Petrochemical Companies Face Credit Rating Concerns Amid Earnings Slump

Increased Downgrade Pressure in Second Half
Concerns Over Demand Slowdown Amid Rising Naphtha Prices

[Asia Economy Reporter Minji Lee] Domestic credit rating agencies have identified the petrochemical sector as facing high downgrade pressure in the second half of the year. Although international oil prices are on a downward trend, the operating environment for petrochemical companies in the second half is expected to worsen due to the visible global economic recession.

According to the credit rating industry on the 8th, Korea Credit Rating and Korea Investors Service prioritized petrochemical companies as those likely to receive negative rating outlooks due to unfavorable business conditions in the second half. Jonghyun Won, Head of Corporate Ratings at Korea Credit Rating, analyzed, “Demand in the petrochemical industry is closely linked to the global economy. Demand forecasts are weak, and cost increases are not being smoothly passed on to selling prices, so operating profits of petrochemical companies this year could plummet by more than 60% compared to a year ago.”

Looking at just the second quarter, the combined operating profit of three domestic petrochemical companies?LG Chem (AA+), Lotte Chemical (AA+), and Kumho Petrochemical (A+)?was 1.2109 trillion KRW, a decrease of about 2 trillion KRW (65%) compared to the second quarter of last year (3.4887 trillion KRW). This is because international oil prices, which fluctuated between $50 and $60 per barrel a year ago, surged past $100, causing naphtha prices to rise sharply. High oil prices are a significant burden for petrochemical companies that receive naphtha from refiners and produce basic feedstocks such as aromatics and ethylene, as well as synthetic resins using these feedstocks.

Although oil prices eased compared to the first half, expansion issues and demand slowdown pose challenges in the second half. China, having lifted its COVID-19 lockdown policies, is aggressively expanding petrochemical production facilities, which could reignite supply burden issues. China, which pressured aromatic products with large-scale expansions last year, plans to complete ethylene production facilities of around 10 million tons this year. If the supply volume released into the market due to facility expansions exceeds demand and the economic slowdown accelerates, profit declines are expected to occur more rapidly.

Credit rating agencies diagnosed that companies producing basic feedstock products are highly exposed to rating downgrades. Lotte Chemical, which recorded a loss in the second quarter, has a high proportion of basic feedstock products (polymers), so its performance is unlikely to improve significantly in the second half. Moreover, with planned investment in expanding the Indonesia NCC, financial structure improvement is also considered distant. Conversely, LG Chem is analyzed to have lower risk compared to other petrochemical companies because its high value-added (specialty) products provide downside support. The increased profitability of its new business in the secondary battery sector is also positive. Byungchan Bae, Head of Evaluation Team 1 at Korea Investors Service, explained, “Companies with business portfolios concentrated in basic feedstocks will find it difficult to improve operating cash flow in the short term. There is a high possibility that some investment funds will be financed through external borrowing, which is expected to deteriorate financial stability.”