industry
Entered 2024.03.06 18:28 Modified 2024.03.06 20:56 Paper A3
China’s low price offensive… Lotte sells ‘petrochemical symbol’
Lotte Chemical pursues sale of 75% stake in TitanSoutheast Asian petrochemical production base, last year’s deficit was KRW 61.2 billion.
Market capitalization of 750 billion… Attention is paid to the signal of Lotte Group’s restructuring
Lotte Chemical Titan Plant. Photo = Hankyung DB Lotte Chemical, Korea’s second largest petrochemical company, has begun the process of selling Lotte Chemical Titan (LC Titan), a large-scale production base in Malaysia. LG Chem, the No. 1 company, began negotiations with Kuwait Petroleum Corporation (KPC) to sell its stake in the second naphtha cracking facility (NCC) plant in Yeosu, Jeollanam-do. Symbolic factories in the main export industry that once supported Korea have been put up for sale due to low prices from Chinese companies.
According to the investment banking (IB) industry on the 6th, Lotte Chemical began looking for a buyer for LC Titan targeting domestic and foreign petrochemical companies and large private equity funds (PEFs). LC Titan is a listed company on the Malaysian stock market in which Lotte Chemical holds a 74.7% stake. The main products produced are ethylene, polyethylene (PE), and polypropylene (PP), which are raw materials for petrochemical products. Lotte Chemical acquired LC Titan from Malaysia’s Chao Group and others for 1.505 trillion won in 2010. LC Titan was a profitable company that made profits of about 300 to 500 billion won every year until the mid-to-late 2010s. It was listed in 2017 at a value of 2.5 times the acquisition price (market capitalization of 4 trillion won). However, the situation turned around as China, which was the largest importer of Korean petrochemical products, began to become self-sufficient in basic chemical materials such as ethylene and propylene. It turned into a deficit starting in the second quarter of 2022 and posted an operating loss of 61.2 billion won last year. The corporate value fell to 746.5 billion won (as of the 6th).
Regarding the sale of LC Titan, the industry is paying attention to Lotte Group Chairman Shin Dong-bin’s statement early this year, “We will sell businesses that are not doing well even after several years.” This is because this sale will be a signal for Lotte Group’s restructuring that will begin in earnest in the future. LG Chem is negotiating to sell its stake to KPC after dividing Yeosu NCC Plant 2. After establishing a new company and transferring assets such as NCC facilities, LG Chem holds a 51% stake and KPC holds a 49% stake. The overall corporate value is said to be around 2 trillion won. Previously, LG Chem pursued the sale of the entire NCC plant to domestic and foreign petrochemical companies and Middle Eastern capital in order to reorganize its business structure, but when this did not work out, it turned to a strategy of selling some shares.
Petrochemicals looking for a way out amid China’s offensive… LG also negotiates sale of Yeosu NCC Factory 2
1st and 2nd place in petrochemicals, resolving ‘marginal businesses’
Lotte Chemical Titan in Malaysia. Petrochemical products are one of Korea’s representative export items, along with semiconductors, automobiles, and TVs. Because of the good cost-effectiveness, I looked for ‘Made in Korea’ products all over the world. China was the country that sought out Korean petrochemical products the most.
It was in the late 2010s that China transformed into a ‘rival’ competing for the global market. Due to the volume offensive driven by price competitiveness, the ‘global territory’ of Korean companies has gradually decreased. Last year’s petrochemical product exports (USD 45.6 billion) decreased by 15.9% compared to a year ago. This is why LG Chem and Lotte Chemical, Korea’s first and second largest petrochemical companies, have begun to close their basic oil production facilities. Instead of liquidating ‘marginal businesses’ with low profitability, LG and Lotte plan to focus their capabilities on areas where there is still a technological gap with China, such as batteries and specialty (high value-added) materials.
○China’s self-sufficiency rate exceeds 100%
According to the Korea Petrochemical Association on the 6th, the proportion of domestic petrochemical companies’ exports to China last year was 36.3%, down 6.6 percentage points from 2020 (42.9%), three years ago. This is the aftermath of Chinese state-owned enterprises such as Sinopec and PetroChina significantly increasing their production capacity through large-scale investments.
Demand for petrochemical products has decreased due to the economic slowdown, but supply from China has continued to increase significantly for several years. This was the case with ethylene, known as the ‘rice of petrochemicals’. Last year, China’s ethylene production amounted to 51.74 million tons, a 60% increase from 2020 (32.27 million tons). It will expand to 55.97 million tons in 2025. Thanks to this, China’s self-sufficiency rate in basic oils such as ethylene and propylene (PP) has already exceeded 100% in 2020 and is expected to rise to 120% in 2025. Self-sufficiency in paraxylene (PX), an intermediate raw material, and PP, a synthetic resin, is expected to reach 100% by 2025. The problem is that when China’s domestic demand decreases due to the economic slowdown, it pours the remaining supply overseas. PP, which is widely used in construction materials, is increasingly coming from China. Chinese companies have high cost competitiveness by introducing the latest equipment ‘COTC’, which converts crude oil directly into ethylene without refining it into naphtha.
Due to oversupply, the ‘ethylene spread’ (the price of ethylene minus the price of naphtha, a raw material), an indicator of the profitability of petrochemical companies, fell from $398 per ton in 2021 to $195 per ton last year. Typically, the break-even point is $300 per ton. This is the background to LG Chem’s loss of 14.3 billion won in the petrochemical sector last year. Lotte Chemical also suffered a loss of 201.5 billion won last year in the basic oil division.
○The way out for Korean companies is ‘technology gap’
This is why LG Chem is selling Naphtha Cracking Facility (NCC) Plant 2 in Yeosu, Jeollanam-do, and Lotte Chemical is selling Lotte Chemical Titan (LC Titan). As the possibility of a rebound in the Chinese economy is low this year, it is not easy to expect improvement in the supply and demand situation.
The reason Lotte Chemical is selling its Malaysian plant rather than its domestic plant is because Chinese companies are mainly pouring surplus supplies into Southeast Asia. As it is difficult to compete on price with Chinese companies, the strategy is to use the funds from selling ‘red ocean’ related facilities to invest in ‘blue ocean’ such as specialty chemical materials, battery materials, and solar energy materials that China has not yet caught up with.
Lotte Chemical is rapidly reorganizing its business portfolio, including selling all of its general-purpose petrochemical product production facilities in China last year. LG Chem is also speeding up the sale of its stake in NCC Plant 2. Last year, when sales negotiations with domestic and foreign companies failed, the company turned to Kuwait Petroleum Corporation (KPC). LG Chem plans to use the proceeds from the sale of its 49% stake to invest in growth industries such as battery materials such as cathode materials, eco-friendly materials, and bio. An industry official said, “There is now almost no way to beat China in general-purpose products with no technological differences. If domestic petrochemical companies want to survive, they have no choice but to compete with next-generation materials.”
Reporters Cha Jun-ho/Ha Ji-eun/Kim Hyeong-gyu chacha@hankyung.com
2024-03-06 09:28:30
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