Upside Potential for Prices of Chemical Products in Asia
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Maintain BUY and target price of KRW504,000
We maintain BUY and our TP of KRW504,000 for Lotte Chemical. Our investment points include the following: (1) The post-COVID-19 economic recovery should drive up both prices for chemical products and profitability. (2) The global chemical industry is likely to enter a full-fledged upcycle beginning in 2021.
Should earnings improvement for the overall chemical industry be confirmed in 1Q21, we will be that much more confident in our expectation of an upturn.
Upside potential for prices of chemical products in Asia
Prices of chemical products have remained bullish since February. As of March 3, ethylene prices (Korean export-basis) rose 6.9% compared to the prior week to USD1,090/tonne, and HDPE (Chinese import-basis)/PP (Chinese import-basis) jumped 2.6% WoW/2.5% WoW to USD1,200/USD1,230. In February, a diminished influx of products to Asia from the U.S. and Europe, attributable to a cold spell in the U.S., played a part in boosting prices, but strong restocking demand from China also served as a major catalyst. We believe that demand for chemical products was clearly increased in 1H21 amid growing IT and automobile output. On the back of bullish Feb-Mar product prices, Lotte Chemical looks highly likely to see earnings improvement in 1Q21, in our view.
Concern over supply glut in 2021 presents good entry point
This year, some investors are concerned about a possible glut in supply of chemicals. We believe the concern is unfounded. Rather, we see the present time as a good entry point: additions to global ethylene capacity in 2021/2022 are estimated at 8.41mn YoY/7.70mn tonne YoY. When compared against the average 5.86mn-tonne increase in ethylene demand seen over the past decade, one could be misled to think that the industry faces a supply glut. However, we note that in 2014 and 2018, demand jumped by 7.85mn tonne YoY and 8.88mn tonne YoY, respectively, and in 2010 skyrocketed 10.31mn tonne YoY. Those three years are significant in that they were periods of economic recovery following recession; this observation suggests that ethylene demand tends to grow quickly after a recession subsides. For 2020, we estimate the pandemic pushed down global ethylene demand by 2.3% YoY. However, the post-pandemic economic recovery in 2021 and a low comparison base from last year should inflate growth in ethylene demand by around 5.0% YoY (+8.29mn tonne) this year. All in all, we believe the global chemical industry has entered a boom phase, which may last until 2022 given that demand seems set to grow.