South Korea “Denial” Continues



By John Richardson

EARNINGS estimates for South Korean petrochemicals companies for the full-year 2012 remain around 30 percent above where they should be because “most financial analysts remain in denial“, said an industry source.

A sign of how bad the times have become was that LG Chem’s Q2 results, which were released last week, were viewed as mildly positive because year-on-year net income “only” declined by 40.1 percent.

“It could have been a lot worse for LG if it had not been for its technology business. LG is, for instance, a producer of lithium ion batteries and liquefied crystal display glass substrates,” the source added.

But over the next few days, Honam Petrochemical and Hanwha Chemical are expected to announce Q2 net income reductions of more than 50 percent.

Honam is heavily exposed to the polyester sector due to its substantial mono-ethylene glycol (MEG) capacities.

MEG sentiment and pricing improved for the week ending 20 July on production losses and hopes for a demand recovery in China, said ICIS.

But MEG and polyester in general have been weak for most of 2012.

“And in Hanwha’s case, it a significant polyvinyl chloride (PVC) exporter to China and PVC is really struggling,” said the source.

Earlier this month, China’s major PVC pipes and profiles producers were operating at 60 percent of capacity with small and medium-sized downstream producers running at even lower rates, according to ICIS

Bearish sentiment among end-users was reflected in January-May suspension grade exports to China that totalled 408,800 tonnes, a 13 percent drop from the previous year’s 470,500 tonnes.

Again, though, as the chart above illustrates, PVC prices have shown some recovery on restocking.

“Most analysts are in denial for the second half of this year because they believe that China’s government will ride to the rescue with more economic stimulus,” continued the source.

“Ironically, the worst that the macro-economic data has become during H1 the more optimistic has been the mood of some analysts on the belief that Beijing will have to sort the problem out.”

But even if the overall economy does pick up in H2, the industry source and the blog are concerned that:

*Petrochemicals will continue to under-perform overall GDP growth because of persistent inventory overhangs, particularly in synthetic resins.

*Low-end manufacturers in southern and eastern China will still struggle as a result of structural changes in the economy.

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