With a turnover of $92 billion in 19 countries, spread over 20 businesses, Lotte is one of South Korea's largest conglomerates. In Pakistan its construction phase started under ICI's supervision in 1996 with the PTA plant commissioned in 1998. PTA business demerged from ICI Pakistan Ltd into Pakistan PTA Ltd (PPTA) in 2000. By 2008, PPTA had become a part of AkzoNobel since AkzoNobel acquired ICI globally. In 2009, KP Chemical, a subsidiary of Lotte, acquired PPTA making it part of Lotte and changed its name to Lotte Pakistan PTA Ltd (LPPTA). In 2012, the Co-Generation Plant was commissioned and KP Chemical's identity changed globally to Lotte Chemical and in 2013, LPPTA became Lotte Chemical Pakistan Ltd.
Business overview - 3QFY17
Improved global demand, decreasing US inventories and reports of strong compliance with Opec and non-Opec agreed cuts resulted in crude oil gaining strength. However, the exchange between US and North Korea and the destruction caused by tropical storms lead to an increase in inventories of crude oil and gasoline. Together this created a bullwhip effect that was further fueled by supply disruptions from Libya. As a result, by the end of 3QFY17, crude oil prices crossed $52 per barrel for the first time since June 2015 as demand rose and investor confidence returned.
The upstream crude oil market trend was followed by the paraxylene (PX) market at large. Strong demand from the downstream PTA sector and unplanned shutdowns at PX plants further fueled the bullish sentiment. The average price of PX last quarter was $824 per tonne, with the quarter ending price was $847. This resulted in lower margins; in the latest quarter margin was $320 per tonne on average as compared to previous quarter's average of $369 per tonne.
Unplanned extended outages in China created a supply/demand gap, which impacted the PTA market in 3QFY17. Chinese manufacturers secured PTA from the spot market to fulfill contractual obligations. PTA prices were supported due to robust demand throughout the quarter from the downstream PSF and PET sector. PET demand increased due to startup of new PET capacities though while inventories were low. As a result of these trends, the PTA industry margins improved and averaged at $103 per tonne while spot PTA prices averaged $639 for the quarter.
Financial performance - 3QFY17
Revenues of Lotte Chemical Pakistan Ltd. were lower than the corresponding period last year due to lower sales. Production during the quarter was 110,613 tonnes, which was 15 percent lower than the corresponding period last year because of outages in July and August for maintenance activities. This led to lower product availability, which is why the firm's sales volume for domestic sales was 114,300 tonnes, 6 percent lower than 3QFY16.
The increase in the PX prices reduced gross profit margin. The decrease in gross profit margin and increase in expenses, particularly administrative expenses, significantly depressed net profit margin. As a result, the firm's net profit for the period was less than half the net profit of the corresponding period last year.
Future outlook
Currently, the global crude oil market is continuing in an over-supply situation. However, the world energy demand forecasts have been revised upwards by International Energy Agency (IEA). Based on observation, it seems that the market is unable to sustain prices above the $50 per barrel mark. Booming production in US and the consistent increase in rig count drives down oil prices. As it is, talks of extension of production cuts beyond March 2018 have already begun between Opec and non-Opec members. It is believed that this is vital for re-balancing of the crude oil market.
As a result, the PX market is expected to follow suit. Since there have been reports of restarting idle PTA capacities in the region, it is expected that healthy demand from the downstream PSF & PTA industries will enable PX and PTA manufacturers to operate at healthy rates.
Though the winter season results in weakening demand from the PET industry, the PSF demand outlooks seems strong in the near future. The recently announced import ban on recycled PET/polyester into China is expected to create more demand for pure polyester. PSF manufacturers are planning to maintain their operations to cater to healthy demand for downstream textiles. As value added textile exports have seen growth as per the latest figures posted by PBS, PSF demand is expected to maintain. Furthermore, with the recent implementation of regulatory duty on PFY, it is expected that operations will be restarted and idle capacity will be used. All this is expected to maintain and increase demand for PTA.
A source of other revenue is also the sale of surplus electricity for which the management is closely following up with K-Electric, Ministry of Water and Power and Nepra.
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Pattern of shareholding (as at 31 December, 2016)
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Percentage held
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Associated companies, undertakings and
related parties: Lotte Chemical Corporation 75%
NIT and ICP 0.1%
Mutual Funds 1%
Directors, CEO, their spouses
and minor children 0.0%
Executives 0.0%
Public sector companies and corporations 0.1%
Banks, development finance institutions,
non-banking finance institutions, insurance
companies, takfaful, modaraba and pension funds 1%
Others 5%
Individuals 18%
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Source: Company accounts
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Lotte Chemical Pakistan Limited
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Rs.mn 3QFY17 3QFY16 YoY
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Revenue 8,466 8,783 -4%
Cost of sales (8,268) (8,532) -3%
Gross Profit 198 250 -21%
Distribution and selling expenses (20) (19) 5%
Administrative expenses (86) (68) 26%
Other expenses (9) (14) -36%
Other income 61 44 39%
Finance costs/income 16 (2) -1041%
Profit before tax 160 191 -16%
Tax (108) (73) 48%
Profit after tax 51 118 -57%
Gross profit margin 2.3% 2.8% -18%
Net profit margin 0.6% 1.3% -55%
EPS (Rs.) 0.03 0.08 -63%
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Source: Company accounts