Oversupply, weak economy to hit margins: Lotte Chemical

South Korean petrochemical producer Lotte Chemical expects profit margins on olefins and aromatics to remain squeezed in the current quarter, as regional capacity expansions add to oversupply and global economic turmoil threatens to undermine demand.

Profits for polypropylene (PP), polyethylene (PE) and other olefins will remain weak amid Asia-Pacific capacity additions, Lotte said. The company's outlook is similar for paraxylene (PX) and other aromatics, mainly because of large-scale capacity additions in China.

Aromatics were hit especially hard in October-December 2019, sending Lotte to an operating loss of 27bn won ($22.7mn) in the segment, compared with a profit of W23bn a year earlier. The company said PX markets were increasingly glutted because of Chinese capacity additions and slumping demand, even as some producers reduced output.

Operating profit from olefins rose by 30pc year on year to W114bn in the quarter, but the average operating margin was equivalent to just 6.6pc of sales, compared with a range of 10.6-11.1pc in the preceding three quarters. Lotte's overall fourth-quarter profit dropped by 25pc to W49bn, while profit for the full year slid by 54pc to W758.2bn.

The company's Lotte Chemical Titan unit in southeast Asia operated at a W3bn loss in the latest quarter. The unit has limited capacity for an upturn in January-March because of volatile feedstock costs and increased competition in the region.

One bright spot is the company's ethane-cracking joint venture in Louisiana, which started up last May. Lotte said the venture will continue to achieve "robust profitability", even as new US cracking capacity potentially drives up ethane prices. The joint venture has posted operating profit margins exceeding 23pc in each of its three quarters of operations, including 25.7pc in October-December. Lotte owns an 53pc stake in the 1mn t/yr cracker venture, with Atlanta-based Westlake's subsidiary Axiall holding the remainder.

By Tony Cox