Skepticism persists despite earnings recovery in petrochemical sector

Smoke comes out of petrochemical plants in Yeosu, South Jeolla Province, March 9. Yonhap

Korean petrochemical firms are beating market expectations with their first-quarter earnings, but analysts warn it is too early to take an optimistic view of their profitability.

Amid prolonged geopolitical tensions disrupting logistics, skepticism persists that the companies could swing back to losses in the second half of the year.

On Thursday, LG Chem said its first-quarter operating profit from its petrochemical business reached 164.8 billion won ($112 million), rebounding from a loss of 239 billion won in the fourth quarter of last year.

The company attributed the earnings recovery to higher prices for raw materials it had purchased at lower costs. It also cited the European Union’s reinstatement of antidumping tariffs.

“This reflects our efforts to cut costs, improve our business portfolio and strengthen structural competitiveness,” LG Chem Chief Financial Officer Cha Dong-seok said during a conference call on first-quarter earnings. “We had already begun turning a profit even before the Iran conflict escalated in February.”

On April 28, Hanwha Solutions Chemical Division said its first-quarter operating profit reached 34.1 billion won, marking its first profit in two and a half years.

IBK Securities analyst Lee Dong-wook said Monday that Lotte Chemical is also expected to beat market expectations, posting 81.5 billion won in first-quarter operating profit — its first profit in 10 quarters.

“SK Innovation is also expected to post solid profits from its chemical business, compared with a loss in the previous quarter,” he said.

Analysts expect the petrochemical industry to remain profitable through the second quarter, supported by government financial aid for naphtha procurement, a key feedstock used to produce petrochemical products such as plastic bags. However, they warned that rising feedstock prices could limit the pace of earnings recovery.

“If tensions in the Middle East persist, profitability improvements will be constrained by higher-priced naphtha and low plant utilization rates,” LS Securities analyst Jeong Kyung-hee said in a report on LG Chem.

Hanwha Investment & Securities analyst Lee Yong-wook also cited stable naphtha supply and plant utilization rates as key factors.

“Supply shortages could lead to weaker earnings in the second half,” he said.

Domestic petrochemical firms have long suffered declining profits due to an oversupply of low-priced Chinese products. In response, the companies and the government have agreed to reduce the combined capacity of naphtha cracking centers nationwide.

Following the outbreak of the conflict in Iran, supply disruptions in the Strait of Hormuz have worsened naphtha shortages, prompting petrochemical firms to further scale back plant operations. Some have also warned customers of potential supply disruptions.