Lotte Chemical Builds Optimism for Recovery After Three Years of Losses

Lotte Chemical is growing more optimistic about a recovery in its performance, overcoming three consecutive years of losses. The company is making significant strides in improving profitability, thanks to ongoing cost-reduction efforts and the effects of restructuring. With asset sales and other measures to improve its financial structure, the potential for a shift to positive cash flow this year is becoming more likely.

According to industry sources on the 19th, Lotte Chemical is expected to benefit from a decrease in naphtha prices starting in the second half of this year, which will ease its raw material costs. The naphtha price hit a low of $551 per ton on the 16th, marking the lowest level of the year. This represents an 18% drop compared to the average price of $673 per ton in January.

Lotte Chemical operates naphtha cracker-based facilities, so it is highly sensitive to fluctuations in raw material prices. Given the high proportion of fixed costs in the petrochemical industry, the drop in naphtha prices is seen as a crucial factor that could reduce the company’s deficit.

Some analysts predict that the impact of the naphtha price drop could be reflected with a delay due to the lagging effect of price adjustments and scheduled maintenance, which could temporarily increase the loss margin in the second quarter. However, many experts agree that product profitability is not expected to worsen.

In addition, the effects of Lotte Chemical’s $5 billion investment in its Indonesia Line project are expected to take full effect starting next year. This large-scale investment, made amid declining profitability in the petrochemical industry due to oversupply from China, has been a focal point. The company has reduced its stake in the Indonesia project from 49% to 24%, easing its financial burden.

Lotte Chemical is also managing its debt ratio, which has steadily improved, ensuring solid financial health. As of the first quarter, the company’s debt ratio stood at 71.53%, a slight decrease from 72.87% in the previous year. While this is still higher compared to 65.46% in 2023, the company has maintained a balanced debt-to-asset ratio, continuing to follow an optimal capital structure.

Despite recording an operating loss of KRW 126.6 billion in the first quarter, marking its sixth consecutive quarter of losses, Lotte Chemical showed signs of improvement. The company reduced its loss margin compared to KRW 135.3 billion in operating loss for the same period last year, thanks to spread improvements, cost-saving measures, and favorable currency effects. Although it was difficult to avoid the effects of maintenance, which is expected to be completed by June 16, analysts anticipate that performance improvements will be seen after the second quarter.

Lotte Chemical is also actively improving its financial structure and cash flow through an asset-light strategy. The company is restructuring low-efficiency businesses and selling non-core assets, including the closure of its synthetic rubber business in Malaysia and the sale of its high-purity terephthalic acid (PTA) subsidiary in Pakistan and all of its shares in Japan's Rezonac early this year.

However, some analysts caution that oversupply issues in China and the Middle East could persist, and monitoring market trends in these regions will be important. There are also concerns that the improvement in profitability from the drop in naphtha prices may be temporary. Naphtha price volatility could increase depending on external factors, such as decisions made by OPEC and the recovery of global demand.

Lee Yong-wook, a researcher at Hanwha Investment & Securities, stated, "The NCC spread is gradually improving, and Lotte Chemical’s loss margin is shrinking. However, the second quarter may see a slight temporary increase in losses due to maintenance impacts." He added, "The easing of U.S.-China tensions and China’s domestic stimulus policies are expected to positively impact the company. Through the sale of its Pakistan subsidiary and the liquidity of Rezonac shares, cash flow improvement and reduced interest expense burden are expected."

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