LG Chem, the top chemical company in the country, is facing a potential downgrade in its credit rating. This is due to increased supply from aggressive facility expansions in China and a prolonged downturn in the petrochemical industry caused by a global demand slump.

According to credit rating agencies on the 15th, NICE Investors Service maintained LG Chem's credit rating at AA+ but lowered its credit outlook from 'stable' to 'negative' on the 10th. Korea Investors Service also assigned LG Chem a credit rating of AA+ on the 9th, while keeping the outlook at 'stable.' Generally, if one credit rating agency lowers an outlook, others are also likely to adjust theirs.

LG Chem Yeosu Plant /Courtesy of LG Chem

If the credit rating falls, the interest costs will increase when issuing corporate bonds, leading to greater financial burdens. Market interest rates may also reflect the outlook adjustment immediately. This month, LG Chem is set to conduct a demand forecast aiming to raise 300 billion won, but the outlook downgrade may increase interest costs. However, even if the rating drops from AA+ to AA, its ability to repay principal and interest is interpreted as excellent.

In the past, LG Chem's petrochemical institutional sector was a strong source of revenue. Out of a total operating profit of 5 trillion won in 2021, more than 4 trillion won was generated from the petrochemical institutional sector. However, this shrank to 1 trillion won in 2022 and reversed to an operating loss of 143.5 billion won in 2023. By September of the previous year, the cumulative operating loss was 37.1 billion won. According to FnGuide, LG Chem's total revenue last year was estimated at 49.3283 trillion won, with operating profit of 1.1504 trillion won, reflecting decreases of 10.7% and 37.8%, respectively, compared to the previous year.

Amid the increased borrowing burden due to investments in the electric vehicle institutional sector, the slowdown of profits in LG Energy Solution is also a cause for concern. LG Chem's net borrowings surged from 6.3 trillion won at the end of 2020 to 19.3 trillion won at the end of last year, more than tripling. Meanwhile, LG Energy Solution's operating profit is projected to drop from 2.2 trillion won in 2023 to 600 billion won last year.

Other petrochemical companies in addition to LG Chem are also expected to report poor performance. Last year, Lotte Chemical's operating loss is estimated at 751.6 billion won. Hanwha Solutions is also expected to incur a loss of 400 billion won. Only Kumho Petrochemical, which secured profitability from synthetic rubber, is expected to achieve an operating profit of 320 billion won.