Due to Rising Raw Material Prices
South Korean petrochemical companies’ business conditions are deteriorating with raw material and product prices going up and down, respectively.
Lotte Chemical recorded an operating loss of 21.4 billion won in the second quarter of this year whereas its operating profit was 594 billion won in the second quarter of 2021. This is because the import price of naphtha as a raw material has risen a lot and the prices of its products such as ethylene and propylene have fallen due to a sluggish demand. Lotte Chemical is the largest ethylene producer in South Korea.
On average, naphtha accounts for 70 percent of the manufacturing cost of a petrochemical product. According to industry sources, the ethylene-naphtha price difference, a main indicator of petrochemical companies’ profitability, is currently below the break-even point of US$300 per ton after having dipped below US$100 last month. At present, the price of naphtha is rising along with the price of crude oil, while the former is not being reflected in petrochemical product prices, which results in the companies’ falling profitability. Korea Petrochemical Ind and Yeochun NCC are in the same situation as Lotte Chemical.
The operating profit of LG Chem, the largest petrochemical company in South Korea, was 878.4 billion won in the second quarter of this year, down 59 percent from a year ago. Likewise, Kumho Petrochemical’s operating profit dropped 53 percent to 354 billion won.
Their recession is likely to continue for the time being as the global economy is yet to recover and they are entering a low season. They are trying to overcome the difficulty by increasing the use of LPG as an alternative to naphtha and diversifying their businesses. For example, Hanwha Solutions recently recorded an all-time high Q2 operating profit of 277.7 billion won despite its chemical business unit’s operating profit that dropped more than 20 percent and this was led by performance improvement at its solar power business unit.