[Click eStock] "Lotte Chemical, Chemical Product Price Increase... Profitability Improvement Expected"

KB Securities Report

[Asia Economy Reporter Minji Lee] KB Securities maintained its buy rating and target price of 504,000 KRW for Lotte Chemical on the 5th, citing expected profitability improvement due to rising chemical product prices.

Baek Young-chan, a researcher at KB Securities, said, "The possibility of entering a full-fledged upcycle in the global chemical industry from this year increases investment attractiveness," adding, "If the improvement in first-quarter earnings is confirmed, the outlook for the chemical industry’s recovery will gain more credibility."

The strong prices of chemical products have continued in both February and March. As of March 3, the ethylene price based on Korean exports rose about 6.9% from the previous week to $1,090 per ton. The prices of HDPE and PP based on Chinese imports increased by 2.6% and 2.5%, respectively, from $1,200 to $1,230 during the same period.

Researcher Baek said, "The inflow of offshore supply caused by the Texas cold wave in the U.S. led to price increases," and "China’s inventory accumulation is also estimated to be an important factor driving price rises." With increased production in IT and automotive sectors, purchasing demand for chemical products in the first half of the year is also rising, suggesting a strong possibility of improved first-quarter earnings.

Although there are concerns about supply in the chemical industry, these are unfounded. The expected global ethylene capacity expansions for this year and next year are 8.41 million tons and 7.7 million tons, respectively. The average ethylene demand increase over the past 10 years was 5.86 million tons. While oversupply might be suspected based on typical demand, considering the rapid rise in ethylene demand after the economic downturn, concerns about supply are deemed excessive.

Researcher Baek stated, "Due to COVID-19, global ethylene demand growth is estimated at -2.3%, but this year, demand growth of around 5% is expected due to economic recovery and base effects," adding, "With demand expansion, the global chemical industry is expected to enter a boom phase until next year."

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