[Click eStock] Lotte Chemical Benefits from China's Power Shortage and Supply Disruptions

[Asia Economy Reporter Lee Seon-ae] NH Investment & Securities forecasted on the 21st that Lotte Chemical will benefit from China's power shortage and supply disruptions. The investment opinion 'Buy' and the target price of 380,000 KRW were maintained.

Although large-scale new facilities such as ethylene and propylene in China were expected to start operations in the second half of the year, the operation schedule is expected to be delayed due to power shortages and technical issues. The Chinese government has restricted power supply in regions such as Guangdong, Zhejiang, Jiangsu, and Xinjiang since September due to carbon reduction policies and worsening coal supply, causing disruptions in petrochemical facility operations. With increased power demand in winter and restrictions on coal power generation to improve air quality ahead of the February Winter Olympics, a decline in facility operating rates and delays in new facility startups are expected. In the case of coal-based Chinese MEG (CTMEG) and PVC (carbide), production decreases have led to a spread turning strong after October, and due to rising coal prices, there is a high possibility of price increases to reflect costs.

Hwang Yoo-sik, a researcher at NH Investment & Securities, stated, "Coal-based ethylene and propylene production facilities such as CTO/CTP are also expected to see improved profitability of Lotte Chemical's petrochemical products in winter due to decreased operating rates and price increases."

Lotte Chemical's third-quarter operating profit is estimated at 332.8 billion KRW (+71.7% y-y, -44.0% q-q). For LC USA, operating profit increased due to the expansion of MEG spreads, but other business divisions are expected to see decreased operating profits due to demand reduction from Southeast Asia shutdowns and Chinese capacity expansions of some products (PIA, HDPE). However, after China's National Day holiday in October, the Southeast Asian market is expected to normalize, with demand and spreads recovering. For Malaysia's LC Titan, performance recovery is expected in the fourth quarter due to demand normalization and the end of scheduled maintenance.

Researcher Hwang said, "We believe that the supply reduction effect of petrochemical products due to production disruptions in China and the easing of shutdowns within Asia will enable demand recovery," adding, "Fourth-quarter operating profit is expected to improve to 423 billion KRW (+95.9% y-y, +27.2% q-q)."