Supply Shortages Intensifying
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
Thanks to Covid-19 and year-end shopping season effects, petrochemical products are enjoying solid spreads. And, with multiple plants under shutdown, supply shortage issues have been intensifying. Firms running normal operations are to take full advantage of the current market situation.
Supply shortages intensifying amid solid year-end demand
The spread and demand pictures for petrochemical products are both looking bright thanks to effects of Covid-19 and year-end online shopping. Upwardly adjusting our annual OP estimates, we raise our TP on KPIC by 25% from W240,000 to W300,000, adhering to a Buy rating.
Already benefiting from Covid-19 effects, demand for wrapping film, hygiene product, home appliance and indoor items is set to accelerate in line with year-end online shopping effects. With contactless purchase practices on the rise, demand for major petrochemical products (including PE, PP, PS, and ABS) should remain solid as long as social distancing restrictions remain in place. On the supply side, Lotte Chemical’s Daesan Plant (NCC 1.1mn tons) and LG Chemical’s Yeosu Plant (NCC 1.2mn tons) are both currently under shutdown. Accounting for a combined 23% of total domestic ethylene production, the two facilities are both not expected to resume operations until late December. Accordingly, supply shortages are expected to linger through at least December.
To strengthen eco-friendly businesses via expansion of secondary battery materials capacity
In September, KPIC announced plans to boost its NCC capacity by 100,000 tons—construction is slated to wrap up by end-2022. Via this expansion, we believe that KPIC is aiming to: 1) procure raw materials for HDPE for use in LiBS; and 2) prepare for ethylene supply shortages in Ulsan after the upcoming shutdown of SK Global Chemical’s NCC (scheduled for end-2020, capacity of 200,000 tons pa). With KPIC already boasting the highest share of the global market for HDPE for use in LiBS, related earnings are likely to further expand in line with the ongoing EV market growth. Moving ahead, the rising sales portion for low-carbon economy-related products is to strengthen recognition of the company as being an environmentally-friendly company.
For 4Q20, we estimate OP of W84.1bn (+610.7% y-y, +33.2% q-q). Last month, spreads hit their highest monthly averages so far this year. In addition, spreads for the firm’s major products (including BD, ethylene and propylene) appear be expanding even further in November. Thus, although shipments are likely to slip in the second half of December due to seasonal effects, KPIC’s OP should display q-q growth in 4Q20.