'Crisis Rumors' Lotte Chemical... Direct Breakthrough with 'New Business + Financial Strength'

Credit Rating Downgrades Trigger Consecutive Warning Signals
Prolonged Slump in Petrochemical Industry

Secured 2.6 Trillion KRW in Cash Assets
New Businesses Like Hydrogen and M&A Gain Momentum

[Asia Economy Reporter Oh Hyung-gil] Lotte Chemical, which had established itself as a core affiliate within the Lotte Group, surpassing distribution, has been unexpectedly engulfed in crisis rumors. The main point is that its credit rating is being shaken due to sluggish petrochemical market conditions combined with large-scale mergers and acquisitions (M&A) and financial support to affiliates. There are concerns that a downgrade in credit rating could lead to the crisis spreading to the holding company or other affiliates.

Lotte Chemical has stated its intention to confront the situation head-on. It is confident that the petrochemical market follows a certain cycle of ups and downs, and that the financial strength it has secured so far will prevent any major burden.

According to industry sources on the 16th, credit rating agencies have recently been lowering or warning of a downgrade in Lotte Chemical’s credit rating one after another. It began on the 10th when Korea Ratings lowered Lotte Chemical’s credit rating outlook. Citing the continued sluggishness in the petrochemical sector and reduced profitability due to high oil prices, the rating was adjusted from 'AA+/Stable' to 'AA+/Negative.'

Following this, Korea Investors Service announced plans to adjust credit ratings for major Lotte Group affiliates including Lotte Chemical. It evaluated that Lotte Chemical’s financial burden has increased due to the Q3 operating loss and acquisitions such as Iljin Materials. NICE Investors Service also placed Lotte Chemical under review for a possible long-term credit rating downgrade, citing increased borrowing burden.

Korea Ratings explained, "Whether Lotte Chemical’s credit rating changes will determine the credit rating of Lotte Holdings. Key monitoring points include changes in the credit ratings of core affiliates, the possibility of increased support burden as a holding company, overall financial burden trends of the group, and any additional governance restructuring linked to Hotel Lotte."

All of them cited poor performance and financial burden as reasons. Lotte Chemical recorded an operating loss of 423.9 billion KRW in Q3 alone, marking losses for two consecutive quarters. The decline in naphtha prices and reduced product demand worsened margins.

Additionally, although it maintained a debt-free status until the end of last year, it is pointed out that the net borrowing scale is rapidly increasing due to weakened operating cash flow from the sluggish market and expanded investments.

However, the assessment is that there is no problem with Lotte Chemical’s financial strength. As of Q3, basic cash and cash equivalents stood at 2.6371 trillion KRW (consolidated basis), an increase of about 1 trillion KRW compared to 1.6028 trillion KRW at the end of last year. The debt ratio was only 53% in Q3 this year, after recording 48% in the first half of last year.

The sluggish market conditions are also attributed to the global economic recession, with other petrochemical companies facing similar situations. The industry expects the market conditions to gradually improve from next year onward. It is not a problem that will be resolved in the short term.

The key lies in new businesses that will compensate for the downturn. Lotte Chemical is accelerating its business transformation through expanded investment in new businesses. Regarding hydrogen and ammonia, on the 9th, Lotte Chemical signed a supply agreement for 500,000 tons of clean ammonia with Lotte Fine Chemical and US-based Tolgrass Energy, and plans to industrialize by importing 50,000 tons of clean ammonia, commercially produced for the first time in the world this year in Saudi Arabia.

It is also expanding into battery materials through Iljin Materials. Iljin Materials, which has about 60,000 tons of copper foil production capacity in Korea and Malaysia, is planning to build factories with a capacity of 230,000 tons by 2027 in Malaysia, Spain, and the United States.

A Lotte Chemical official said, "Following separator production, we are constructing a battery electrolyte organic solvent plant, and Lotte Aluminium and Lotte Fine Chemical are respectively engaged in cathode foil and copper foil businesses," adding, "We plan to lead the hydrogen energy and battery materials business by securing technology and establishing cooperation among affiliates."

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