Lotte Chemical’s petrochemical plant in Daesan, Seosan of South Chungcheong Province (Courtesy of Lotte)
South Korea’s No. 2 petrochemicals maker Lotte Chemical Corp. has taken a hit from lowered credit-rating outlook on the company and major affiliates due to its deteriorating financial condition amid high crude oil prices and a prolonged slowdown of the global petrochemical industry.
Korea Ratings said on Thursday it has downgraded the outlook of the holding company and five units of Lotte Group, the country’s No. 6 conglomerate, from stable to negative.
The firms with lowered outlook are holding company Lotte Corp. with AA-, Lotte Chemical with AA, financial services unit Lotte Capital Co. with AA-, auto loan arm Lotte Auto Lease Co. with AA-, real estate firm Lotte Property & Development with AA- and car leasing company Lotte Rental Co. with AA-.
Lotte Chemical’s rating outlook downgrade was due to its persistent operating losses amid prolonged industry downturn and its financial burden increased by large investments, Korea Ratings said.
The industry slowdown has continued with high crude oil prices and sluggish global demand, the rating agency added.
The outlook downgrade on Lotte Chemical, Lotte Group’s major subsidiary, has reduced the possibility of the company’s support for other affiliates in their financial emergencies, Korea Ratings noted.
Lotte Chemical has posted a series of operating losses. It logged 92.4 billion won ($67 million) in deficit for the first quarter of this year.
The firm had a 347.7 billion won operating loss last year, after a 762.6 billion won shortfall in 2022.
Lotte Chemical has bet on some large deals in recent years, including a 5 trillion won investment in an Indonesian petrochemical project and the acquisition of Iljin Materials for 2.7 trillion won in 2022, which has become Lotte Energy Materials Co.
The petrochemical firm’s net borrowing on a consolidated basis surged to 6.4 trillion won as of the end of March, more than 21 times at the end of 2021.
The company will have new proceeds by selling equities of its affiliates with poor earnings, Korea Ratings said in a report. Investors should consider that its financial burden on investments continues, including Lotte Chemical Indonesia New Ethylene (LINE) project in Indonesia, the report added.
The rating agency forecast that it will take a while until Lotte Chemical, shifting its main focus to copper foil and hydrogen from petrochemicals, earns profits through the business restructuring.
As some 70% of the firm’s revenue is from sales of basic chemicals such as polymer and monomer, it will take some time to strengthen the business diversification to a meaningful level, Korea Ratings said.
It could see lower-than-expected profitability of the copper foil business continue due to sluggish electric vehicle demand and intensifying competition with Chinese players, according to the rating agency’s forecast.
By Hyun-Ju Jang
blacksea@hankyung.com
Jihyun Kim edited this article.
