April's $315/ton average slides to $163 by mid-June, well below the $250 break-even threshold; negative lagging effect and Chinese oversupply cloud the second-half outlook

A view of the petrochemical complex in Yeosu, South Jeolla Province. [Yonhap]
A view of the petrochemical complex in Yeosu, South Jeolla Province. [Yonhap]

Dark clouds are gathering again over South Korea's petrochemical industry, which had briefly swung to profit in the first half of this year on a war-driven demand boost tied to Middle East geopolitical tensions. A key profitability indicator has been cut in half in just two months, falling well below the break-even point, while fears of margin losses in the second half and a Chinese supply glut are compounding earnings concerns.

According to raw-materials price statistics from the Ministry of Trade, Industry and Energy, the ethylene spread — the gap between the price of ethylene and its feedstock naphtha, and the industry's benchmark profitability gauge — has been falling sharply this month. After averaging $315 per ton in April, the spread had shrunk to around $163 as of June 19. Given that the industry generally places the break-even threshold at $250, producers have effectively entered a deep loss-making zone where every ton manufactured adds to their losses.

Until recently, the industry had been riding a wave of optimism. A surge in product prices driven by the escalating Middle East war helped companies return to profit in the first quarter, and that momentum was expected to carry into the second quarter. According to FnGuide, the consensus estimate for LG Chem's second-quarter operating profit stood at 354.2 billion won ($229 million), pointing to a return to the black. LG Chem posted operating profit of 164.8 billion won in its petrochemical division in the first quarter, but battery-segment losses pushed the company to an overall operating loss.

Hanwha Solutions and Kumho Petro Chemical were also projected to post sharply higher year-on-year profits of 175.7 billion won and 121 billion won, respectively. Lotte Chemical was expected to report operating profit of around 100 billion won for the second quarter. These gains were largely attributed to a positive lagging effect — the profitability boost that comes from feeding lower-cost raw materials secured earlier into production while selling finished goods at elevated prices.

However, a sudden US-Iran end-of-war agreement eased Middle East tensions and sent international oil prices into a clear downtrend. In the second half, companies will have to process expensive naphtha purchased at peak prices earlier this year, even as product selling prices fall in line with cheaper crude — a recipe for negative margins. While some inventory stockpiling can provide partial price support, many analysts warn that a rapid recovery in supply capacity could push the industry back to the pre-war oversupply conditions.

Structural oversupply looks set to worsen further. Hwang Seong-hyeon, an analyst at Eugene Investment & Securities, said China's new chemical production capacity is estimated to exceed 34 million tons in the second half, a sharp increase from 4.35 million tons in the first half of this year. "Weak demand for pipes, construction materials and interior products due to China's sluggish real estate market means a strong rebound in commodity chemical demand will be difficult," he said.

Credit outlooks for companies are also wavering amid fears of a prolonged industry downturn. NICE Credit Rating recently revised its outlook on Lotte Chemical's unsecured bond rating of AA- from "stable" to "negative," and lowered Kumho Petro Chemical's A+ outlook from "positive" to "stable." The moves signal that the prolonged slump is now constraining even the potential for credit improvement.

Restructuring talks delayed by the war have also become an urgent priority. Discussions slowed during the conflict as companies focused on securing raw materials, but the need for consolidation is growing as oversupply persists. HD Hyundai Chemical and Lotte Chemical took the first step at the Daesan industrial complex, and a broad framework for consolidation between Lotte Chemical and Yeosu NCC at the Yeosu complex has taken shape. However, talks within the Yeosu complex's second project — involving LG Chem and GS Caltex — and at the Ulsan complex, where S-Oil, SK Geocentric and Korea Petro Chemical IND are based, remain deadlocked due to disagreements among the parties.


keg@heraldcorp.com