The domestic petrochemical sector is reeling from uncertainty as Middle East tensions reignite. Spot prices for naphtha (product), an essential basic feedstock for the petrochemical industry, have climbed steeply, worsening conditions to the point that the spot ethylene spread has turned a negative (-) margin. The ethylene spread (ethylene price minus naphtha price) is regarded as a key profitability indicator for petrochemical corporations.
The industry says it is still in a revenue-generating range because the one-month delayed spread, which reflects shipping and production, matters more than the daily changing spot price. But it is concerned that the volatility in naphtha prices is adding to second-half uncertainty. As a result, projections for petrochemical earnings vary widely across the securities industry.
According to the energy industry on the 29th, the spot ethylene spread was -$17.74 per ton (t) on the 22nd. The next day, the spread was -$5.75 per t. The spot ethylene spread is the ethylene price minus the naphtha price on the day, and a negative reading is unusual.
This was due to a jump in spot prices as supply concerns for naphtha, the feedstock, resurfaced when tensions between Iran and the United States intensified at the time. When the ethylene spread turns negative, petrochemical corporations lose money the more they run their plants. The industry generally sees the breakeven point for the ethylene spread at $250–$300 per t.
Weekly price trends are also unstable. According to raw material price information from the Ministry of Trade, Industry and Resources, the average international ethylene price last week was $940 per ton. In contrast, naphtha was $968 per ton, leaving the ethylene spread at a negative $28.
The petrochemical industry views heightened uncertainty as the biggest risk. Even if the short-term ethylene spread does not immediately affect earnings, it can determine the medium- to long-term price direction.
In practice, the industry puts more weight on the one-month lagging spread. That is because there is a physical time gap from purchasing naphtha as a raw input, transporting it, processing it into products, and selling them. This metric is considered more accurate for gauging corporations' profitability.
According to Samsung Securities Research Center, as of the 27th, the one-month lagging ethylene spread was $331. In other words, the margin of today's selling price minus the raw input price from a month ago exceeds $300.
A source at a petrochemical corporation said, "We usually reach medium- to long-term contracts through price negotiations and bring in naphtha, so the spot ethylene spread does not immediately affect earnings," and added, "What is most unsettling is that we cannot predict the direction of results as naphtha prices surge and plunge every day."
Given the circumstances, earnings outlooks for the petrochemical industry are sharply divided even within the securities industry. Petrochemical corporations posted strong results in the first quarter, but many expect results to weaken over time as reverse-lag effects emerge. The reverse-lag effect refers to losses that occur when raw inputs purchased at high prices are fed into production, only for market prices to fall when the products are actually sold.
According to financial data provider FnGuide, Lotte Chemical's expected operating profit for the second quarter is 135.6 billion won, while the third quarter is projected to show an operating loss of 14.8 billion won. With petrochemicals accounting for about 70% of total sales, Lotte Chemical's results hinge on petrochemical market conditions.
Earnings forecasts vary widely by securities firm. Jeon U-je, a researcher at KB証券, said of Lotte Chemical, "Second-quarter operating profit is expected to be 255.9 billion won, beating the market consensus by 231%," and noted, "The petrochemical industry is shifting from oversupply to short-term undersupply and easing long-term oversupply, improving market conditions."
By contrast, researcher Yun Jae-seong at Hana Securities said, "Lotte Chemical is expected to post 66.9 billion won in operating profit for the second quarter, 52% below the market consensus," and added, "Higher raw input prices will be reflected in third-quarter results, leading to a reverse-lag effect."
If the short-term undersupply of petrochemical products persists and corporations retain pricing power, a surprise result is possible; conversely, if a reverse-lag is deemed to have begun, weaker results are expected.
Meanwhile, as supply chain risks have grown since the Middle East crisis, the government is again reviewing the supply and demand situation for naphtha and petrochemical products. At the "Emergency review meeting on the supply and demand of naphtha and petrochemical products" held at the Korea Chamber of Commerce and Industry in Seoul on the 28th, the Ministry of Trade, Industry and Resources said it expects the current Middle East situation to have a limited short-term impact on Korea's naphtha supply.
The domestic petrochemical industry has secured the naphtha it needs through next month at levels above last year, and inventories of petrochemical products are also seen as stable.