Concerns are growing that Korea's petrochemical sector, which saw a sharp improvement in first-quarter results due to the U.S.-Iran war, will post losses in the second half. That is because the risk of "reverse lagging" has increased after importing materials and supplies at high prices during the war. The reverse lagging effect refers to a situation in which profitability deteriorates when product prices fall at the time of sale after buying materials and supplies at high prices.
According to Ministry of Trade, Industry and Resources statistics on the 2nd, as of the 29th, the spot price of ethylene was $960 per ton and the spot price of naphtha was $761 per ton. The ethylene-naphtha spread stood at $199.
The ethylene-naphtha spread is a key indicator for gauging the profitability of domestic petrochemical corporations. The larger the figure obtained by subtracting the price of naphtha, a materials and supplies input, from the product price of ethylene, the higher the corporations' profitability. According to the industry, the spread for the break-even point is estimated at around $200.
With the Strait of Hormuz closed due to the war between the United States and Iran, the ethylene-naphtha spread exceeded $500 in April. After the war, international oil prices surged and petrochemical product prices also jumped, widening the price gap with naphtha purchased earlier.
In the first quarter this year, petrochemical corporations saw a noticeable improvement in results due to the "lagging effect (margin volatility arising from the time gap between feedstock purchases and petroleum product sales)." Lotte Chemical posted an operating profit of 73.5 billion won in the first quarter, returning to the black for the first time in 10 quarters. LG Chem's petrochemical institutional sector also recorded 164.8 billion won in operating profit in the first quarter. Hanwha Solutions' chemical institutional sector and SKC's chemical business each posted profits of 34.1 billion won and 9.6 billion won, respectively.
The problem is that the reverse lagging effect could emerge from the second half. Petrochemical corporations are understood to be feeding into their processes materials and supplies secured at relatively high prices during the war. If oil prices fall, petrochemical product prices also weaken, squeezing margins.
The securities industry expects petrochemical corporations are likely to swing to losses in the second half. According to FnGuide, Lotte Chemical's estimated operating loss in the third quarter is 47.4 billion won, turning to a loss, with a further operating loss of 40 billion won projected in the fourth quarter.
The China-led oversupply that has threatened the very survival of Korea's petrochemical industry also persists. From 2020 to 2024, global ethylene production capacity expanded by about 45 million tons, of which China accounted for 25 million tons. As Chinese companies supplied large volumes of products at low prices, the domestic petrochemical sector struggled with losses for the past several years.
Restructuring of the petrochemical industry being pursued by the government and the industry is also being delayed. The government said it would cut 18%–25% of domestic naphtha cracking center (NCC) capacity. However, with corporations deeply divided over S-Oil's "Shaheen Project," which is set to begin commercial operation early next year at the Ulsan industrial complex, and with corporations whose results have recently improved reluctant to shut facilities, restructuring has failed to gain momentum.
An industry official said, "The temporary improvement in results due to the war is likely to end in the second quarter this year," adding, "In the second half, with the reverse lagging effect and China-led oversupply expected to worsen results again, we need to focus on cutting capacity and, over the longer term, shifting our business portfolio toward specialty materials."