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Roller coaster week witnessed, local dynamics may take driving seat

Pakistan Stock Exchange (PSX) went through a roller coaster ride during the week ended on 10th January 2020, mainly due to geopolitical tensions. Nosedive at the start of the week on heightened geopolitical tensions was followed by volatility in subsequent two sessions as markets looked for clarity. However, towards the end of the week subsiding tension formed the basis of strong recovery. The benchmark index closed the week at 43,207 points, up 2.1%WoW along with improved activity.

Average daily trading volume for the week was up 7.6%WoW to more than 303 million shares. Foreign interest also remained high with a net buy of US$7.02 million against net sell of US$7.29 million for last week. Top performers of the week were: BOP, BAFL, LUCK, HMB and MEBL, while the laggards were: INDU, HASCOL, MLCF, ASTL and KAPCO. The scrips posting highest trading volume during the week included: BOP, KEL, UNITY and TRG.

Other news flows during the week included: 1) Pakistan reaffirming its resolve not to become a part of any conflict in the region and renewed its offer for mediating in the Middle East crisis, 2) ECC approving amendments in the Regulation and Generation of Transmission and Distribution of Electric Power Act 1997, 3) the ECC directing the Ministry of Finance to explore all possibilities for improving the liquidity position of PSO, 4) Pakistan’s exports of goods declining 3.96%YoY in December 2019, and 5) The National Assembly passing a bill — for exchange of information and criminals with countries — to meet a requirement of the FATF.

With the geopolitical noise reducing, local dynamics are expected to take the driving seat where improving reserves (at 21-month high of US$11.5 billion) and increased political harmony signal smooth sailing. However, uncertainty regarding upcoming FATF review is expected to cause volatility. Moreover, result season knocking on the door, any surprise or disappointment in earnings, particularly of heavyweights like Banks, Oil & Gas, can play a key role in determining the direction of market.

The year 2019 ended on a subdued note with a meager revival of the manufacturing sector, clarity over Brexit and mellowing US-China trade tensions providing support to commodity markets. Energy (Brent/Arab Light prices were up, driven by announced extension in supply cuts by OPEC plus producers. Meanwhile global growth metrics and adherence to supply cuts will guide the narrative for markets into CY20. Coal prices, up 4.5%MoM, are expected to witness a sequential decline, amid seasonal slowdown. While energy prices cooling off post easing tensions in the Middle East, PkR stability is a welcome sign. Rising international commodity prices of cotton and scrap steel will likely counter the positive impact for textile and steel players at home. Within Chemical sector, declines in international urea and DAP price pose negative implication for the local players, which will struggle to pass-on cost inflation. The excess global ethylene capacity keeping PVC ethylene margins healthy should bode well for local PVC producer (EPCL).

 

December 2019 witnessed consolidation of major shifts in international refining margins, with HSFO showing a continued break downward despite crude treading higher. FY20TD average cracks of light distillates HSD/MS averaging at US$+10.07/+2.7/bbl firming their spreads as compared to 4QFY19 average of +8.9/+1.7/bbl) and HSFO cracks worsening to average -16.7/bbl (vs. 4QFY20 average of -9.4/bbl) tanking further to US$-27.0/bbl during 4QCY20, contrasting the divergence between light vs. heavy distillate prices Barring US-Iran tensions, Saudi Arabia and other OPEC+ nations reaching a consensus on furthering supply cuts during 1QCY20 coupled with dissipating trade tensions are fueling bullish sentiment in crude, which are likely to prove positive for global refining cracks Monitoring moves in HSFO 180 CST commodity futures contracts we highlight the continued slide in HSFO futures prices for delivery contracts during CY20 (lower by US$24.2/ton on average June’19 settlements) extending to US$82.6/ton average for CY21 Considering the proposed power tariff hikes (under the new full tariff recovery mechanism) and elevated gas prices.

Analysts believe the case for FO based captive power generation is gaining steam, while efficient FO power IPPs are better placed to move up the merit order and restart supplying electricity to the grid.

December 2019, volumetric offtake clocked in at 1.4 million tons, moving 4%MoM/-5%YoY with MS being the only silver lining up 7%YoY), while FO/HSD sales declined by 49/2% YoY. For 1HFY20, volumes amounted to 8.7 million tons, receding 4%YoY exhausted by weak power demand (cumulative FO sales dipped 19%YoY), where monthly average sales have dropped to 195,000 tons as compared to 240, 000 tons during 1HFY19. In terms of market shares, PSO/APL/HASCOL account for market shares of 43/11/7% during the month under review. A comparison with December’18 reveals decreasing share of HASCOL/ APL/SHEL by 1ppt each while PSO increasing its share by 4ppts. 4%YoY decline in cumulative POL product sales for 1HFY20 underpinned y a fall in December 2019, for POL products from the industrial segment mainly as slowing transport demand and tightening discretionary demand persist.

With major shifts underway, analysts advocate for building positions in PSO, offering 20% upside potential as issuance of Sukuk enters final stages where analysts expect PSO to receive Rs45b billion, easing the liquidity crunch being faced by the company while also allowing it to incur much needed capex for storage expansion.

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