KUALA LUMPUR (May 10): A high inflation environment and geopolitical tensions will continue to hurt demand for polyethylene (PE) and polypropylene (PP) products, Lotte Chemical Titan Holding Bhd (LCT) president and chief executive officer Park Hyun Chul said on Wednesday (May 10), warning of challenging times for the petrochemical industry, as supply is also outstripping demand, particularly now that China is becoming self-sufficient.

Park said demand for PP and PE is expected to improve slightly in the second half, but may not be sufficient to stem a decline in earnings this year. Moreover, feedstock prices remain high.

“The overall petrochemical industry is going through a challenging time. We hoped that demand would have improved after the reopening of China, but unfortunately, it has been very slow. This is a problem,” said Park at a memorandum of understanding (MOU) signing ceremony between LCT and British-based biotech company Polymateria Ltd to develop products incorporating next-generation biodegradable plastics in Malaysia.

LCT’s product spread is not improving, amid abundant supply of the two materials in the market, coupled with weaker-than-expected demand recovery from China, he explained. “Currently, our product spread is not improving, but we are hopeful that in the second half this year, there will be some advancements."

LCT made no promises of returning to the black in the coming quarters, but the management assured that losses would be narrowed on a marginal uptick in general demand.

The largest producer of polyolefin in Southeast Asia has reported losses for four consecutive quarters since the second financial quarter ended June 30, 2022 (2QFY2022).

For 1QFY2023, it posted a net loss of RM224.76 million, against a net profit of RM104 million a year earlier, as revenue sank 29% to RM1.97 billion from RM2.76 billion before, following lower average selling prices (ASPs) and sales volume.

However, net loss narrowed on a quarter-on-quarter basis from RM317.28 million for 4QFY2022 to RM224.76 million for 1QFY2023.

“We are hopeful that this trend will continue as net losses narrow, although our first quarter was slow,” Park said.

He indicated that additional supply of generic chemicals of PP and PE in the market had led to a mismatch between supply and demand, which further affected the sector's recovery, as China which used to be the net importer of the materials is building its own plants now and becoming self-sufficient. New petrochemical plants in the region also added to the supply exceeding demand.

LCT's competitor Petronas Chemicals Group Bhd has also launched the commercial operations of its new polymer plant facility in Pengerang, Johor, further adding to supply.

Park added that the new additions will keep Asian polymer markets oversupplied in 2023, and that this would result in margin compression.

“The ASP of PP in good years when we used to make billions was around US$1,400, but that has come down to US$1,000 per tonne, due to the oversupply situation,” Park observed.

“Although geopolitical tensions have contributed additional uncertainties to the operating environment, we are cognisant of the petrochemical industry’s deep and prolonged cyclical behaviour that is characteristic of oil markets and prices rooted in the industry’s structure,” he said, adding that LCT is actively developing specialty materials to maintain demand for new products.

Currently, 45% of LCT’s business is focused on commercialising specialty materials, with lesser competition in the region.

The group currently markets 20 specialty products, and is looking to further expand its product range this year.

Reflecting on the group’s low share price, Park indicated that LCT shares are grossly undervalued, as the company is optimistic about its long-term growth potential once the new mega Lotte Chemical Indonesia New Ethylene (LINE) project is completed in 2025.

“We think our share price is grossly undervalued. We have zero gearing, and are sitting in a net cash position. Our LINE project in Indonesia has not even been factored into the share price yet. But unfortunately, analysts are only looking at company prospects for three to six months. This company is meant for long-term production,” he said.

Analysts have mixed views on LCT, following its 1QFY2023 results, as the macro environment remains challenging for the group moving forward.

KAF Equities Sdn Bhd trimmed its LCT earnings estimate for FY2024 by 25% to RM72.8 million, and slashed its FY2025 forecast by 56% to RM141.6 million.

CGS-CIMB Research also cut its target price for LCT to 99 sen, from RM1.04 previously, while keeping a "reduce" call, in view of weak petrochemical demand and excess supply.

The research house also expects LCT to report a larger annual loss of RM1.08 billion for FY2023 — wider than its record loss of RM714.64 million for FY2022 — from an earlier annual net loss forecast of RM582 million.

LCT shares closed down a sen at RM1.20 on Wednesday, translating into a market capitalisation of RM2.77 billion.