Restructuring NCCs... Some Companies to Post Surprise Q3 Results [Click e-Stock]

There is an analysis suggesting that Naphtha Cracking Center (NCC) companies undergoing restructuring are expected to post a surprise performance in the third quarter. On October 16, Hana Securities released a report titled "Refining Margin Strength and NCC's Return to Profitability," predicting that some NCCs will return to profitability and that many petrochemical companies will see a reduction in losses.

NCCs are large-scale facilities that produce basic petrochemical raw materials such as ethylene and propylene by cracking petroleum refining by-products at high temperatures. Since 2010, Middle Eastern oil-producing countries have been actively expanding and building new NCCs, which has gradually weakened the competitiveness of NCCs in other regions, including South Korea.

Business Environment Improving

The business environment, which has challenged NCC companies and the broader petrochemical industry over the past three to four years, is beginning to change. First, oil prices have entered a stabilization phase. Adjustments in operating rates and restructuring in response to sluggish market conditions are starting to yield results. In August, the Ministry of Trade, Industry and Energy and ten major petrochemical companies signed a "Voluntary Agreement for Industrial Restructuring to Revitalize the Petrochemical Industry," focusing on reducing NCC capacity by 2.7 to 3.7 million tons.

Interest rate cuts, driven by stabilized oil prices and inflation, have also positively affected demand. In particular, the potential for a strong U.S. natural gas market due to increased LNG exports next year, as well as sanctions on China and India resulting from Russian and Iranian crude oil imports, are expected to help South Korean companies regain their competitive edge. Additionally, the use of low-cost feedstock is contributing to improved performance for NCC companies.

Korea Petrochemical Ind. Returns to Profit After Two Years

Yoon Jaesung, an analyst at Hana Securities, commented on petrochemical companies, stating, "It is significant that Korea Petrochemical Ind. has returned to profitability after two years, given its low depreciation costs and high operating rates." He added, "Lotte Fine Chemical, which is benefiting from strong performance in ECH (epichlorohydrin, a raw material for epoxy resins and synthetic glycerin), has good short-term momentum, and Kumho Petrochemical, which is expected to benefit from a strong natural rubber market next year, is still significantly undervalued."

Hana Securities estimated that, among petrochemical companies, Korea Petrochemical Ind. and Lotte Chemical would exceed the securities market consensus for third-quarter results by 123% and 27%, respectively. LG Chem, Kumho Petrochemical, KCC, and Lotte Fine Chemical are expected to meet the consensus.

However, Hana Securities noted that, unlike petrochemicals, the solar power sector does not have a favorable environment for passing on increased costs, as the main market in the United States continues to experience oversupply despite restructuring news from China. The firm believes that buying opportunities may arise after restructuring becomes more concrete next year.