Petrochemical Industry Sighs Despite Falling Naphtha Prices... Striving to Find Breakthrough (Comprehensive)

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[Asia Economy Reporter Oh Hyung-gil] Although international naphtha prices, which surged after Russia's invasion of Ukraine, have turned downward, the dark clouds looming over the petrochemical industry remain. Poor performance is expected starting from the first quarter, and the outlook is that demand will not recover as much as anticipated even after the second quarter. The industry is focusing on advanced new materials instead of the traditional 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 stabilized compared to the previous month when it exceeded $1,000 after Russia's invasion of Ukraine, it is still nearly 60% more expensive than the same period last year, when it was $557.

Naphtha, often called the "rice" of petrochemicals, is the main raw material for plastics and textiles. Since it is produced during the crude oil refining process, its price is determined by international oil price trends. This year, the instability has been further exacerbated by supply concerns over Russian naphtha due to 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% year-on-year to 834.7 billion won.

Lotte Chemical is projected to record 144.5 billion won, down 76.8%, and Kumho Petrochemical is expected to post 422.1 billion won, down 31.1%. Hanwha Solutions' operating profit is forecasted 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 lockdowns in major cities, the petrochemical demand slump 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 results 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 rising raw material prices for cathode materials and separators will drive sales prices up, boosting revenue.

Lotte Fine Chemical is also experiencing 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 and is expected to break records again in the first quarter. Margins for chlorine-based products and urea solution are improving."

This atmosphere aligns with petrochemical companies' recent efforts to transform from traditional petrochemical firms into specialized materials companies. Successfully developed materials often lead to business restructuring.

Lotte Chemical has presented a long-term vision to invest 10 trillion won by 2030 in hydrogen and battery materials sectors, aiming to increase sales to 50 trillion won. To accelerate new businesses, it has established separate hydrogen energy and battery materials business units.

An industry official said, "Existing petrochemical business units are maintaining competitive advantages through efficiency improvements, while more companies are focusing on developing battery, eco-friendly, and bio-materials," adding, "This is a strategic aspect to establish a business model that can sustain continuous growth."