Chemical Stocks Deeply Troubled by Weak Market Conditions and Rising Oil Prices

Chemical Industry Index Down 4% Over Two Months
Continued Oil Price Rise Also a Negative Factor
Lotte Chemical Down 7%, Daehan Petrochemical Down 10%

[Asia Economy Reporter Minji Lee] Investment sentiment toward chemical stocks is declining as selling prices fall due to pressure from large-scale capacity expansions and raw material oil prices continue to soar.

According to the Korea Exchange on the 25th, the KRX Energy & Chemical sector index fell 3.9% from 4181.01 to 4014.37 over the past two months as of the previous day. Considering that the KOSPI (4.39%) and KOSDAQ (2.97%) indices rose during this period, this performance appears weak. Among related stocks, Lotte Chemical fell 7% during the same period, while Daehan Petrochemical (-10%), Kumho Petrochemical (-5.7%), and LG Chem (-6.8%) also declined. However, LG Chem has shown an upward trend since early this month after forming a bottom at 802,000 KRW, as its business value centered on cathode materials was re-evaluated.

The recent stock price trend contrasts with earnings forecasts. According to securities firms' estimates, Lotte Chemical's operating profit in Q2 is expected to increase by 1676% year-on-year to 584.5 billion KRW. Kumho Petrochemical is also predicted to grow 450% to 658 billion KRW, and LG Chem is forecasted to increase 118% to 1.246 trillion KRW. This reflects the expectation that the strong economic recovery following COVID-19 will continue to drive earnings growth in Q2, following Q1. However, as the selling price decline due to oversupply issues becomes more pronounced, investment sentiment has deteriorated.

The downward trend in selling prices is expected to continue in the second half of the year. Since last year, a new capacity expansion cycle for ethylene and propylene has been underway, centered on China, and the pressure for expansion is expected to be most intense from the second half of this year through early next year. According to Bloomberg, the global new ethylene capacity from January to May this year was 2.71 million tons. From June to the end of the year, large-scale facilities totaling approximately 8.85 million tons?about three times more?are scheduled to start operations. Accordingly, the spread (the difference between raw material costs and selling prices) of petrochemical products has been under continuous downward pressure after peaking in March and April.

Researcher Kyuwon Hwang of Yuanta Securities explained, "Due to a cold wave in the southern United States, global ethylene plant operations were halted, benefiting domestic chemical companies until May, but now concerns over earnings are increasing due to expansion pressure. Considering the slowdown in petrochemical product demand in Asia starting in mid-to-late Q2 and the large-scale expansion pressure in the second half, it is time to lower expectations."

The continued rise in oil prices is also negative for chemical stocks. If cost increases are passed on to product prices, price resistance may occur, making it difficult to flexibly transfer the increase to prices. Looking at international oil prices, West Texas Intermediate (WTI) crude oil surged about 55% from around $47 at the beginning of this year to $73. Researcher Yusik Hwang of NH Investment & Securities said, "When oil prices rise from a low level, price resistance is low, allowing earnings growth through increased product demand. However, if oil prices rise further around the $70 level, the spread could shrink rapidly, and if a sudden decline occurs, earnings burdens due to high-priced raw material purchases will expand."

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