Lotte Chemical’s Profits Nosedive With a 97% Decline in Q2 2020

Lotte Chemical reported a 97% decrease in profits to just Rs. 55 million during the 2nd quarter of 2020. It booked a profit of Rs. 1.76 billion in the same period last year.

This took the company’s half-year profits to Rs. 113.15 million as compared to a profit of Rs. 3.05 billion.

Revenue for the quarter was 74% lower than the corresponding period last year mainly due to lower sales volume and lower PTA price. It had reported a net revenue of Rs. 4.41 billion during the 2nd quarter as compared with Rs. 17.06 billion in the same period last year. This coupled with reduced margins resulted in a gross loss of Rs. 96 million for the quarter as compared to a gross profit of Rs. 2.60 billion during the same period last year.

As a result of lockdown to contain the outbreak of COVID-19, the demand for PTA reduced significantly and the company had to suspend its plant operations for almost 54 days during Q2 2020. Therefore, the production and sales volume during the quarter was 61% and 58% lower than the corresponding period last year.

Being a petrochemical, prices of PX and PTA are linked with international oil prices. The second quarter commenced with crude oil (WTI) prices showing extreme volatility as the pandemic and subsequent lockdown measures severely impacted global demand. As the April Crude (WTI) contract came to an end, the unavailability of physical storage and prevailing market conditions caused crude oil to trade at negative pricing. However, such prices were short-lived.

During the above mentioned period, OPEC Plus extended its production cuts, and businesses cautiously resumed operations causing global demand to gradually improve.

The second quarter commenced with PX prices trending higher due to recovery in downstream operations in China increasing the trend of upstream pricing. This trend continued until the end of the quarter, with SPOT prices recovering by approximately $95 per tonne from the start of the quarter. Nonetheless, the PX market remained under pressure due to prevailing oversupply concerns and increasing downstream PTA inventory.

The PTA market trended higher during the second quarter supported by renewed demand following a recovery in downstream polyester operations as lockdown measures in China eased. Despite oversupply concerns in the market, PTA prices continued to trend higher in May supported by unplanned PTA shutdowns and high downstream Polyester production. However, the PTA prices were unable to match the recovery in upstream PX as PTA producers offloaded inventory which led to margins falling below $100 per tonne towards the end of the quarter.

The market was unable to gather sufficient support as it was plagued by negative sentiment amid fears of a second wave of the epidemic which could undermine the recovery.

The lack of demand for textile due to COVID-19 led to concerns of a possible production cut by polyester producers in order to minimize losses.

The distribution and selling expenses were higher than the corresponding period last year due to the overall impact of inflation as they were stated at Rs. 27.40 million while the other expenses were reported at Rs. 137.34 million as compared to Rs. 190.26 million. They were lower than Q2 2019 mainly due to lower provision for Workers’ Profit Participation and Workers’ Welfare Funds on the back of lower profit.

Other income for the quarter was reported at Rs. 277.39 million, up 6.80% as compared to Rs. 259.82 million. It was higher than last year due to higher income earned on bank deposits. Lotte booked a finance income of Rs. 160.71 million during the quarter as compared to a finance cost of Rs. 68.35 million.

Earnings per share (EPS) for the quarter decreased to Rs. 0.04 per share as compared to Rs. 1.17 per share for Q2 2019.

Outlook

The company in its annual book stated that the Crude Oil market is expected to slowly recover as global lockdowns ease resulting in renewed demand. PX prices are largely expected to trend with upstream crude while finding additional support from ongoing PX supply reductions in Asia as producers cut back production due to lockdown measures and poor industry margins.

The PTA market is expected to continue its recovery as downstream polyester producers maintain high operating rates due to healthy margins and low inventory levels. However, the current trend is not expected to last as weak global demand may lead to a slowdown in the recovery.

The domestic polyester market is expected to recover, owing to improving the consumption of PET products and PSF offtake as lockdown measures ease and business activity returns to normal.

With global economies re-opening, we may see the export sector recover thereby improving the overall demand for textiles. The government’s recent efforts in the new budget to help industries especially the textiles and the export sectors, the company sees domestic operations gradually improve.


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