Ethylene prices hurt local petrochemical firms

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Ethylene prices hurt local petrochemical firms


Falling ethylene prices are taking their toll on local petrochemical companies’ bottom lines.

As ethylene prices fall to their lowest level since the 2009 global financial meltdown, the local petrochemical industry is reporting far worse profits for the second quarter compared to a year earlier.

Their losses are expected to continue throughout the year.

According to data from the Ministry of Trade, Industry and Energy, the price of 1 ton of ethylene fell to $761 last month, nearly half of the $1,380 posted on Aug. 17 last year. Although prices had remained above $1,000 per ton until last year, they started falling in January, averaging $934 that month.

Prices recovered a bit in February (an average $1,141) and March ($1,012), but the fall continued in April with ethylene prices hitting an average of $990 per ton.

As ethylene becomes cheaper, profit levels tend to erode.

LG Chem said last week its operating profit for the second quarter this year fell 62 percent to 267.5 billion won ($226 million) compared to a year earlier. The company’s president, Shin Hak-cheol, said the entire petrochemical market struggled.

According to analysts, Lotte Chemical’s operating profit for the second quarter will be around 364 billion won, down 48 percent from a year earlier. They believe the situation for Hanwha Total will be similar.

Industry sources blame oversupply from North America. They say U.S. chemical firms are producing more and cheaper ethylene from shale gas, while demand for ethylene has remained the same as trade conflict between Beijing and Washington continued.

“Prices for raw materials dropped as the shale gas supply significantly increased, which contributed to the oversupply of ethylene and the resulting price fall,” an industry source said.

The ethylene supply is expected to continue rising, which is bad news for local petrochemical companies. Local ethylene production volume is expected to reach 13.3 million tons by 2023 from the current 10 million tons.

Korean petrochemical companies are already manufacturing more than 10 million tons of ethylene every year. LG Chem produces 2.45 million tons of ethylene per year, followed by 2.33 million tons by Lotte Chemical, 1.95 million tons by Yeochun NCC and Hanwha Total’s 1.4 million tons.

SK Innovation is planning to open an ethylene plant in China by 2020 that would produce 1.1 million tons of ethylene annually. GS Caltex is also preparing to build its own ethylene plant in Yeosu, South Jeolla.

When Lotte officially opens its $3.1 billion ethylene manufacturing plant in the United States, LG Chem’s production volume could rise to 4.7 million tons per year.

Analysts are lowering their profit estimates for local petrochemical companies and remain pessimistic about their share prices.

“We are lowering Lotte Chemical’s operating profit estimate for this year by 8 percent to 1.3 trillion won,” said Lee Do-yeon, an analyst at Korea Investment & Securities.

“This decision is largely based on changes in the company’s share price over the past five years and the decreasing spreads in its ethylene business.”

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