KUALA LUMPUR: Lotte Chemical Titan Holding Bhd will be able to tap on the strong selling prices or better price spreads against naphtha in 2021, on a selected range of its production output.
CGS-CIMB Research said 2021 would likely see a consumer-led recovery in demand for durable goods which should benefit demand for petrochemical products such as polyvinyl chloride (PVC), polypropylene (PP), polystyrene (PS), acrylonitrile-butadiene-styrene (ABS) and bis-phenol A (BPA).
“Because Lotte Chemical is focused on the polyolefins business, it should benefit from any recovery in demand from copolymer PP, which is used in the production of automobiles and electronic appliances, ” said the research unit.
CGS-CIMB Research expects the recovery in copolymer PP demand to help sustain currently lofty PP-naphtha price spreads, even if demand for homopolymer PP should soften in the event that the production and stockpiling of medical, health, hygiene products and fast-moving consumer goods begin easing.
Lotte Chemical has a production capacity for 640,000 tonnes per annum (tpa) of PP, which is estimated to have contributed to 33% of its revenue in the financial year ended Dec 21,2020 (FY20).
Lotte Chemical may also benefit indirectly from any global recovery in automobile and durable consumer goods production, via increased demand for ABS plastics, which may increase demand for butadiene and keep butadiene selling prices high.
Lotte Chemical’s naphtha cracker in Malaysia has the capacity to produce 100,000 tpa of butadiene, which is estimated to have contributed to 4% of its FY20 revenue.
According to Lotte Chemical, it sells about 50% to 60% of its butadiene output to its 10%-owned Lotte UBE Synthetic Rubber Sdn Bhd, which uses the butadiene to produce synthetic rubber.
The remaining butadiene is sold to various paint manufacturers.
CGS-CIMB Research also believes that polyethylene (PE) prices probably peaked in the fourth quarter of 2020 or could be about to peak in the first quarter of 2121.
The possible downward momentum in PE prices from second quarter 2021 onwards, coupled with the research unit’s expectations for rising oil and naphtha prices, could squeeze spreads against naphtha and progressively de-rate Lotte Chemical’s share price, although the average selling prices and spreads for 2021 as a whole are expected to be higher year-on-year.
Lotte Chemical has a 40% stake in a monoethylene glycol (MEG) plant in the United States, which CGS-CIMB Research expects to be loss-making in FY21 due to weak MEG prices and higher ethane gas prices due to curtailment of US shale oil and gas production.
Lotte Chemical has the capacity to produce 1 million tpa of PE, accounting for almost half of its estimated FY20 revenue.
“Lotte Chemical and Petronas Chemicals have large exposures to the ethylene value chain which we think will likely see oversupply in 2021, potentially resulting in a gradual slide in PE prices this year, and continuing weakness in MEG prices, ” said the research unit.
Meanwhile, CGS-CIMB Research also retained its “neutral” weighting on the Asian petrochemical sector as the upstream products, particularly ethylene, is still subject to supply gluts from China.
The research unit said government stimulus policies in China had increased sales of automotive and electronics products by 12.8% as well as household appliances by 8.7% year-on-year in the fourth quarter of 2020.
“As such, the spreads of downstream products related to durable goods production, including ABS and BPA, have surpassed pre-Covid-19 pandemic levels, hitting multi-year highs in late-2020, ” said CGS-CIMB Research.
ABS is also widely used in the production of components for electrical appliances and cars.
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