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MarketScreener Homepage  >  Equities  >  KOREA EXCHANGE  >  Lotte Chemical Corp    A011170   KR7011170008

LOTTE CHEMICAL CORP

(A011170)
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Asian petrochemical profits slammed by trade war crossfire, oversupply

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08/22/2019 | 11:10pm EDT
FILE PHOTO: Trucks are seen outside Shandong Haiyou Petrochemical Group refinery in Ju county, Shandong province, China

SINGAPORE/SEOUL (Reuters) - Profits from making petrochemicals in Asia have plunged to their lowest in months as the unrelenting trade conflict between Beijing and Washington stifles Chinese demand for chemicals and plastics just as waves of new production start to come on line.

The global output capacity for polyethylene, a key ingredient for plastics used in everything from piping to toys, is expected to exceed demand by 3 million tonnes by the end of 2020, compared to overcapacity of 545,000 tonnes in 2019, data from commodity consultancy Wood Mackenzie showed.

That comes as new production is set to crank up in China, South Korea and Malaysia, although the United States and the Middle East will account for more than half of the new volumes.

"In the next two years, the operating rates (of polyethylene units) will be impacted as the capacity additions are faster than the demand addition," said U.S.-based Wood Mackenzie principal analyst Ashish Chitalia.

Though analysts say polyethylene profit margins are already at their narrowest in around seven years, ballooning supplies could drive them even lower - placing high-cost producers under critical pressure.

The spread between prices for polyethylene and feedstock naphtha gives an approximation of how much profit petrochemical makers can make.

Based on data from the Korea Petrochemical Industry Association (KPIA), the average spread between high-density polyethylene (HDPE) and naphtha feedstock costs in the second quarter was $421.34 a tonne - the lowest quarterly average since 2012.

And the pressure is growing. The average spread for HDPE - used to make bottle caps, detergent tubs and piping - was down to $414 a tonne in the week ended Aug. 16.

GRAPHIC: Asia's petrochemical margins under pressure https://fingfx.thomsonreuters.com/gfx/ce/7/5850/5833/AsiaPetChemMargins.png

Meanwhile a plastic known as linear low density polyethylene (LLDPE), used in a host of products including food and non-food packaging, is similarly weak.

"The average LLDPE/naphtha spread for July was around $418 a tonne and could fall below producer break-even levels of around $400 to $450 in 2020 due to long supplies," said Tan Yi Ling, principal analyst of polyolefins at IHS Markit based in Singapore. In January the spread was about $542, Tan said.

SOUTHEASTERN COMFORT?

The year-long, tit-for-tat trade dispute between Washington and Beijing has roiled financial markets and cast a long shadow over the global economy.

China exported 12 million tonnes of its plastic end-products worldwide in 2018, 3 million tonnes of which went to the United States, said Wood Mackenzie's Chitalia.

But these plastics exports to the United States are now hit by tariffs, the analyst said, pushing some petrochemical companies to look for customers in new regions.

Shin Hak Cheol, chief executive of South Korea's LG Chem, told reporters in July that South Korea's top chemical maker plans to tap markets in areas such as Southeast Asia to offset easing demand from plastics makers in China.

"The trade dispute between the U.S and China is not expected to end in the short term," he said.

"Additionally, South Korean petrochemical makers expanded their facilities five years ago during a peak time in the petrochemical cycle, and some of those increased supplies have hit the market and will keep coming to the market in 2020."

In the petrochemicals trade it typically takes four to five years from initial investments to start-up of commercial operation.

Meanwhile, Malaysia's state energy firm Petronas is expected to start up a 1.2 million tonnes-per-year ethylene facility in the south of the country later this year, looking to supply local markets.

"These new capacities illustrate the new paradigm confronting petchem (petrochemical) producers," said Paul Hodges of The pH Report, part of consultancy firm International eChem. "Low-cost supply is no longer the key to success ... Sustainability is replacing globalisation as the key driver for the industry."

(Reporting by Seng Li Peng in SINGAPORE and Jane Chung in SEOUL; Additional reporting by Beijing Newsroom; Editing by Joseph Radford and Kenneth Maxwell)

By Seng Li Peng and Jane Chung

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Financials (KRW)
Sales 2019 16 072 B
EBIT 2019 1 359 B
Net income 2019 1 099 B
Debt 2019 279 B
Yield 2019 3,98%
P/E ratio 2019 7,77x
P/E ratio 2020 6,57x
EV / Sales2019 535x
EV / Sales2020 507x
Capitalization 8 603 B
Chart LOTTE CHEMICAL CORP
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Income Statement Evolution
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Mean consensus OUTPERFORM
Number of Analysts 29
Average target price 297 655,17  KRW
Last Close Price 251 000,00  KRW
Spread / Highest target 67,3%
Spread / Average Target 18,6%
Spread / Lowest Target -24,3%
EPS Revisions
Managers
NameTitle
Gyo-Hyeon Kim Co-President, Co-CEO & Director
Soo-Young Huh Co-President & Director
Dong-Bin Shin Chairman
Seong Taeg Cho Chief Financial Officer
Gyeong-Bo Kang Executive Board Member & Head-Research VI Team
Sector and Competitors
1st jan.Capitalization (M$)
LOTTE CHEMICAL CORP7 233
LG CHEM LTD--.--%20 086
FORMOSA PLASTICS CORPORATION--.--%19 975
FORMOSA CHEMICALS & FIBRE CORPORATION--.--%16 895
COVESTRO AG4.12%9 167
HENGYI PETROCHEMICAL CO LTD--.--%5 206