In November 2016, OPEC agreed to its first cut in production in 8 years, trimming output by 1.2 million barrels per day from the start of 2017. This move has led to a chain reaction in the global market of petrochemicals, influencing companies whose main products’ prices are derived from this industry.
Lotte Chemical Pakistan Limited (LCPL) is a supplier of Purified Terephthalic Acid (PTA). PTA is a base raw material for Pakistan’s textile and polyethylene terephthalate (PET) packaging industries. Paraxylene is widely used as a feedstock (or “building block”) to manufacture PTA.
As the OPEC production cut took effect, prices of petrochemical paraxylene (PX) rose at the start of 2017. Though prices peaked in February of this year, since then they have generally followed a declining trend.
While PTA’s prices have followed the trajectory of PX’s, on the whole they have stayed relatively stable, increasing the PTA-PX spread. From June to July this year, the PTA-PX spread increased by $13 per ton this year.
As per calculations by Optimus Capital Management, though PTA-PX spread has increased by 12 percent since 2016, strengthening in upstream markets has increased PX prices by 2 percent leading to a week-on-week spread decline by 12 percent. The trend however continues to remain favourable. If the PTA-PX margin is maintained at the current level of $110, the expected EPS at the end of 2017 is 0.99. However, if the spread declines to $85 per ton, expected EPS could decline to Rs0.73. As per Lotte’s first quarterly report of 2017, EPS was Rs0.21.
Advising caution, Foundation Securities calculated the break-even mark for Lotte at $120 per ton as regards the PTA-PX spread. However, PTA’s prices are also trending higher on the back of higher upstream values and high demand from the downstream Polyester Staple Fibre. This could offset the potential increases in PX.
With the imposition of anti-dumping duties on PSF, which provides support to the local PTA demand, Lotte’s sales continued to increase in the first quarter of this year. Lotte does face challenges in the form of already burgeoning PSF inventories in the regional market that are associated with higher production rates of Chinese PSF producers. However, if the PTA-PX spread continue at current levels, Lotte’s financials are expected to continue being strong.
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