As the war between the United States and Iran drags on, domestic petrochemical corporations are expected to extend their earnings improvement into the second quarter after the first. Revenue is rising as they sell petroleum products made with materials and supplies purchased at low prices before the war at higher prices. However, the outlook for the second half is not bright. That is because the cost of materials and supplies purchased after the rise in international oil prices is likely to be reflected negatively in results.
According to the petrochemical industry on the 11th, LG Chem posted an operating profit of 165 billion won in the petrochemical business in the first quarter of this year, returning to the black. Hanwha Solutions' institutional sector for chemicals and SKC's chemical business also recorded profits of 34.1 billion won and 9.6 billion won, respectively. Kumho Petrochemical likewise posted an operating profit of 59.4 billion won. Lotte Chemical also swung to a profit with first-quarter operating profit of 73.5 billion won.
There is an outlook that the earnings improvement of petrochemical corporations will continue in the second quarter. According to FnGuide, Lotte Chemical's estimated operating profit for the second quarter was projected at 18.7 billion won. Compared with the operating loss of 433.9 billion won in the fourth quarter of last year, this is a significant improvement. Kumho Petrochemical's second-quarter operating profit is expected to reach 113.8 billion won, about double the first quarter.
Many analysts say the increase in operating profit at petrochemical corporations is due to the "lagging effect (margin fluctuations caused by the time gap between purchasing feedstock and selling petroleum products)."
Before the outbreak of the U.S.-Iran war, the basic olefin spread (the price difference between final products and materials and supplies) failed to exceed the break-even point ($250–$300 per ton), leaving petrochemical corporations mired in losses. However, as petroleum products produced using past low-priced feedstock were sold at higher prices after the war, the spread rose. The recent basic olefin spread is said to have far surpassed the break-even point.
Utilization rates at corporations' naphtha cracking center (NCC) facilities are also gradually rising. Lotte Chemical raised the utilization rate at its Daesan plant, which had been maintained at 73% after the Middle East crisis, to 83% last month. Recently, Yeochun NCC also increased its rate from 60% to 65%, and Korea Petrochemical Ind from 62% to 72%. LG Chem said during its first-quarter conference call that it would raise the second-quarter average utilization rates at the Daesan and Yeosu Plant 1 to above 75%.
However, many expect a reverse lagging effect starting in the second half. This occurs when materials and supplies are purchased at high prices but product prices fall at the time of sale, worsening profitability. It mainly occurs during oil price declines and eats into operating profit as inventory valuation losses. In mid-March, Dubai crude futures prices neared $140 per barrel but fell to $97 as of the day.
Yoon Jae-sung, an analyst at Hana Securities, said, "Corporations that were urgently securing inventories stopped doing so as the possibility of an armistice emerged. Prices of major petrochemical products and spreads are clearly falling," and added, "In June–July, petrochemical corporations appear set to enter a downturn in results."
Korea's three major credit rating agencies are also maintaining a "negative" outlook on the petrochemical industry. A credit rating industry official said, "With an end to the war between the United States and Iran not far off, spread volatility is high and uncertainty over second-half results is significant," and noted, "We will review supply chain stabilization and restructuring effects over the mid to long term and reflect them in credit ratings."