Lotte has posted strong financials for 1HCY18 with the bottom line nearly quadrupling YoY. The jump in profits was driven almost entirely from higher international PTA prices that increased by about 30 percent as compared to the same period last year.
Paraxylene (PX) is the core raw material for the manufacture of PTA and significantly influences Lotte’s profitability. As a rule of thumb, LOTCHEM requires approximately $120 per ton as the PTA-PX spread to break even. PTA prices have been on the rise with PX prices rising relatively slowly, this has allowed the PTA-PX spread to continue on an upward trajectory since December. As per a recent report by Foundation Securities, PTA-PX spread was about $259 per ton locally in July, more than double of Lotte’s break-even point.
The higher core delta has driven Lotte’s profitability resulting in a 4.2 times increase in gross profit. Despite finance costs increasing, mostly due to exchange losses, higher gross profit have trickled down to higher net profit. The bottom line was supported by an increase in other income, which can be attributed to surplus cash levels that resulted in income from short-term fixed deposits.
Recently, PX prices have stabilized due to increase in capacity by almost 2 million tons in the region, which commenced operations in April this year. Since PX is a petrochemical, i.e. a second level derivative of crude oil, international oil prices impact its prices. If oil production is at an elevated level, then PX prices will slide down further.
While PTA prices are impacted by oil price and PX price movements, its demand is mostly determined by PSF, PFY and PET industries. PSF has witnessed a decrease in price which may result in a higher demand. On the other hand, there has been higher cotton production during the last fiscal year which may decrease PSF demand going forward.
Increase in PSF and PFY demand depends on Pakistan’s textile sector. On the export side there has been a modest 9 percent growth in textiles and a 13 percent growth in Pakistan’s plastic exports which are dominated by PET. As textile and plastic production increases, demand for Lotte’s products as the sole supplier of PTA in Pakistan grows.
Recently, PTA-PX spread has declined somewhat with a 3 percent increase in PX prices. However, the long term trend expected is for the PTA-PX spread to continue being significantly above breakeven levels.