prices and strong polymer spreads (to naphtha) despite falling product prices. RIL's EBIT margins for its petrochemical business improved to 12.2% during the first nine months of the financial year ending March 2016 (9MFY16) from 8.4% for the same period last year. Similarly the EBIT margins for IOCL's petrochemical business improved to 29.1% in 9MFY16 from 9.1% a year earlier.

Margins of GAIL (India) Limited's (BBB-/Stable) petrochemical business, which uses gas as feedstock have weakened. It suffered EBIT losses of INR6.9bn in 9MFY16 compared with EBIT profit of INR2.9bn a year earlier. Fitch expects its FY16 profitability to remain weaker than FY15 levels, although we expect some margin improvement from the successful renegotiation of prices for certain long-term gas purchase agreements in December 2015.

The profitability of South Korea-based SK Innovation Co. Ltd's (SKI, BBB/Negative) naphtha-based petrochemical business also improved in 2015. Fitch expects SKI's petrochemical business to benefit from robust product spreads (to naphtha) in 2016.