All’s well in South Korea – for now

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

South Korean petchem majors are expected to post another quarter of bumper earnings thanks to high operating rates and strong sales volumes.

A Seoul-based equity research analyst think this year could well turn out to be a bonus. He expects the fourth quarter to be tougher with operating results likely to be lower than Q3, partly because of the negative impact of new capacities flooding the market. But strong results in the first three quarters of the year should help the companies post favourable numbers for the full year.

This was evident in LG Chem’s recent announcement of an 83% year-on-year increase in Q3 net income. Operating profit for the petrochemicals division was up 63% from the same period last year but down 2% from the second quarter (see slide). The big gains came in from the LCD and battery businesses on the back of rising mobile handset and notebook sales. Other South Korean companies are due to post their results in the next few weeks.

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LG’s success in diversifying its portfolio has caught the attention of other South Koreans.

SK Energy is set to challenge LG in the battery business. It was recently selected to supply lithium ion batteries to Daimler AG’s Japanese unit. LG Chem has already signed a contract to supply batteries for a new hybrid car to be launched by General Motors.

And Hanwha announced yesterday that it would invest $673m in the solar energy business. It plans to start a new plant in Ulsan for producing solar batteries capable of generating 30megawatts of power annually. Hanwha’s ambition is to become one of the top ten global manufacturers of solar batteries by 2015 with a worldwide market share of 5% and revenue of approximately $841m. To achieve this number, annual production would be raised to 330 megawatts in 2012 and 1 gigawatt in 2015.

Given the growing competition in petchems it makes sense for the Korean companies to branch out. But the analyst is not convinced that they are all moving in the right direction. For instance, the solar energy space is already crowded and he is not sure if Hanwha will be able to make money in solar batteries.

The odd one out is Honam Petrochemical which has not yet diversified from petchems. The only announcement by the company this year was a decision to merge affiliate KP Chemical. It is said to be looking at acquiring a stake in downstream engineering plastic and speciality chemical businesses in South Korea. But it will have to act faster to reduce its exposure to commodity petchems.

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