PETALING JAYA: The rising price of polyethylene (PE), which has recovered to US$900 per tonne from the weak levels observed during the second quarter, will lead to a stronger second half for Lotte Chemical Titan Holding Bhd.
According to KAF Research, the spread of PE-to-naphtha (the raw material used to produce its chemical products) has expanded close to US$600 per-tonne-level in September 2020, compared with US$480-US$520 per tonne back in the second quarter of 2020.
This came as the result of stronger PE prices because Hurricane Laura in the US has affected production in the US after damage to local infrastructure. Meanwhile, prices of naphtha – obtained by refining crude oil – are lower recently, falling along with Brent crude prices.
Although second half 2020 is expected to be stronger for Lotte Chemical Titan, KAF still envisages the upside of the spreads to be limited as “the expected incremental supply of PE in 2021 is likely to still outpace incremental demand on a global basis”.
Additionally, the affected US plants should restart operations by end of 2020, bringing petrochemical dynamics back to normal.
“Hence, our product spreads assumptions for both financial year 2020 (FY20) and FY21 remain very conservative at circa US$436 per tonne and US$443 per tonne, respectively, ” it said in a report.
The research firm foresees naphtha prices to gradually strengthen starting 2021.
For FY20, Lotte Chemical Titan should be seeing its worst year, according to KAF, and thereafter be on a gradual path to recovery starting 2021 with spreads stabilising at US$400-US$500 per tonne levels.
The petrochemical group posted a core profit of RM48.5mil in second quarter 2020 when the average PE-naphtha spread was at U$487 per tonne.
“In first half 2020, core loss was at RM91.7mil, hence, our base case assumption implies lower product spread in fourth quarter 2020 on the back of weaker product prices as US plants come online gradually, ” said KAF.
Meanwhile, Lotte Chemical Titan’s major Indonesian expansion plan has yet to start, with the date of investment undisclosed due to the currently weak market climate.
This, said KAF, should help allay investor concerns over the potential for the company being caught out by a prolonged petrochemical price dip due to the significant investment needed for that Indonesia project.
“We believe the company will not be paying a higher dividend in 2020, given challenging global conditions and instead reserve its cash pile (RM1.67 per share) for major project expansions in the future, ” it added.
The research firm has maintained a “buy” on the stock with a sum-of-part target price held at RM2.55.
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