India Petroleum & NATURAL RESOURCES Chemicals Insight AND...

Disclaimer & Disclosures

This report must be read with the disclosures and the analyst certifications in

the Disclosure appendix, and with the Disclaimer, which forms part of it.

Issuer of report: HSBC Securities and Capital Markets (India) Private Limited

View HSBC Global Research at:

https://www.research.hsbc.com

Refining margin has dipped on weak distillate margin

Both polymer and polyester margins are inching up

India oil consumption growth moderated in July but remains

above historical trend

Highlights

Refining margins in the region continue to weaken due to further dip in distillate

margins. The Singapore Complex refining margin averaged USD3.8/b in August

(down USD1.1/b m-o-m, USD1.9/b y-o-y). We continue to believe that regional refining

margin will trend around USD5-6/b over medium term. The global refining industry has

steadily hiked gasoline production which in turn has meant lower throughput of middle

distillate and hence distillate margins will gain strength, in our view.

Polymer margins have moved up in August. PE-Naphtha margin is up by c2% m-o-m

while PP-Naphtha margin was also up by c2% m-o-m. PSF and POY margins were up

sequentially by 9-10%. Please see page 9 for detailed charts.

LNG price has moderated as LNG terminals restart operations. Operators of LNG

plants at Gorgon, Australia and Angola have indicated that these plants will be

operating optimally by 2016-end after unplanned shutdown a few months ago. While

new capacity including new trains in Australia and Sabine Pass, USA, is scheduled to

commence operations later this year, we believe the spate of new regas capacity will

continue to provide some support to the regional LNG market.

Petroleum product consumption in India grew by 4% y-o-y, or c134kbd in July’16

over July’15. This was lower than 10% growth y-t-d in CY16. We believe that the

pace will remain moderate in monsoon months, but underlying growth remains higher

than historical trend of 110kbd in the last decade. Growth in July was led by Petrol

and LPG.

Global oil demand and supply. OPEC expects world oil demand to grow by

c1.2mb/d in 2016, as per the latest OPEC Monthly Oil Market Report. It pegged total

oil demand at 94.26 mbd at present. If further expects non-OPEC production to

gradually recover after its bottom in 2QCY16. OPEC production averaged 33.1 mbd

in July, which was largely flat sequentially. Oil tanker freight rate continued falling

with VLCC (very large crude carrier) rate currently at cUSD12,000/d (down from

average of cUSD27,000/d in June 2016).

Agricultural commodities: Global agricultural commodity price outlook remains

bearish. While there has been modest improvement in soybean prices, the prices

along with those of corn and wheat remain close to the lower end of the 5-year range.

29 August 2016

Kumar Manish* Analyst

HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+91 22 22681238

Thomas C. Hilboldt*, CFA

Analyst

The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2922

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

India Petroleum & Chemicals Insight

EQUITY NATURAL RESOURCES AND ENERGY

India – Oil and Gas August 2016 – Weak refining, strong polymers


29 August 2016

2

Highlights 1

Crude oil trends 3

Refining margins and product spreads 5

Product demand – India, China & US 7

India – Other product sales 8

Petrochemical margins 9

Indian petrochemical margins 11

Global LNG prices 13

Global fertilizer and agricultural commodity prices 14

Disclosure appendix 15

Disclaimer 17

Contents

3


29 August 2016

Crude oil trends

Brent-WTI spread (USD/b) Brent-Dubai spread (USD/b)

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Arab Light-Heavy spread (USD/b) Brent premium (USD/b) over Indian crude basket

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream, Ministry of Petroleum, India

Other Asian Crude benchmark prices (USD/b)

Brent prices and Brent-Maya spread (USD/b) (RHS)

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

25

30

35

40

45

50

55

May-16 Jun-16 Jul-16 Aug-16

WTI Brent WTI spread

20

25

30

35

40

45

50

55


Dubai Brent Dubai spread

15

20

25

30

35

40

45

50

55


Arab Heavy Arab Light Heavy Spread

20

25

30

35

40

45

50

55


Indian Basket crude price Brent Premium to Indian basket

20

25

30

35

40

45

50

55

60


Tapis Cinta

20

30

40

50

60

70

80


Brent (USD/bbl) Brent-Maya spread (USD/bbl)


29 August 2016

4

Brent front-month spreads to 2M, 3M, 6M and 12M (USD/b)

Source: Bloomberg

Brent (USD/b) and dollar index Net long combined non-commercial positions in crude oil

Source: Bloomberg Source: CFTC, Bloomberg

Crude oil futures

Source: Bloomberg

-8

-7

-6

-5

-4

-3

-2

-1

0


2M 3M 6M 12M

70

75

80

85

90

95

100

105

0

20

40

60

80

100

120

140

160

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Brent -LHS

0

50

100

150

200

-1,000

-500

0

500

1,000

200

0200

1200

2200

3200

4200

5200

6200

7200

8200

9201

0201

1201

2201

3201

4201

5201

6

Th

ou

san

ds

Net Commercial Combined PositionNet Non commercial combined positionBrent

0

20

40

60

80

100

120

140

160

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Aug-15 Aug-13 Aug-11

Aug-09 Aug-07 Aug-05

NYMEX crude 1M forward

5


29 August 2016

Refining margins and product spreads

Singapore Complex GRM (USD/b) (Dubai cracking) averaged below USD5/b in August

Arab Light – Arab Heavy (USD/b) spread inched lower in August

Source: Thomson Reuters Eikon Source: Thomson Reuters Eikon

Petrol–Dubai spread (USD/b) is plateauing Diesel – Dubai crack spread (USD/b) dipped


Jet fuel – Dubai crack (USD/b) also dipped Naphtha – Dubai crack (USD/b) has weakened


0

2

4

6

8

10

12

14

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

FY16 FY17

2

3

4

5

6


FY16 FY17

0

5

10

15

20

25

30

35


FY16 FY17

0

5

10

15

20

25


FY16 FY17

0

5

10

15

20

25


FY16 FY17

(20)

(10)

0

10

20


FY16 FY17


29 August 2016

6

Singapore GRM (USD/b) and refinery shutdowns (in Asia/Middle East)

Source: Bloomberg, Thomson Reuters Datastream

Refinery outages (mbd) globally

Source: Bloomberg, Thomson Reuters Datastream

Status of refinery capacity addition in India

Company Location Capacity (kbd) Expected date of commissioning

BPCL Kochi (expansion) 120 Q2FY17 HPCL Barmer, Rajasthan (greenfield) 180 Mothballed IOC Vadodara (expansion) 85 2018 Nagarjuna Cuddalore (greenfield) 120 Mothballed HPCL Mumbai (expansion) 60 2018 HPCL Vizag (expansion) 120 2020 HMEL Bhatinda, Panjab 50 2017

Source: HSBC, Company data

0

2

4

6

8

10

0%

5%

10%

15%

20%

25%

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

Shutdown capacity (percentage of capacity) Singapore GRM ($/bbl)

0

5

10

15

20

25

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Asia/Middle East Europe/Africa Americas

7


29 August 2016

Product demand – India, China & US

INDIA y-t-d domestic petrol sales (mt) INDIA y-t-d domestic diesel sales (mt)

Source: PPAC Source: PPAC

China Gasoline Demand (mt) China Diesel Demand (mt)

Source: Thomson Reuters Datastream, HSBC estimates Source: Thomson Reuters Datastream, HSBC estimates

US total motor gasoline demand (mt) US total distillate demand (mt)

Source: Bloomberg, DOE Source: Bloomberg, DOE

9 9 10 11 12

14 15 16 17

18

21

12 14

0%

5%

10%

15%

20%

0

5

10

15

20

25

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Sales (in mmt) - LHS

40 42 46

51 55

59 63

69 69 69 73

42 45

-2%

0%

2%

4%

6%

8%

10%

12%

0

20

40

60

80

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Sales (in mmt) - LHS YoY growth - RHS

47 4852 56

64 68 7278

8794

106115

67 70

0%2%4%6%8%10%12%14%16%18%

01224364860728496

108120132

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Gasoline (LHS) YoY growth %

104 109116124139139

155167171170174173

10294

-10%

-5%

0%

5%

10%

15%

20%

25%

-100

-50

0

50

100

150

200

25020

04

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Diesel (LHS) YoY growth %

399

402

393

389

391

384

371

376

380

393

158

160

-4%

-2%

0%

2%

4%

0

100

200

300

400

500

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Demand (in mmt)-LHS YoY growth-RHS

180

184

177

156

162

164

157

163

165

167

67

64

-16%

-12%

-8%

-4%

0%

4%

8%

0

50

100

150

200

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Demand (in mmt) - LHS YoY growth - RHS


29 August 2016

8

India – Other product sales

LPG sales (mt) Kerosene sales (mt)


Naphtha sales (mt) Jet fuel sales (mt)


Fuel oil sales (mt) Petcoke sales (mt)


10 11 12 12 13

14 15 16 16

18 19

11 12

0%

2%

4%

6%

8%

10%

12%

0

5

10

15

20

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16


10 10 9 9 9 9 8

8 7 7 7

4 4

-10%

-5%

0%

5%

0

2

4

6

8

10

12

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15yt

d 16


13 13 13 14

12 10 11

12 12 11

13

7 8

-20%

-10%

0%

10%

20%

0

5

10

15

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16


3 4

4 5 5 5

5 5 5 6 6

3 4

-10%

0%

10%

20%

30%

0

2

4

6

820

05

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16


13 13 13 13 12

11 10

8

6 6 6

4 4

-30%

-20%

-10%

0%

10%

20%

30%

0

5

10

15

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16


5 5 6 6 7

5 6

9

11

14

17

9

12

-40%

-20%

0%

20%

40%

60%

0

5

10

15

20

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ytd

15

ytd

16

Sales (in mmt) - LHS YoY growth - RHS

9


29 August 2016

Petrochemical margins

PE – Naphtha(USD/t) margin is moving up again

RIL (derived) selling price vs international price and spread (USD/tonne)

Source: Thomson Reuters Datastream, HSBC estimates Source: RIL, HSBC estimates

PP – Naphtha (USD/t) spread too moved up sharply in July



PSF-Naphtha (USD/t) margin inched up but remains weak



0

500

1,000

1,500

2,000

Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16

Naphtha PE-Naphtha PE (RIL implied)

0

500

1,000

1,500

2,000

Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16

Naphtha PP-Naphtha PP (RIL implied)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

Naphtha PSF-Naphtha PSF (RIL implied)

300

400

500

600

700

800

900

Apr Jun Aug Oct Dec Feb

FY11-15 FY16 FY17

FY11-15 Aug-15 Jul-16 Aug-16

549 612 612 625

300

400

500

600

700

800

900

1,000


FY11-15 Aug-15 Jul-16 Aug-16

501 746 696 711

400

900

1,400


FY11-15

FY11-15 Aug-15 Jul-16 Aug-16

785 684 632 684


29 August 2016

10

PX – Naphtha (USD/t) spread is up y-o-y PX-PTA (USD/t) spread remains weak


MEG – Naphtha (USD/t) margin also moved up moderately

PSF- Naphtha Integrated margins (USD/t)


POY-Naphtha integrated margin remains lower than the five year range

Middling grade cotton (USD cents/lb)

400

900

1,400


FY11-15 FY16 FY17

Source: Thomson Reuters Datastream, HSBC estimates Source: Bloomberg

0

50

100

150

200

250

Dat

eA

pr-1

0A

ug-1

0Ja

n-11

Jun-

11N

ov-1

1M

ar-1

2A

ug-1

2Ja

n-13

Jun-

13O

ct-1

3M

ar-1

4A

ug-1

4Ja

n-15

May

-15

Oct

-15

Mar

-16

0

100

200

300

400


FY11-15

FY11-15 Aug-15 Jul-16 Aug-16

132 66 67 72

100

300

500

700

Apr Jun Aug Oct Dec FebFY11-15

FY11-15 Aug-15 Jul-16 Aug-16

495 358 427 431

200

400

600

800

1,000

Apr Jun Aug Oct Dec FebFY11-15

FY11-15 Aug-15 Jul-16 Aug-16

470 476 383 394

400

900

1,400


FY11-15

FY11-15 Aug-15 Jul-16 Aug-16

785 684 632 684

11


29 August 2016

Indian petrochemical margins

Indian PE – Naphtha spread (INR/kg) PP – Naphtha (INR/kg) spread

Source: RIL, HSBC estimates Source: RIL, HSBC estimates

MEG – Naphtha (INR/kg) spread PTA – Naphtha (INR/kg) spread


PSF – Naphtha (INR/kg) spread POY – Naphtha spread (INR/kg)


40

60

80

100

120

140

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16

40

50

60

70

80

90

100

110

120

130

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16

20

30

40

50

60

70

80

90

100

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16

25

45

65

85

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16

10

20

30

40

50

60

70

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16

20

30

40

50

60

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY17 FY16


29 August 2016

12

Current under-recovery (Brent of USD40.73/b and INR/USD 66.87 exchange rate)

Petroleum products Units Under-recovery (% of MRP)

LPG INR/cylinder 63.91 (15% of price) Kerosene INR/litre 11.49 (73% of price)

Source: HSBC estimates. Note: Prices based on PPAC’s latest fortnightly review

Automotive retail fuel prices (INR/litre) Industrial fuel prices (INR/kg)

Source: PPAC, BPCL; IGL Source: PPAC, BPCL

Note: Turpentine price is in INR/litre

30

40

50

60

70

Petrol (INR/ltr) Diesel (INR/ltr) CNG (INR/kg)

-12M -6M -3M -1M Current

10152025303540455055

Tho

usan

ds

-12M -6M -3M -1M Current

13


29 August 2016

Global LNG prices

Global LNG landed prices (USD/mBtu) Global LNG demand for annual basis

(bcm)

25

26

27

28

29

30

31

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

2012 2013 2014

2015 2016


Asian LNG demand trend (mt) Europe LNG demand trend (mt)

-

5

10

15

20

Jan-1

3

Apr-

13

Jul-

13

Oct

-13

Jan-1

4

Apr-

14

Jul-14

Oct

-14

Jan-1

5

Apr-

15

Jul-

15

Oct

-15

Jan-1

6

Apr-

16

Japan S. Korea China India Taiwan Other Asia

0

2

4

6

Jan

-12

Jul-1

2

Jan-

13

Jul-1

3

Jan

-14

Jul-1

4

Jan-

15

Jul-1

5

Jan

-16

Belgium Spain Turkey

UK France Greece


Asian LNG prices (USD/mBtu)

Source: Thomson Reuters Eikon

0

2

4

6

8

10

Japa

n

Sou

th K

orea

Chi

na

Tai

wan

Indi

a

UK

Bra

zil

Cov

e P

oint

, US

Can

ada

Por

t

Current 1 year ago

0.0

5.0

10.0

15.0

20.0

25.0

Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16

India Japan Korea China Taiwan


29 August 2016

14

Global fertilizer and agricultural commodity prices

Urea Black Sea Spot price (USD/tonne) US CBOT Corn Futures price (USD/bushel)

Source: Bloomberg Source: Thomson Reuters Datastream

Potash Vancouver FOB price (USD/tonne) US CBOT Wheat Futures price (USD/bushel)


DAP US Gulf Spot price (USD/tonne) US CBOT Soya bean Futures price (USD/bushel)


150

250

350

450

550

650

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2010-14 Range 2015 2016

2

4

6

8

10

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

Series1 2015 2016

200

250

300

350

400

450

500

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

Series1 2015 2016

3

4

5

6

7

8

9

10Ja

n

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2010-14 Range 2015 2016

200

300

400

500

600

700

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2010-14 Range 2015 2016

6

8

10

12

14

16

18

20

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2010-14 Range 2015 2016

15


29 August 2016

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Kumar Manish and Thomas C. Hilboldt

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's

existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons

when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different

securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and

therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should

carefully read the entire research report and not infer its contents from the rating because research reports contain more

complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12

months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will

be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a

Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is

between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more

than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,

change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,

regional market established by our strategy team. The target price for a stock represented the value the analyst expected the

stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as

Overweight, the potential return, which equals the percentage difference between the current share price and the target price,

including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the

succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,

the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or

10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12

months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,

stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the

past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 29 August 2016, the distribution of all independent ratings published by HSBC is as follows:

Buy 43% (25% of these provided with Investment Banking Services)

Hold 42% (26% of these provided with Investment Banking Services)

Sell 15% (18% of these provided with Investment Banking Services)


29 August 2016

16

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to

current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current

model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis

for financial analysis” above.

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[525552]

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