Coal price surge puts S.Korean petrochemical firms ahead of Chinese rivals

Rising coal prices in China will likely benefit South Korean petrochemical companies such as Lotte Fine Chemical and Hanwha Solutions, by strengthening their price competitiveness over Chinese rivals with heavy coal dependence.

The unit price of coal has been rising rapidly in China from about $200 per ton early this year to about $430 this month. Not only the coal production in the country has been cut following toughened environmental regulations, but the aggravation of Australia-China relations has reduced the import volume from Australia.

Industry analysts note that the price hike will have a direct cost impact on the major Chinese petrochemical players whose manufacturing process requires large volumes of coal. Most Chinese firms use coal-derived materials to produce a range of chemical products including polyvinyl chloride (PVC), epichlorohydrin (ECH) and acetic acid (AA).

PVC is a key material to be hit by the surge in coal prices. China, which accounts for 43% of the global PVC production, mostly uses the carbide manufacturing process that requires coal. On the other hand, most of the South Korean PVC makers including Hanwha Solutions use the ethylene dichloride (EDC) process without coal.

“The global demand for PVCs is rising fast as the major countries around the world are expanding infrastructure spending. 70% of the PVC produced are used in the construction sector,” said an industry official.

Market watchers highlight that aside from the strengthened price competitiveness of Hanwha Solutions’ PVC products, the company’s stock valuation must be revisited as its solar panel business will have lower loss figures starting from the third quarter of this year.

Likewise, Lotte Fine Chemical is projected to benefit as its Chinese rivals are facing a heavier cost burden. The South Korean company produces its main product, ECH, through a propylene-based manufacturing process that does not require coal. In contrast, about 40% of the Chinese makers make ECH from glycerin-based manufacturing processes that use methanol derived from coal.

Domestic securities firms including Daishin Securities, Hi Investment & Securities Co. and Hyundai Motor Securities have recently raised the target price of Lotte Fine Chemical shares. Lotte Fine Chemical’s stock price has moved up by 40% over the last 16 trading days. Its subsidiary Lotte Ineos Chemical Co. makes AA and Vinyl Acetate Monomer (VAM).

“Lotte Fine Chemical’s profitability in chlorine business will be improved significantly,” noted Hyundai Motor Securities.  

Write to Ji-yeon Sul at sjy@hankyung.com
Daniel Cho edited this article.