Increase in China's Self-Sufficiency Rate Makes Domestic Competitiveness Decline Inevitable
Lotte and LG Have High Proportions Related to NCC and PDH
SK, with High Cyclical Proportion, Also Faces Financial Burden
Hanwha's Petrochemical and Solar Power Performance Rebound Delayed
Amid continued sluggishness in the petrochemical industry, it is forecasted that the financial burdens on domestic companies engaged in related businesses will persist for the time being. While each company plans to restructure their business portfolios through new business investments, it is expected that it will take time to generate meaningful earnings.
On the 9th, NICE Credit Rating held the '2024 Credit Seminar' at the Korea Exchange Conference Hall, diagnosing the credit risks of major groups such as SK, LG, Lotte, and Hanwha in light of the long-term downturn in the petrochemical industry and the decline in the domestic real economy.
On the 9th, a Q&A session was held during the '2024 Credit Seminar' at the Korea Exchange Conference Hall. [Photo by Lee Seong-min]
NICE Credit Rating assessed that Korea's petrochemical industry, which relied heavily on exports, is experiencing a decline in mid- to long-term competitiveness due to China's increased self-sufficiency. In particular, since raw materials are entirely imported, it is expected that restructuring will begin centered on naphtha cracking facilities (NCC) with weak cost competitiveness.
Senior Researcher Kim Seoyeon stated, "With China's capacity expansions concentrated in NCC and propane dehydrogenation (PDH) facilities, i.e., olefin base feedstocks and polypropylene (PP), the oversupply situation has significantly worsened, so companies with business portfolios focused on these products are expected to face unfavorable business environments."
Although these products account for about 30% of the entire domestic industry, their share in the business portfolios of Lotte and LG is relatively high at 36% and 32%, respectively. Domestic companies operating in the petrochemical sector are experiencing a decline in cash generation from existing businesses while expanding financial burdens due to investments in future new businesses. However, NICE Credit Rating evaluated that long-term profitability will recover after business restructuring.
SK, which has a high proportion of cyclical industries such as semiconductors and batteries, is expected to continue facing financial burdens for the time being. Lead Researcher Shin Hoyong noted, "SK's petrochemical division generated annual profits exceeding 1 trillion KRW from 2016 to 2018, but recent performance has deteriorated due to increased supply from China. SKC and SK Innovation, which hold olefin base materials, have recently significantly increased their borrowings." Over five years, SK Innovation's borrowings have increased 3.8 times, and SKC's 2.4 times.
SK Innovation's financial burdens are attributed to battery sector sluggishness caused by the electric vehicle chasm and high capital expenditures (CAPEX). However, it is expected that stable profit generation from refining and lubricants divisions, along with Pre-IPO fundraising and external borrowings, will enable the company to meet funding needs. In SKC's case, considering the poor performance in the chemical sector and the burden of new business investments, the trend of increasing financial burdens is expected to continue.
Regarding the timing of SK On's transition to a deficit, Researcher Shin said, "As a latecomer rapidly expanding production capacity (CAPA), it took time to stabilize initial operating costs and yields. As this stabilizes, positive effects are expected to emerge." He added, "With the expansion of order bases related to the finished car industry, performance is expected to improve going forward."
LG Group, which has recently experienced a significant decline in petrochemical performance, is scheduled to invest more than 9 trillion KRW annually from this year through next year, exceeding operating cash flow, indicating the need for financial burden management.
Researcher Ahn Sujin stated, "LG Group's operating profit decreased by 1.7 trillion KRW from 7.2 trillion KRW in 2018 to 5.6 trillion KRW last year, while the group's net borrowings increased from 18.4 trillion KRW at the end of 2018 to 36.9 trillion KRW at the end of 2023. However, based on stable profit generation in the electronics and telecommunications sectors, improved profitability in the battery sector, and various financing methods such as rights offerings and asset sales, the increase in borrowings is expected to be controlled."
Lotte Group is expected to see a decline in overall profit generation and sustained high debt burdens due to the poor performance of its petrochemical division, which had served as the group's 'cash cow.'
Researcher Choi Youngrok diagnosed, "Although investments in non-petrochemical sectors are expanding, the business proportion of olefin-based basic materials remains high, limiting the diversification effect of the portfolio. Businesses such as Lotte Energy Materials' battery materials are expected to take time to generate meaningful earnings due to the slowdown in the electric vehicle market, which is the upstream industry."
Hanwha Group is expected to experience delays in the recovery of its petrochemical and solar power divisions' performance but is anticipated to offset this with increased order backlogs in its defense and shipbuilding sectors, supporting the group's overall performance. Researcher Choi said, "The petrochemical division, which is expanding into eco-friendly and non-petrochemical products, is expected to see increasing investment scale through 2026."
He added, "In the solar power business, downstream performance related to power plant development is relatively favorable, but the upstream sector manufacturing cells and modules faces increased risks of excess inventory from Chinese products. Considering the excessive inventory turnover rate, it will take considerable time to exit the loss-making phase."
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