Korea escapes from China slowdown

By Malini Hariharan

The blog has been scanning equity analyst reports of South Korean companies and has noticed that earnings expectations for the year are being revised upwards despite market uncertainties.

Companies such as S-Oil are expected to benefit from a recovery in refining and paraxylene (PX) margins. Woori Investment & Securities has raised its estimate for complex refining margins in Asia from $8 to $9 for 2011 and from $9 to $10 for 2012.

S-Oil’s results will also be boosted from increased volumes of PX available from a new 900,000 tonnes/year plant that it started up in April. PX margins are expected rebound in the second half of this year on strong demand.

Start up of a new 12,000 tonnes/year ethylene vinyl acetate (EVA) sheet plant and a 20,000 tonnes/year high-end film line in the second quarter is forecast to support SKC.

The strength in caustic soda and polyvinyl chloride (PVC) margins is expected to help Hanwha Chemical post strong numbers this year starting from the first quarter. Hanwha’s 50% stake in Yeochun NCC (YNCC) means that the company will gain from strong ethylene, propylene and butadiene prices.

But in line with what the blog has been writing about Asian markets, analysts at Woori are cautious on Honam Petrochemical, South Korea’s largest petrochemical producer, as second quarter earnings are likely to be affected by weak margins for polyethylene (PE), monoethylene glycol (MEG) and polypropylene (PP).

“Product margins for its major offerings have fallen steadily since March, and
2Q11 earnings are likely to plunge quarter on quarter. In fact, demand for Asian petrochem products has slowed sharply from China, presumably due to the Chinese government’s tightening measures and the limited power supply for the polyester industry. We expect the country to continue its tightening policy in the near term,” they said.

Honam with its exposure to commodity petrochemicals remains in a vulnerable position unlike other Korean companies with a diversified product portfolio.

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