LG Chem’s 2017 3rd Qtr. Earning Surprise
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LG Chem’s 2017 3rd Qtr. Earning Surprise
Company benefit from external factors, including China’s stringent environment regulations

27(Fri), Oct, 2017

A view of LG Chem’s plant in Ochang, Chungcheongbuk-do (Photo: LG Chem)

LG Chem's earnings for the 3rd quarter of 2017 are expected to mount about analysts’ expectations, as the company is benefiting from the effects of hurricanes hitting the United States, China’s stringent environment regulations, and German automakers’ investment into EVs. Surprised by LG Chem’s external benefits, securities analysts are scrambling to revive upward estimates for the company’s 3rd quarter performance, so it makes LG Chem shares top securities companies’ recommendation lists. Chemical industry sources and FnGuide said LG Chem’s operating profit for the 3rd quarter is estimated at 708.4 billion won. Market consensus for Korean securities companies in mid June showed an estimated 640 billion won in operating profit for LG Chem, but the 3rd quarter estimate represents a 10.7 percent jump in three months. LG Chem’s business performance for the 3rd quarter is expected to surge a whopping 54 percent over 460 billion won in the same period of last year. 

Initially, securities companies made lower-than-expected predictions for LG Chem’s performance for the 3rd quarter, predicting that ethylene prices, which have skyrocketed to a record high, would be stabilized somewhat. Ethylene is an essential raw material for producing petrochemical products. LG Chem is the second largest ethylene producer in Korea with an annual production capacity of 2.2 million tons, followed by Lotte Chemical’s production capacity of 3.23 million tons. LG Chem’s business performance is heavily influenced by ethylene prices. 

LG Chem is benefitting from the effects of Hurricane Harvey, which slammed the United States’ largest refinery/chemical complex in Mexico Bay in Texas, which accounts for 55 percent of the U.S. ethylene production. Ethylene prices, which stood at an average of $1,149 in August, surged 14.4 percent to an average of $1,315 for the first 15 days of September. Korean chemical companies are expected to see profits increase for the time being due to low crude oil prices and rising chemical product prices. 

China’s strengthening of environment regulations also serves as a favorable factor for LG Chem’s business performance. In the wake of a fire accident hitting PetroChina’s refinery plant in August, the Chinese government announced steps to relocate all chemical plants in downtown city to outskirts by 2025. 

It also plans to put on hold the operation of chemical plants until year-end to achieve the 2017 goal of improving air pollution. 

The steps will give disadvantages to Chinese chemical companies, which enjoy a competitive edge by producing petrochemical products with the cheaper coal, which in return results in aggravating China’s air pollutions. Chinese chemical companies’ declining plant operation is expected to see demand for LG Chem’s products rise.

LG Chem’s cash cow is still the petrochemical business, but expectations for growth in the battery business are mounting of late. LG Chem’s battery business turned around for a profit in the 2nd quarter of the year for the first time in the sixth quarter, and the company’s business performance in the business is expected to surge. 

German automakers, including Volkswagen, Benz and BMW, together announced a plan to concentrate investments into the EV business during the 2017 Frankfurt Motor Show, one of the world’s top five motor shows, held from Sept. 14 to 24, which is likely to help LG Chem benefit. 

Volkswagen Group plans to pour 20 billion euro (some 27 trillion won) into the EV business by 2030. Buffeted by China’s steps to discriminate Koreans companies against the installation of the Terminal High Altitude Area Defense (THAAD) system in Korea, LG Chem, which has turned its attention to supply EV batteries from Chiba to Europe, is expected to benefit. 

LG Chem’s share prices are expected to keep rising thanks to the high profitability riding on the company’s portfolio focusing value-added products and the attraction of LG Chem as the benefiter of EVs. LG Chem has seen its share prices surge 37.8 percent in tow and half months between late June and Sept. 15, Chu Yoon-jin, a researcher with Volkswagen, said. 

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