Demand is sluggish as costs rise due to high interest rates
Profits rapidly deteriorating… 5 out of 10 are in deficit
“Oversupply is in full swing… “Chinese market emergency”
Companies suspend new projects one after another
LG Chem recently halted a large number of new projects being pursued in one business division. This is because long-term investments cannot be guaranteed. At the same time, we began reducing costs across the company. It is recommended to wash and reuse work gloves or to use backing paper. Encouragement for all employees to use up their remaining annual leave has also increased in intensity compared to previous years. The reason LG Chem tightened its belt is because its petrochemical division posted continuous losses from the fourth quarter of last year (October to December) to the second quarter of this year (April to June). The total deficit during this period amounts to 230 billion won. Although it turned into a surplus of 37 billion won in the third quarter (July to September), it is unclear whether the surplus will continue in the fourth quarter and next year. As the ‘cash cow’ (source of cash generation) for new investments such as battery materials and biotechnology was shaken, the entire company was put on alert.
The petrochemical industry, one of Korea’s leading export players, is unable to get out of a long tunnel of recession. This is due to simultaneous adverse events on both the supply and demand sides.
As a result of Dong-A Ilbo analyzing the financial status of 10 major domestic petrochemical companies on the 10th (as of January to September each year), their average operating profit rate sharply deteriorated from 11.5% in 2021 to 2.7% last year and 0.8% this year. Five companies, Lotte Chemical, DL Chemical, Isu Chemical, Hyosung Chemical, and Korea Petrochemical, are in deficit this year.
The cost of sales ratio, which is the ratio of cost of sales (raw materials, labor costs, etc.) to sales, is gradually increasing. The average cost of sales ratio of petrochemical companies rose to 81.8% in 2021 and 89.9% last year, and even exceeded the 90% mark this year (91.4%).
The Korean petrochemical industry mainly produces various chemical products and basic raw materials by cracking naphtha from crude oil using naphtha cracking equipment (NCC). Chemical products and basic raw materials are used in disposable products, films, home appliance interior materials and parts, automobile interior materials, masks and gloves, etc. As inflation due to high interest rates and high oil prices continues and global demand for downstream industries decreases, the petrochemical industry, which supplies raw materials, has been hit hard. Demand for quarantine products (masks, gloves), which had increased explosively during the novel coronavirus infection (Corona 19) pandemic, has also decreased significantly. This also coincided with a slump in the global real estate market, including in the US and China.
Here, sluggish demand in China was the final blow. As of last year, China accounted for 39.1% of domestic petrochemical product exports. The effect of China’s re-opening (resumption of economic activities) also fell short of expectations.
In this situation, the risk of oversupply from China is in full swing. The Chinese government is increasing its petrochemical self-reliance rate by significantly expanding domestic petrochemical facilities. Not only has profitability deteriorated immediately, but there are concerns that the Chinese market could quickly be lost to local companies in the mid to long term.
According to Hanwha Investment & Securities, the NCC margin of Lotte Chemical, LG Chemical, and Yeocheon NCC was $248 (about 330,000 won) per ton from January to November of this year, down 18% from $301 per ton in the same period last year.
Kim Dae-jong, a professor of business administration at Sejong University, said, “The difficult situation in the petrochemical industry goes beyond what is shown in numbers,” and added, “The difficulties may continue until global uncertainty is resolved.”
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.