Petrochemical Profit Recovery Faces Headwinds in Q3

As conflicts in the Middle East repeat and prolong, clients are not rushing to place volume orders, taking into consideration the evaporative environment of international market prices. Consequently, while raw material prices have been rising recently, the margin of increase to product unit prices remains limited.

According to the raw material price information from the Ministry of Trade, sector and Energy on Sept. 16, the ethylene spread (the value obtained by subtracting the naphtha price from the ethylene price) stood at the $267 level as of the previous day.

The ethylene spread recorded an average of about $315 per ton in April before falling to an average of $135.3 in June. At the end of July, which falls in the third quarter, it was at the $100 level, and in August, it recovered again to record an average of $209.38.

The petrochemical sector typically views $250 to $300 as the break-even point, and the sector expects that a extensive performance slowdown will not occur thanks to increased margins entering September.

An sector official said, “We expected a performance slowdown due to a ‘reverse lagging effect (profit decrease caused by the time lag in raw material input)’ occurring in the third quarter, however as conflicts in the Middle East have intensified again, we believe the lagging effect will be maintained.”

However, profitability improvement is limited as the low-price offensive from China continues and volume orders from downstream industries are not growing.

The sector explains that while extensive pre-orders were made in the first half of the year in the aftermath of the Middle East conflict, clients have already secured inventory starting from the third quarter, meaning immediate additional demand is not significant.

In addition, because both raw material purchases and exports in the petrochemical sector are based on the dollar, the impact of a falling exchange rate is not as severe as it is to other export manufacturing industries. Ultimately, the dominant analysis is that unless supported by a substantial demand recovery in downstream industries, it will be difficult to expect a performance rebound to the petrochemical sector based solely on simple, temporary external variables.

Accordingly, the profitability of the domestic petrochemical sector in the third quarter of this year is projected to fall below that of the second quarter.

According to financial information provider FnGuide, LG Chem’s consolidated operating profit to the third quarter of this year is projected to be 190.6 billion won (about $138.8 million), which is expected to decrease by 71.96% compared to the same period last year.

During the same period, Lotte Chemical was expected to post an operating loss of 142.5 billion won. Hanwha Solutions’ operating profit to the third quarter is projected to be 209.2 billion won, turning to a surplus from a deficit of 7.4 billion won during the same period last year.

However, compared to the second quarter operating profit of 306.5 billion won, it is projected to decrease by 31.7%.

The operating profit forecast to Kumho Petrochemical is 102.7 billion won, which is projected to increase by 21.6% from 84.4 billion won during the same period. However, compared to 339 billion won in the previous quarter, it is expected to decrease by 69.7%.

An sector official said, “Because the ethylene spread has risen this month, we do not expect an operating deficit,” however added, “While there is room to prices to rise if demand increases in a tight supply situation, under recent conditions, such an upward margin appears to be limited.”