Korean petchem producers cut output on weaker margins

South Korea’s petrochemical makers reduced ethylene production as a global economic slowdown is expected to hurt demand in the second half with their profitability already down.

Naphtha-fed steam cracker operators including Lotte Chemical Corp., LG Chem Ltd., Korea Petrochemical Ind. Co. and Yeochun NCC Co. (YNCC) cut operating rates of the ethylene plants to low-80%, according to sources. Those cracker operators maximized their runs last year on strong demand amid COVID-19.

That came as the spread between ethylene and naphtha, a major feedstock of the industrial chemical, narrowed to $101 per ton, about a third of the usual breakeven point of around $300, as of Aug. 19, according to South Korean government data. The spread was close to $500 in April.

Ethylene prices have lost 41.9% in the last four months as China’s economic slowdown slashed demand, while naphtha prices have declined 22.5% in the same period on falling crude oil prices.

FEW SIGNS OF IMPROVEMENT AFTER SLUGGISH EARNINGS

The declining ethylene-naphtha spread hurt domestic petrochemical companies’ earnings as ethylene normally makes up as much as 40% of total products manufactured from crackers.

Lotte Chemical reported an operating loss of 21.4 billion won ($16 million) in the second quarter, compared with a profit of 594 billion won a year earlier. Korea Petrochemical and YNCC also swung to operating losses in the April-June period with deficits of 43 billion won and 33.9 billion won, respectively.

LG Chem’s operating profit more than halved to 878.4 billion won from 2.1 trillion won a year ago.

Their operating cash flow, a measure of the amount of cash generated by a company's normal business operations, also deteriorated with LG Chem’s operating cash flow at minus 431 billion won and Lotte Chemical’s at minus 225.9 billion won.

The industry is unlikely to rebound anytime soon, given sluggish demand amid growing fears of a global recession. LG Chem and Lotte Chemical’s operating profits were forecast to tumble 78% and 50%, respectively, according to analysts.

Write to Kyung-Min Kang at kkm1026@hankyung.com
Jongwoo Cheon edited this article.