Inventories of four largest Korean petrochemical firms surged by 54%

Business Monday 11/July/2022 13:19 PM
Inventories of four largest Korean petrochemical firms surged by 54%

Seoul: Seoul Inventories of the four largest Korean petrochemical firms increased by more than 54 per cent due to the decreased demand after Russia's invasion of Ukraine and China's lockdown measures.

Raw materials and products piled up in the warehouse, and inventories have also increased. Amid high oil prices, interest rates, and currency rates, companies are concerned about this year's performance. According to a quarterly report by each company on the 8th, inventories of Korea's top four petrochemical companies, LG Chem, Lotte Chemical, Hanwha Solutions, and Kumho Petrochemical, amounted to 15.3667 trillion won in March, up 54 per cent from a year ago (9.954 trillion won).

Inventory assets refer to the value of raw materials purchased by the company and finished products for sale. It is important to manage inventories efficiently with accurate predictions.

As of the end of March, LG Chem's inventory amounted to 9.311 trillion won, up 58 per cent from 5.8901 trillion won in the previous year. Finished products and raw materials, which account for the majority of inventory, rose 49 per cent and 62 per cent year-on-year to 4.8241 trillion won and 2.3094 trillion won, respectively.

Lotte Chemical's inventory also rose 56 per cent to 2.8542 trillion won. Its product and raw material inventories amounted to 728 billion won and 716.6 billion won, respectively.

Inventories of Hanwha Solutions and Kumho Petrochemical also rose 39 per cent and 57 per cent to 2.4155 trillion won and 785.2 billion won, respectively.

A petrochemical industry source explained, "Companies increase inventory by purchasing raw materials in large quantities when international oil prices are soaring. This year's inventory seems to have increased as demand is less than expected."

Companies increase their purchases of raw materials and products during the industrial boom. However, when the market slows down, inventory is accumulated in the warehouse as supply is delayed. In the first quarter of this year, LG Chem's inventory turnover rate was 1.2, down 0.4p from a year ago (1.6).

The high turnover rate means that the inventory sales are also fast. Lotte Chemical's inventory turnover also decreased from 2.3 to 1.9. The inventory turnover of both Hanwha Solution (1.4-1.2) and Kumho Petrochemical (3.7-2.8) also decreased.
Increased inventory and decreased demand have a negative impact on companies' performance. When the value of inventory decreases, companies set up a provision for losses.

This is directly related to profitability because it is included in the cost of sales. In the first quarter, LG Chem set 273 billion won for provision, up 89 per cent from 144.2 billion won a year earlier.

Lotte Chemical's provision for losses more than doubled from 18.1 billion won last year to 39.3 billion won this year. Hanwha Solutions and Kumho Petrochemical also decided to increase provisions by 38 per cent and 100 per cent to 38.3 billion won and 4.2 billion won, respectively.

The securities firms predicted that demand will continue to decrease due to the global economic recession. SK Securities estimated LG Chem's second-quarter operating profit at 895 billion won, down 58.2 per cent from a year ago.

Hi Investment and Securities estimated Lotte Chemical's second-quarter operating profit at 28.5 billion won, down 95per cent.

The outlook for the second half is not bright either. The Russia-Ukraine war and China's lockdown are expected to be prolonged and rising oil prices, interest rates, and currency rates are also expected to speed up a decrease in demand.