Oversupply continues to hamper Lotte Chemical Titan

PETALING JAYA: Analysts say they anticipate a longer road to recovery for Lotte Chemical Titan Holding Bhd (LCT) as industry weakness has persisted.

The group reported a loss of RM1.2bil for its financial year ended Dec 31, 2024 (FY24).

CIMB Research said LCT is expected to register losses over the next three years, driven by oversupply of ethylene and propylene because of a significant capacity expansion in China.

However, CIMB Research said in a report that LCT’s overall results were above expectations, with FY24’s core net loss coming in at 6% lower than its forecasts and 20% lower than consensus, owing to lower associate losses.

One of LCT’s associates, Lotte Chemical USA, recorded an improvement in its performance as the ethane cracker plant resumed normal operations following a shutdown for repairs and maintenance.

Additionally, LCT had said the RM17bil Lotte Chemical Indonesia New Ethylene (LINE) project in Merak, Indonesia, in which it has a its 51% stake, is on track for completion in the middle of this year.

The group further noted it is optimistic about demand in Indonesia, which has shown encouraging signs since the end of last year, as manufacturing has increased.

“The Indonesian government has implemented policies and import quotas, requiring resin importers and converters to prioritise local products before resorting to importing. We are projecting a startup loss of around RM50mil based on its effective stake of 51%,” the research house said.

CIMB Research said LCT has maintained a stable operating rate of 59% in the fourth quarter of last year (4Q24), resulting in a full-year FY24 rate of 57%.

However, LCT’s full-year rate had been 67% in 2023. The decline was due to scheduled maintenance of its cracker and downstream plants in Malaysia in 2Q24, leading to a 14.2% year-on-year drop in FY24 production volumes.

“To address persistent oversupply and negative margins over the past two years, LCT decided to scale down operations by temporarily shutting down Naphtha Cracker 1 in Pasir Gudang from Dec 15.

“This led LCT to lower its guidance for it operating rate to about 50% to 55% for this year from 55% to 60% previously,” the research house said.

In line with that, CIMB Research lowered its target price to RM0.67 per share and maintained its “hold” rating on the group.

Meanwhile, CGS International (CGSI) Research maintained its “hold” rating on LCT with a target price of RM0.58 a share.

It noted the group’s core net loss for 4Q24 of RM768mil would have been wider if not for the capitalisation of about RM600mil of interest expense on a US$1.845bil loan drawn down for the LINE project.

CGSI Research said as long as the project is not operational, LCT can continue to capitalise the interest expense on the debt.

“Given the current poor economics of naphtha-based petrochemical operations, we do not expect LCT to operationalise the LINE project, but will still be obliged to service the LINE debt,” the research house said, adding that LCT would draw down its banking facilities in Indonesia to pay interest costs.

It also noted the parent company, Lotte Chemical Corp is likely to step in should LCT find itself in a tight spot.

“Also, we hope that the partial shutdown in Malaysia will help reduce losses.

“Downside risks for the group include polymer selling prices falling in 1Q25 from 4Q24 levels, with potential further pressure from a brewing US-China trade war,” CGSI Research said.