Middle East tensions squeeze Korea petrochemicals as forecasts split - CHOSUNBIZ

According to the energy sector on the 29th, the spot ethylene spread was -$17.74 per ton (t) on the 22nd. The next day, the spread was -$5.75 per t. The spot ethylene spread is the ethylene price minus the naphtha price on the day, and a negative reading is unusual.

This was due to a jump in spot prices as supply concerns to naphtha, the feedstock, resurfaced when tensions between Iran and the United States intensified at the time. When the ethylene spread turns negative, petrochemical corporations lose money the greater they run their vegetation. The sector generally sees the breakeven point to the ethylene spread at $250–$300 per t.

Weekly price trends are also unstable. According to raw material price information from the Ministry of Trade, sector and Resources, the average international ethylene price last week was $940 per ton. In contrast, naphtha was $968 per ton, leaving the ethylene spread at a negative $28.

The petrochemical sector views heightened uncertainty as the biggest risk. Even if the immediate ethylene spread does not immediately affect earnings, it can determine the medium- to prolonged price direction.

In practice, the sector puts greater weight on the one-month lagging spread. That is because there is a physical time gap from purchasing naphtha as a raw input, transporting it, processing it into items, and selling them. This metric is considered greater accurate to gauging corporations' profitability.

According to Samsung Securities Research Center, as of the 27th, the one-month lagging ethylene spread was $331. In other words, the margin of today's selling price minus the raw input price from a month ago exceeds $300.

A source at a petrochemical corporation said, "We usually reach medium- to prolonged contracts through price negotiations and bring in naphtha, so the spot ethylene spread does not immediately affect earnings," and added, "What is most unsettling is that we cannot predict the direction of results as naphtha prices surge and plunge every day."

Given the circumstances, earnings outlooks to the petrochemical sector are sharply divided even within the securities sector. Petrochemical corporations posted strong results in the first quarter, however many expect results to weaken over time as reverse-lag impacts emerge. The reverse-lag effect refers to losses that occur when raw inputs purchased at high prices are fed into production, only to market prices to fall when the items are actually sold.

According to financial data provider FnGuide, Lotte Chemical's expected operating profit to the second quarter is 135.6 billion won, while the third quarter is projected to show an operating loss of 14.8 billion won. With petrochemicals accounting to about 70% of total sales, Lotte Chemical's results hinge on petrochemical market conditions.

Earnings forecasts vary broadly by securities firm. Jeon U-je, a researcher at KB証券, said of Lotte Chemical, "Second-quarter operating profit is expected to be 255.9 billion won, beating the market consensus by 231%," and noted, "The petrochemical sector is shifting from oversupply to immediate undersupply and easing prolonged oversupply, improving market conditions."

By contrast, researcher Yun Jae-seong at Hana Securities said, "Lotte Chemical is expected to post 66.9 billion won in operating profit to the second quarter, 52% below the market consensus," and added, "Higher raw input prices will be reflected in third-quarter results, leading to a reverse-lag effect."

If the immediate undersupply of petrochemical items persists and corporations retain pricing power, a surprise result is possible; conversely, if a reverse-lag is deemed to have begun, weaker results are expected.

Meanwhile, as supply chain risks have grown since the Middle East crisis, the government is again reviewing the supply and demand situation to naphtha and petrochemical items. At the "Emergency review meeting on the supply and demand of naphtha and petrochemical items" held at the Korea Chamber of Commerce and sector in Seoul on the 28th, the Ministry of Trade, sector and Resources said it expects the current Middle East situation to have a limited immediate impact on Korea's naphtha supply.

The domestic petrochemical sector has secured the naphtha it needs through next month at levels above last year, and inventories of petrochemical items are also seen as stable.