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Q2 setback for Korea

Analysts Reports, Business, Company Strategy, Fibre Intermediates, Markets, Polyolefins, South Korea
By John Richardson on 05-Aug-2011

By Malini Hariharan

The margin pain experienced in Asia in the last quarter is clearly evident in the recently released results by South Korean majors Honam Petrochemical and LG Chem.

Honam’s operating profit for Q2 declined 36.8% from the previous quarter to Won36.1bn. LG Chem’s operating profit was down 7.2% at Won775.4bn while its petrochemical segment saw a 11.9% decline in profit to Won642bn.

High butadiene and acrylontirile prices and weak demand from the information technology industry hit LG’s key acrylonitrile butadiene styrene (ABS) business which accounted for 30% of the petrochemical division’s operating profit in the second quarter. Contribution from the naphtha cracker and polyolefins business remained stable at 26% despite weak product prices and LG attributed this to the special grades that it offers.

Honam’s results were dragged down by the poor performance of affiliate companies KP Chemical and the recently acquired Titan Chemicals.

Analysts at Woori Investment & Securities estimate that earnings at KP declined 50% due to a sharp narrowing of the spread between purified terephthalic acid (PTA) and mixed xylenes (MX). KP is a standalone PX, PTA and polyethylene terephthalte (PET) producer and has to buy MX feedstock for its operations.

Earnings at Titan also declined mainly because of inventory valuation losses.

Honam was saved by the strength in butadiene and monoethylene glycol (MEG) markets. Butadiene prices have been in the $2,750-4,150/tonne range because of a structural shortage of the product globally.

Woori estimates that Honam’s per tonne EBITDA from butadiene was ten times the average EBITDA for polyethylene (PE), polypropylene (PP) and MEG. With butadiene projected to remain short for the next couple of years Honam will continue to benefit and butadiene’s contribution to the company’s EBITDA is likely to touch 50% in 2012.

Both LG and Honam have predicted a stronger Q3. The price increases seen since the beginning of July certainly point in this direction and many market players are fairly confident that markets will remain firm in August and September supported by plant turnarounds and shutdowns like the one at Formosa Petrochemical in Taiwan.

But the consensus for the fourth quarter is that there is still too much macroeconomic uncertainty to make a prediction.