Lotte Chemical Titan sees demand growth offsetting oversupply pressure

MOSCOW (MRC) -- The share prices of Lotte Chemical Titan Holdings Bhd (LCT) and its peer Petronas Chemicals Group Bhd (PetChem) have risen 40.6% and 24.5% respectively since their lows in August, thanks to better product prices over the past few months, reported TheEdgeMarkets.

This is because the petrochemical industry has been experiencing supply disruptions from the US as a result of Hurricane Laura, as well as strong demand for polyethylene (PE) and polypropylene (PP), which are used in the manufacturing of a host of things, including face masks, personal protective equipment and packaging materials.

Still, analysts have cautioned that incoming supply may outweigh demand.

LCT is Malaysia’s largest integrated producer of olefins and polyolefins, consisting of PP and PE products. Its products are sold to plastic fabricators and trading houses locally and around the world.

In an email interview with The Edge, LCT president and CEO Dr Lee Dong Woo concedes that industry oversupply will persist in the short to medium term, resulting in some pressure on average selling prices (ASPs). Over the longer term, the overcapacity concern could be offset by overall demand growth, supported by a growing population and economic expansion.

He sees continued improvement in the business outlook in 4Q2020, after the reopening of regional economies, especially with the strong recovery in China.

“Our business is closely tied to regional and domestic economic growth, as it is essential to the key manufacturing sector,” says Lee.

He adds that the petrochemical sector’s outlook is also dependent on how US president-elect Joe Biden’s administration manages its relationship with China, after the industry was hit by trade disputes between the two superpowers.

Domestically, LCT’s rivalry with PetChem may intensify in view of rising capacity from the latter’s Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor.

Lee is unfazed, however, saying Malaysia remains a net importer of petrochemicals and that the new supply from PetChem will replace domestic imports.

“Currently, we have some pricing premium for our products, owing to the value-added services LCT provides to its customers.”

While the new supply may erode some of the pricing premium, he stresses that LCT’s market is not confined to the country, but it also exports to Indonesia, China and other Southeast Asian markets.

Malaysia, Indonesia and other Southeast Asian markets contribute 70% to the company’s revenue, while Northeast Asia and other parts of the world contribute the remainder.

LCT operates an integrated petrochemical complex comprising 12 plants in Pasir Gudang and Tanjung Langsat, Johor. In Indonesia, three non-integrated downstream PE plants are in operation.

“We expect sustained ASPs in the short term, similar to that observed in 3Q2020 amid further reopening of regional markets as well as post-pandemic recovery, with more vaccines (developed),” says Lee.

During the Movement Control Order (MCO) period, LCT saw lower demand from the industrial plastics segment such as automotive and electrical and electronics, but this was partially mitigated by higher demand from the commercial and disposable food packaging and medical equipment segments.

“Our sales in the domestic market were notably affected during the full MCO in April and May. However, we were able to divert our local sales to the regional markets such as China,” he explains.

LCT’s operating rate was lower in the first half of 2020, owing to the major statutory plant turnaround (shutdown to perform maintenance, repair or overhaul operations), but it is on track to meet the full-year operating capacity target of 80% to 85%.

On average, its budgeted capex for annual routine maintenance is RM200 million to RM300 million.

The pandemic has affected LCT’s expansion, particularly its 51%-owned Indonesia Lotte Chemical Indonesia New Ethylene (LINE) project, which is now under strategic review. The other 49% of the project is held by its South Korea-based parent Lotte Chemical Corp.

The USD4.4 billion (RM18 billion) project is crucial in LCT’s becoming the top-tier petrochemical firm in Southeast Asia, with USD6 billion in revenue by 2024, from USD2 billion in 2019.

The initial arrangement was to commence project construction at end-2020 or early 2021, according to Lee.The capital mix for the project comprises 40% equity and 60% debt.

“We aim for the project to be completed in time to ride the next petrochemical cycle uptrend to maximise our return on investment in the project,” he says.

To enhance its footing in the regional market, LCT is exploring opportunities to develop and expand value-accretive as well as synergistic businesses.

In its financials for the third quarter ended Sept 30, 2020, LCT reported a 13.7% fall in net profit to RM78.77 million from RM91.3 million a year ago, owing to lower revenue, higher share of associate losses and higher operating cost of RM15.9 million resulting from Hurricane Laura.

it expects LCT to post stronger q-o-q earnings in 4Q, as Lotte Chemical USA Corp plants have fully resumed operations since mid-October after Hurricane Laura, coupled with a higher polymer spread of US650 a tonne in October against US589 a tonne in 3Q.

“Though the spread may remain firm in November/December, it could soften in 2021 on new supply from Malaysia’s RAPID as well as China,” the research house says.

LCT has been in a net-cash position since its relisting in July 2017, with RM3.97 billion recorded as at end-September 2020.

However, its share price has more than halved against its initial public offering price of RM6.50, on the back of declining profits in the past years caused by high feedstock costs and low product prices.

The stock closed at RM2.47 on 1 December, valuing it at RM5.7 billion.

Titan Chemical Corp Bhd was taken private in 2011, a year after Lotte Chemical Corp, an affiliate of South Korean retail giant Lotte Group, bought into it.

LCT’s IPO in 2017 received tepid response from investors, prompting it to cut the IPO price by one-fifth to RM6.50, from RM8. The number of shares was also reduced to 580 million, from 740.48 million, owing to the cut in the institutional offering.

Within a month of its listing, LCT shocked investors when it announced a 47.2% q-o-q drop in its 2QFY2017 earnings before interest, taxes, depreciation and amortisation (Ebitda), owing mainly to water disruption at its Johor-based petrochemical plant. Compared with a year ago, 2QFY2017 Ebitda was down 58.1%.

The water shortages occurred in April, before the IPO, but LCT said the full impact was not known until mid-July - after the listing.

It later caught the market by surprise when its net profit slumped 97% to RM10.13 million in the last quarter of 2018 from RM378.15 million a year earlier, owing to margin squeeze.

Its share price had been on a downtrend after it fell below RM4 in April 2019. During the recent market crash in March, the counter even hit an all-time low of 93.7 sen. Year to date, it has rebounded 2.5%.

As LCT is tightly controlled by Lotte Chemical Corp, which has a 76.03% stake, its public shareholding spread of 23.97% falls short of the minimum spread requirement of 25%.

LCT has embarked on a dividend reinvestment scheme to address the shortfall, but this is subject to its ability to declare dividends. It paid a 7 sen dividend in 2019 after a 17 sen payout in 2018.

Lee says LCT has been distributing half of its profit after tax since its relisting in 2017. Its 12-month trailing dividend yield stands at 2.85%.

“It is the board’s intention to continue with the dividend payout subject to the company’s financial performance,” he says.

As MRC wrote earlier, South Korea’s Lotte Chemical has restarted its fire-hit naphtha-fed steam cracker in Daesan. Thus, the facility begins trial runs of naphtha on 7 December, 2020. Lotte Chemical had initially planned to restart the cracker in September, then - in mid-November and finally - to early December. The cracker was shut on March 4 following an explosion, which injured more than 30 people. Lotte Chemical has two steam crackers. The steam cracker in Daesan has a production capacity of 1.1 million mt/year of ethylene, 550,000 mt/year of propylene and 150,000 mt/year of butadiene, while the Yeosu steam cracker is able to produce 1.18 million mt/year of ethylene, 550,000 mt/year of propylene and 130,000 mt/year of butadiene.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's DataScope report, PE imports to Russia decreased in January-November 2020 by 17% year on year and reached 569,900 tonnes. High density polyethylene (HDPE) accounted for the greatest reduction in imports. At the same time, PP imports into Russia increased by 21% year on year to about 202,000 tonnes in the first eleven months of 2020. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.
MRC

MOSCOW (MRC) -- Asian refining margins for jet fuel inched higher on Monday, but reimposed travel restrictions in several countries to slow the spread of a highly-infectious coronavirus variant is expected to dent passenger demand recovery, reported Reuters.

Refining margins, also known as cracks, for jet fuel ticked up USD0.05 to USD4.76/bbl over Dubai crude during Asian trading hours.

The cracks, however, have shed 11% since hitting a more than nine-month high of USD5.35/bbl on Dec. 18.

The Philippines on Saturday extended a ban on flights from the United Kingdom by another two weeks to mid-January in a bid to prevent the spread of the new coronavirus variant, while Japan said it would temporarily ban non-resident foreign nationals from entering the country.

Cash differentials for jet fuel were at a discount of USD0.10/bbl to Singapore quotes on Monday, compared with a discount of USD0.11/bbl in the last trading session on Thursday.

The aviation fuel market is getting some support from air cargo demand, which has firmed in recent weeks as e-commerce deliveries surged during the holiday season, market watchers said.

Meanwhile, airlines are also expected to play a vital role in the mass vaccine rollout in coming days, which is expected to unlock an immediate boost for the sector.

As MRC informed before, slumping fuel consumption during the pandemic is accelerating the long-term shift of refining capacity from North America and Europe to Asia, and from older, smaller refineries to modern, higher-capacity mega-refineries. The result is a wave of closures, often centering on refineries that only narrowly survived the previous closure wave in the years after the recession in 2008/09.

We remind that PetroChina has nearly doubled the amount of Russian crude being processed at its refinery in Dalian, the company's biggest, since January 2018, as a new supply agreement had come into effect. The Dalian Petrochemical Corp, located in the northeast port city of Dalian, was expected to process 13 million tonnes, or 260,000 bpd of Russian pipeline crude in 2018, up by about 85 to 90 percent from the previous year's level. Dalian has the capacity to process about 410,000 bpd of crude. The increase follows an agreement worked out between the Russian and Chinese governments under which Russia's top oil producer Rosneft was to supply 30 million tonnes of ESPO Blend crude to PetroChina in 2018, or about 600,000 bpd. That would have represented an increase of 50 percent over 2017 volumes.

Ethylene and propylene are feedstocks for producing PE and polypropylene (PP).

According to MRC's DataScope report, PE imports to Russia decreased in January-November 2020 by 17% year on year and reached 569,900 tonnes. High density polyethylene (HDPE) accounted for the greatest reduction in imports. At the same time, PP imports into Russia increased by 21% year on year to about 202,000 tonnes in the first eleven months of 2020. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.
MRC

MOSCOW (MRC) -- Pinnacle, a leading provider of data-driven reliability and integrity programs, has acquired Houston-based Trinity Bridge, LLC, a consulting company specializing in risk-based inspection programs for the refining and petrochemical industries, said Hydrocarbonprocessing.

This comes on the heels of Pinnacle’s announced rebrand and reinvestment into technology and systems to create next generation reliability solutions for the industry.

"Reliability will be the key to sustainability for industries like oil and gas refining, chemicals, mining, and water treatment, and Trinity Bridge brings a great team of people to accelerate that advancement,” said Ryan Sitton, founder and CEO, Pinnacle and author of "Crucial Decisions." "Lynne Kaley and I have worked alongside each other as competitors and collaborators for nearly 20 years, and I have always respected and admired her. She was a pioneer in the early days of Risk-Based Inspection technology development, and we are excited to have her and her team join us in building next generation of solutions to optimize reliability."

Lynne Kaley, principal owner of Trinity Bridge, will be joining Pinnacle as vice president of research and development. In this role, she will lead Pinnacle’s investment into the development of new technology, processes, and solutions to advance industrial reliability.

"We are really excited to join the Pinnacle organization and combine our expertise with the resources of such a forward-thinking company,” said Kaley. “Pinnacle’s vision and commitment to advancing credible reliability solutions for the industry is an area where we believe we have a lot to contribute. We are looking forward to being a part of driving the next revolutionary advancements."

As MRC informed earlier, in 2018, Pinnacle Polymers, one of the major PP manufacturers in the US, has announced force majeure at its polypropylene (PP) facility in Garyville, Louisanna, USA. The Pinnacle Polymers plant has a capacity of 410,000 tonnes per year.

According to MRC's ScanPlast report, November PP production in the country exceeded 169,100 tonnes, compared with 152,000 tonnes in October; several producers increased their capacity utilisation. Russia's overall PP production reached 1 698,000 tonnes in January-November 2020, compared to 1 298,000 tonnes a year earlier. Six out of eight producers increased their capacity utilisation, two producers decreased production volumes.

MRC

MOSCOW (MRC) -- The US Securities and Exchange Commission (SEC) says that RPM International agreed to pay USD2 million to settle SEC's charges of accounting and disclosure violations related to a government investigation, according to Chemweek.

The SEC's complaint alleged that RPM failed to timely disclose a material loss contingency for a US Justice Department investigation. The US District Court for the District of Columbia entered a final judgment against RPM and Edward Moore, RPM's general counsel and chief compliance officer.

The judgment is related to disclosure and accrual of loss reserves in fiscal 2013 relating to RPM's Tremco Roofing Division’s General Services Administration (GSA) contracts. The restatement shifted accrual amounts among three quarters in RPM's fiscal 2013, which had the effect of reducing net income by USD7.2 million and USD10.8 million for the quarterly periods ended 31 August 2012 and 30 November 2012, respectively, and increasing net income for the quarterly period ended 28 February 2013 by USD18.0 million. RPM has previously said these restatements had no impact on audited financial statements for the full 2013 fiscal year. An RPM audit committee’s investigation concluded that there was no intentional misconduct on the part of any of its officers.

RPM agreed to pay a penalty of USD2 million. Moore agreed, without admitting or denying the complaint's allegations, to pay a penalty of USD22,500.

As MRC reported earlier, in January, 2017, RPM International Inc. announced that it ha acquired Prime Resins to be part of its USL Group. Prime Resins is a manufacturer of specialty chemicals and equipment for infrastructure construction and repair.

We remind that Russia's output of chemical products rose in November 2020 by 9.5% year on year. At the same time, production of basic chemicals increased in the first eleven months of 2020 by 6.6% year on year, according to Rosstat's data. According to the Federal State Statistics Service of the Russian Federation, polymers in primary form accounted for the greatest increase in the January-November 2020 output. Last month"s production of polymers in primary form rose to 896,000 tonnes from 852,000 tonnes in October. Overall output of polymers in primary form totalled 9,240,000 tonnes over the stated period, up by 17.1% year on year.
MRC

MOSCOW (MRC) -- BASF has set itself “clear and measurable” targets to boost sustainable agriculture by 2030. The company’s Agricultural Solutions division will annually increase its sales share of solutions with a “substantial” sustainability contribution by 7%, said Chemweek.

The company will also bring digital technologies to more than 400 million ha of farmland and continue stewardship programmes to ensure the safe use of its products. BASF aims to help farmers achieve a 30% reduction in CO2 emissions per tonne of crop produced.

The president of BASF’s Agricultural Solutions division, Vincent Gros, points out that over the coming decades, the agricultural food system will undergo an accelerated transformation to provide access to enough food for a growing world population. “At the same time, we will need to mitigate its impact on our planet,” he says.

The company says that it will support farmers to become more carbon efficient and resilient to volatile weather conditions with technologies that increase yield, make farm management more effective, and decrease environmental impact. Those include: crop protection products, such as the herbicide, saflufenacil (trade-marked as Kixor), that enable farmers to grow crops without ploughing; new crop varieties such as InVigor canola seeds with glufosinate-ammonium-tolerant LibertyLink technology, providing higher yield stability, especially under more severe weather conditions; biological inoculants and innovative digital solutions; and nitrogen management products such as Vibelsol and Vizura, that reduce greenhouse gas emissions.

BASF aims to increase the number of sustainable solutions it brings to farmers. The company claims to be continuously investing in its R&D pipeline, steered systematically by sustainability criteria. It says that it assesses its entire product portfolio against clearly defined and third-party validated sustainability criteria. BASF’s Agricultural Solutions division will contribute “significantly” to the BASF Group target of EUR22 billion (USD25.6 billion) in sales by 2025. In 2019, it said that it was targeting increased market share and growth of one percentage point above the agricultural inputs market, aiming for a 50% increase in sales by 2030.

Among its stewardship initiatives, the company cites protective equipment, customised training, digital solutions, and “new and future-oriented” application technologies, such as drones. Initiatives using drones have already been launched in China and Colombia, it says. BASF also points out the Easyconnect closed transfer system, which was supported by key players in the agricultural industry, with first market launches expected from 2021/22.

As MRC reported before, German chemicals maker BASF said in early November it had put a project to build a petrochemicals complex in India worth up to USD4 billion on hold due to the economic uncertainty caused by the COVID-19 pandemic. BASF signed a memorandum of understanding with Abu Dhabi National Oil Company (ADNOC), Adani Group and Borealis AG in October 2019 to evaluate a collaboration to build the chemical site in Mundra, in India’s Gujarat state.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,760,950 tonnes in the first ten months of 2020, up by 3% year on year. Only high density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments increased. At the same time, PP shipments to the Russian market reached 978,870 tonnes in January-October 2020 (calculated using the formula: production minus exports plus imports minus producers' inventories as of 1 January, 2020). Supply of exclusively of PP random copolymer increased.

BASF is the leading chemical company. It produces a wide range of chemicals, for example solvents, amines, resins, glues, electronic-grade chemicals, industrial gases, basic petrochemicals and inorganic chemicals. The most important customers for this segment are the pharmaceutical, construction, textile and automotive industries.
MRC