[Into the Stocks] Hukems Leaving Hanwha Solutions... Can Carbon Emission Credits Fill the Gap?

Provided 70% of DNT to Hanwha Solutions... Hanwha Solutions Declares Self-Sufficiency in DNT
Carbon Emission Rights Market Expected to Show 'Low Start, High Finish' This Year... High-Margin Business with Operating Profit Margin Exceeding 90%

HUCHEMS is taking the lead in the CDM business and actively entering the carbon credit market in the future. The photo shows HUCHEMS production facilities equipped with gas reduction equipment.

[Asia Economy Reporter Gong Byung-sun] Concerns are growing as Hanwha Solutions, the largest customer of Huchems, withdraws. Whether the gap left by Hanwha Solutions can be filled through the renovation of existing plants and carbon emission rights is the key to a turnaround.

Huchems is regarded as the number one industrial nitric acid company in Korea. It supplies most of the nitric acid needed in the domestic market. The total nitric acid production volume is 1.33 million tons, and the production capacity of nitric acid derivatives (DNT) reaches 260,000 tons. DNT is a raw material for toluene diisocyanate (TDI), which is commonly known for its use in producing polyurethane foam and polyurethane coatings.

The operating profit margin is also not bad. In both 2019 and 2020, the overall operating profit margin exceeded 16%. This is a positive sign that the company's sales are driven by its business activities. Moreover, although the chemical industry’s operating profit decreased by 27.1% year-on-year last year due to COVID-19, Huchems only saw a 10.4% decline, showing relatively good performance.

The external environment also favored Huchems. The spread (price difference between raw materials and final products) of TDI and toluene (TOL), which determine the profitability of DNT, peaked in October last year on a quarterly average basis and then entered a correction phase but rebounded again from February. Sangwon Han, a researcher at Daishin Securities, predicted, “The spread improvement effect will be more significantly reflected in the second quarter than in the first quarter.” Above all, a severe cold wave in the U.S. caused petrochemical facilities to halt operations, expanding the spread.

Korea’s No.1 Industrial Nitric Acid Company... But Simple Sales Structure

However, Huchems’ DNT division has a critical weakness: its sales structure is simple. Due to the explosive and toxic nature of DNT, exports are difficult. Therefore, most sales occur domestically. In particular, Huchems supplied 180,000 tons of the total 260,000 tons of DNT exclusively to Hanwha Solutions, accounting for about 75% of the total.

On the 30th of last month, concerns about this weakness became a reality. According to the electronic disclosure system, Hanwha Solutions announced that it will self-supply 180,000 tons of DNT and 400,000 tons of nitric acid by 2024. The purpose is to strengthen competitiveness in the chemical sector. Huchems was expanding a plant capable of producing an additional 400,000 tons of nitric acid at a cost of 150 billion KRW. The plant’s completion is also scheduled for 2024, coinciding with Hanwha Solutions’ self-supply timeline.

As a result, securities firms pointed out that Huchems’ supply-demand balance could deteriorate and profitability could be damaged. One analyst said, “In the worst case, 120,000 tons of nitric acid used for DNT production could become surplus.” Dongwook Lee, a researcher at Kiwoom Securities, also explained, “Since DNT is difficult to export, existing plants may become idle facilities.” If existing plants become idle, fixed costs of about 20 billion KRW are expected to occur.

Looking at Huchems’ stock price, the news of Hanwha Solutions’ self-supply clearly acted as a negative factor. According to the Korea Exchange on the 20th, as of the 30th of last month, Huchems’ stock price closed at 22,300 KRW, down 13.23% (3,400 KRW) from the previous trading day. Since the stock had risen 19.81% from the 11th to the 29th of last month, showing a recovery trend, this situation is all the more disappointing for Huchems.

There Is Enough Time to Respond by 2024... Carbon Emission Rights Market Expected to Show a Low-High Pattern This Year

However, there is also analysis that Hanwha Solutions’ DNT self-supply will not necessarily lead to losses. The previously mentioned plant expansion could help defend against performance shocks. Kyuwon Hwang, a researcher at Yuanta Securities, predicted, “From 2024, when the plant is completed, it will generate an additional annual operating profit of about 16 billion KRW.”

Although negative factors have occurred, some opinions suggest that the impact has been excessively reflected. Since this will happen three years later, there is enough time to respond in the meantime. Short-term DNT segment profit decline will not occur, and in the mid-to-long term, the DNT plant can be converted into a mononitrobenzene (MNB) plant. Researcher Dongwook Lee said, “The DNT supply contract between Huchems and Hanwha Solutions runs until 2032, so if the 2024 contract is withdrawn, a penalty of about 10 billion KRW will occur,” adding, “Some of the penalty can be used for facility conversion costs.” Also, even if Hanwha Solutions starts self-supply, it will take a long time to operate and stabilize the new plant initially.

Above all, carbon emission rights are expected to lead Huchems. The operating profit margin of the carbon emission rights division exceeds 90% annually, making it a high-margin business. Huchems ended its fixed carbon emission rights supply contract, which sold at 18,000 KRW per ton, and started selling entirely on a spot basis from this year. This opened the way to trade according to the situation. The carbon emission rights market is expected to show a low-high pattern this year. From July, the third phase of the carbon emission rights policy will be implemented, increasing the paid allocation from the existing 3% to 10%. In the mid-to-long term, major countries are accelerating the introduction of carbon taxes to strengthen eco-friendly policies. Korea is also expected to begin serious discussions on carbon tax introduction from this year. Researcher Hwang predicted, “Huchems’ carbon emission rights sales target for this year is 1.43 million tons, with about 30% and 70% expected to be sold in the third and fourth quarters, respectively.”

Reflecting these points, Huchems’ stock price has rebounded this month. From the 1st to the 19th, Huchems’ stock price rose 5.73% (1,250 KRW). During the same period, the KOSPI index rose 4.49% (137.42 points), showing a relatively stronger upward trend.

This content was produced with the assistance of AI translation services.