Lotte Chemical Slides 16.34% Despite First Quarterly Profit in 10 Quarters

Lotte Chemical shares sink despite strong first-quarter earnings

Returns to profit for first time in 10 quarters on inventory valuation gains, lag effect

Debate deepens over whether improved petrochemical fundamentals can last

Shares of Lotte Chemical Co., South Korea’s second-largest petrochemical producer, tumbled on May 12. The drop came a day after the company posted its first quarterly operating profit in 10 quarters and won praise from securities firms. Investor sentiment weakened as the market split over whether the improved profitability can be sustained after the end of the US-Iran war.

Lotte Chemical closed at 89,100 won, down 16.34% from the previous session, according to the Korea Exchange.

The stock had jumped 6.61% in the previous trading session after the company reported strong first-quarter results. On May 12, it gave up more than twice that gain.

The sharp decline after the earnings release triggered a wave of frustration from retail investors on online stock message boards. Posts included comments such as, "I bought at 100,000 won and got trapped. Is there any chance rescue will come at that level?" "One mountain after another," and "I lost."

Lotte Chemical reported first-quarter revenue of 4.9905 trillion won and operating profit of 73.5 billion won. Revenue rose 1.8% from a year earlier, while operating profit returned to black. It marked the company’s first quarterly operating profit since the third quarter of 2023.

Lee Jin-myung, an analyst at Shinhan Securities, attributed the earnings improvement to reversals of inventory valuation losses following a jump in naphtha prices after the Iran war broke out, along with a favorable lag effect. Both inventory valuation gains and losses and the lag effect reflect changes in the value of inventories held in storage or still being processed.

For petrochemical producers, it typically takes one to two months from the purchase of raw materials to the sale of finished products. If products made from previously purchased feedstock have not yet been sold by the closing date, the effect appears in accounting as inventory valuation gains or losses. If they have already been sold, it shows up as a lag effect.

Inventory gains and a positive lag effect can emerge when war disrupts oil supply. The issue comes after the fighting ends. Once supply disruptions ease and chemical product prices normalize, producers may have to sell products made from unusually expensive feedstock at lower prices.

The market is divided over whether the Middle East conflict has changed global petrochemical supply and demand enough to sustain stronger profitability than before the war.

Jung Kyung-hee, an analyst at iM Securities, wrote that the petrochemical industry had struggled to break out of a chronic oversupply cycle over the past four years because of aggressive capacity expansion led by China and the Middle East. The unexpected conflict in the Middle East could now push the market into a phase of easing oversupply, she wrote. Supply and demand may improve structurally as damage to facilities in the region cuts production and exports, as Asia and Europe trim output because of naphtha procurement disruptions, and as project delays and restructuring of aging plants unfold simultaneously.

Cho Hyun-ryul, an analyst at Samsung Securities, took the opposite view. He wrote that the number of chemical products seeing better supply-demand balance after the war appears limited, with no clear positive signs beyond inventory-related effects, and maintained a neutral rating on Lotte Chemical.

Views also diverged on whether Lotte Chemical can extend its strong performance into the second quarter.

Lee Yong-wook, an analyst at Hanwha Investment & Securities, said chemical spreads — a profitability measure calculated by subtracting raw material costs from product prices — remain above prewar levels. With the positive lag effect continuing through April, he projected that Lotte Chemical would stay profitable in the second quarter.

Kim Hyun-tae, an analyst at BNK Investment & Securities, was more cautious. He said prices for products that had surged in the short term, including butadiene, a feedstock for synthetic rubber, are starting to decline. Weekly spreads are also stabilizing lower quickly, he added, and second-quarter operating profit will likely remain only slightly in the black.

Han Gyeong-woo, Hankyung.com reporter case@hankyung.com