Even as Naphtha Prices Fall, Petrochemical Industry Remains Uneasy... Breakthrough Lies in New Materials

Q1 Performance Decline Inevitable
Recovery Difficult Within H1
Breakthrough Through Core New Materials

[Asia Economy Reporter Oh Hyung-gil] Although international naphtha prices, which surged after Russia's invasion of Ukraine, have turned downward, the dark clouds hanging over the petrochemical industry remain unchanged. Poor performance is expected from the first quarter, and the outlook is that demand will not recover as much as expected even after the second quarter. The industry is focusing on advanced new materials instead of the existing petrochemical sector to find a breakthrough.

According to the industry on the 6th, the international price of naphtha in the first week of April fell 8.0% from the previous week to $888 per ton. Although it has regained stability compared to the previous month when it exceeded $1,000 after Russia's invasion of Ukraine, it is still nearly 60% more expensive than $557 during the same period last year.

Naphtha, known as the "rice" of petrochemicals, is the main raw material used for plastics and textiles. Since it is produced during the refining process of crude oil, its price is determined by the international oil price trend. This year, the instability has intensified due to supply concerns of Russian naphtha caused by Western sanctions against Russia.

Petrochemical companies estimate that profit deterioration in the first quarter is inevitable due to increased cost burdens. According to FnGuide, LG Chem's operating profit for the first quarter is expected to decrease by 40.7% compared to the same period last year, to 834.7 billion won.

Lotte Chemical is expected to record 144.5 billion won, down 76.8%, and Kumho Petrochemical is expected to record 422.1 billion won, down 31.1%. Hanwha Solutions' operating profit is expected to decrease by 43.8% to 143.2 billion won.

The dominant view is that demand recovery will not be easy for the time being. Due to the resurgence of COVID-19 in China and the lockdown of major cities, the petrochemical demand downturn is expected to be prolonged.

On the other hand, petrochemical companies are expected to offset losses by recording strong performance in the advanced new materials sector.

LG Chem anticipates strong performance centered on electric vehicle battery materials. According to Hi Investment & Securities, the advanced materials division, which recorded an operating profit of 236 billion won last year, is estimated to increase to 353 billion won this year. There is also optimism that sales will be driven as selling prices rise due to increased raw material prices such as cathode materials and separators.

Lotte Fine Chemical is also continuing strong performance in chlorine-based products such as caustic soda and epoxy resin raw materials (ECH). Yoon Jae-sung, a researcher at Hana Financial Investment, explained, "Lotte Fine Chemical has been setting record-high operating profits for five consecutive quarters recently and is expected to break records again in the first quarter. Margins for chlorine-based products and urea water are improving."