Global petrochem supply glut divides Korea’s winners, losers

The global petrochemical market is grappling with oversupply amid weak demand in the pandemic era, creating a clear divide between winners and losers among South Korea’s petrochemical makers.

LG Chem Ltd., Korea’s largest chemical maker, said last month its quarterly revenue and operating profit rose to all-time highs in the July-September period thanks to robust sales in its cash-cow petrochemical business.

Analysts said demand for its key products such as acrylonitrile butadiene styrene (ABS) and acrylonitrile butadiene latex (NB Latex), used to make plastic wrapping and a variety of industrial and consumer plastic goods, was rising amid the COVID-19 pandemic.

Hyosung TNC Corp., the world’s largest spandex yarn provider, swung to a 60 billion won ($54 million) profit in the third quarter, while Kumho Petrochemical Co.’s operating profit also surged to its highest level in many years.

By contrast, Lotte Chemical Corp.’s operating profit fell by more than a third. Other companies, such as Korea Petrochemical Ind Co., saw their profit increase only by low single digits.

Industry analysts say the earnings divide was created by an oversupply in upstream products like ethylene, a basic material for a variety of plastics, at a time when downstream products, which use applied materials, are in relatively greater demand given the pandemic-era non-contact business environment.

SUPPLY OUTPACES DEMAND

“What’s happened, I think, is that production has got ahead of demand, particularly at upstream plants,” said an industry official. “But demand for applied products has been strong.”

According to the petrochemical industry, the prices of high-density polyethylene (HDPE), used in tubs and pallets, rose 2.2% in October from the previous month. Prices of low-density polyethylene (LDPE), widely used in clear plastic bags, gained 7.3% on month. Linear low-density polyethylene (LLDPE), which is also used in plastic bags and cable coverings, rose 5.6%. However, the price of ethylene, a basic material for the PE segment, fell 7.3% in the corresponding period.

Situations are similar in the propylene segment.

Polypropylene (PP), a key polymer found in plastic film, saw its prices rise 7.5% in October from September, while the price of its basic material, propylene (PP), fell 1.1%.

AGGRESSIVE FACILITY EXPANSION

Industry officials attributed the rare price gap between basic and applied materials to a supply glut created by aggressive expansion of upstream facilities by petrochemical firms, particularly in China and the Middle East, in the past two to three years. Korean companies followed their global peers.

In 2018, Lotte Chemical opened a $3.1 billion petrochemical plant in the US to manufacture ethylene using shale gas, which is cheaper than naphtha, the main feedstock for various plastics products. S-Oil Corp., a local refiner, also established a basic material chemical plant in the same year.

Industry data showed facilities that can produce about 8.73 million tons of ethylene globally have been newly created this year alone, outpacing an additional demand of 6 million tons.

Analysts say any near-term price recovery in upstream products is elusive as oversupply situations are expected to persist for the time being.

Local refiners such as GS Caltex and Hyundai Oilbank are shifting their focus toward petrochemical products amid the collapse in the price of naphtha, their main product.

Write to Jae-Kwang Ahn at ahnjk@hankyung.com
In-Soo Nam edited this article.