KUALA LUMPUR: The earnings outlook for Lotte Chemical Titan Holding Bhd, which provides olefins and derivative products, is expected to hinge on the direction of naphtha prices.
CGS-CIMB Research, in a report, noted that naphtha prices have moderated slightly in April to US$905 (RM3,939) per tonne from US$993 (RM4,323) per tonne in March.
“This has allowed polymer-naphtha spreads to improve on a month-on-month basis. We think that it is too early to celebrate, as the April naphtha price is still higher than the first quarter of 2021’s average of US$864 (RM3,761) per tonne.
“Also, since Lotte’s naphtha actual cost of sales typically lags by one-to-two months against spot prices, the high March naphtha prices may only hit the company in April or May.”
Naphtha is a flammable liquid that is used as fuel, metal cleaner, high-octane gas and as petrochemical in production of plastics.
Naphtha prices are highly correlated with crude oil, as it is usually produced during the refining of crude oil.
The research house said the risk premiums embedded in oil and naphtha prices may remain high should the Russia-Ukraine war drag on and as Europe moves towards an embargo on Russian crude and oil product imports.
“The downside risk is that if the premiums escalate, crude oil prices may be higher than our average forecast of US$98 (RM426) per barrel for 2022.”
With Petronas Chemicals Group Bhd likely to start its Pengerang plants by mid-2022, it said domestic and regional competition could intensify, leading to potentially weaker polymer selling prices.
“The upside risks include a potential resolution of the Ukrainian conflict and a potential US-Iran nuclear deal that will allow a swift upswing in Iranian oil exports,” it said.
Separately, CGS-CIMB Research said Lotte had reported its weakest earnings in seven consecutive quarters.
“Lotte delivered a first quarter 2022 core net profit of only RM41mil, which was 91% lower than the previous corresponding period’s RM440mil and 55% lower than the already-low fourth quarter 2021 core net profit of RM90mil.
“While first quarter 2022 revenue rose year-on-year and quarter-on-quarter from higher average selling prices, Naphtha feedstock costs rose even faster, causing a sharp squeeze in spreads between selling prices and Naphtha costs.”
CGS-CIMB Research pointed out that the rise in Naphtha costs was driven by the higher crude oil prices.
It noted that oil prices began rising from the third quarter of 2021 as the organisation of the petroleum exporting countries plus crude oil production increases lagged behind oil demand improvements, causing oil stocks to decline globally.
“The onset of the Russia-Ukraine war from Feb 24, pushed up oil and naphtha prices further in the first quarter of 2022, due to the incorporation of a war premium and efforts by US allies and Europe to avoid purchases of Russian crude oil and oil products such as naphtha.”