Lotte Chemical Co., which has been focused on the production of basic petrochemical materials, is on its way to record the largest profit this year in its history out maneuvering LG Chemical to lead the chemical industry in Korea with its operating profit likely to amount to over 2 trillion won thanks to improvements in low oil price and specifications of its products, industry sources projected recently. According to a consensus by local brokerages, Lotte Chemical is estimated to have raised about 11.77 trillion won ($9.73 billion) in sales last year along with about 1.56 trillion won in operating profit that is a whopping 345 percent jump from the previous year.
The company’s striking earnings growth led its stock prices to surge from the 140,000-won level early last year to top 300,000 won in June. Shares of Lotte Chemical retreated in late October following the announcement of the company’s plan to buy Samsung Group’s chemical units stoking worries over its capability to pay 2.79 trillion won for the buyout, but the company’s shares have soon recovered to the current level of 240,000 won.
Analysts noted that worries over Lotte Chemical’s financial capability to pay for Samsung Group’s chemical unit were exaggerated. As of the three months ended in September last year, Lotte Chemical had 1.65 trillion won worth of cash and cash-equivalent assets. The company is confident in its funding capability and expects the vertical integration of Samsung SDI’s chemical division and Samsung Fine Chemicals with its own business to create synergies, said an official from Lotte Chemical who asked to be unnamed.
Materials such as propylene and butadiene that Lotte Chemical produces are raw materials of epichlorohydrin produced by Samsung Fine Chemicals and engineering plastic and artificial marble produced by Samsung SDI’s chemical unit. Industry experts note that Lotte Chemical’s portfolio, which currently focuses on producing basic raw materials such as ethylene, could be expanded to include specialty chemical products following the Samsung merger.
Reflecting Samsung Group’s chemical units, Lotte Chemical is forecast to boost its sales this year by additional 2.53 trillion won and operating profit by 176 billion won.
Analysts also note that like last year, the overall industry conditions are expected to be favorable to Lotte Chemical this year. The company could improve its operating income in 2015 partly because the price of petrochemical products did not fall much despite plunging oil prices. Lotte Chemical’s margin from selling naphtha-polyethylene and mono ethylene glycol (MEG) has also increased.
Using naphtha extracted from crude oil, Lotte Chemical produces ethylene, polyethylene (PE), and polypropylene (PP). The company’s profit increases when margin improves with either a rise in ethylene, polyethylene, and polypropylene prices or a fall in naphtha price. Analysts project that the company’s margin will likely remain solid this year as the price of West Texas Intermediate (WTI) crude oil has fallen to the $20 per barrel mark earlier this year and its competitors have not decided to increase their production.
Demand outlook also looks bright. Despite concerns over the possibility of a hard landing of China’s economy, the volume of polyethylene imports is expected to continue to grow 10 percent annually. Demand for materials produced by Lotte Chemical is also likely to grow steadily this year once Hyosung begins operation of its polyketon manufacturing facility as well as Kumho Polychem of its new factory.
Lotte Chemical is also expected to benefit from the Iranian boon following the lifting of international sanctions. South Korea’s largest export item to Iran is synthetic resins, which account for 10 percent of total exports. Analysts note that exports of synthetic resins to Iran, particularly of polypropylene, can increase following the growth in purchasing power.
A view of Lotte Chemical’s plant complex in Yeosu, South Jeolla Province.(Photo: Lotte Chemical)
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