LG Chem Profit Falls on Feedstock Costs, Waning China Demand

July 18 (Bloomberg) -- LG Chem Ltd., South Korea’s largest chemicals maker, reported a 40 percent decline in second-quarter profit as feedstock expenses gained amid weakening demand in China, its biggest market.

Net income fell to 373.9 billion won ($327 million) in the three months ended June 30 from 624.5 billion won a year earlier, the Seoul-based company said today in a regulatory filing. The quarterly result, the smallest since it adopted international accounting rules in 2011, fell short of the 382.8 billion won average of 20 analyst estimates compiled by Bloomberg. Sales rose 5.2 percent to 6 trillion won.

Demand for LG Chem’s products including ethylene and polyvinyl chloride used in water-resistant fabrics and window frames waned as China’s economic growth slowed for the sixth straight quarter. Gross domestic product in China, which accounts for more than a third of LG Chem’s sales, expanded 7.6 percent in the second quarter, a three-year low.

“Earnings continue to fall because of China,” said Yoo Young Kook, an analyst at KTB Securities Co. in Seoul, who has a “buy” recommendation on LG Chem. “Earnings may improve as prices of products have started rebounding since the end of last month.”

LG Chem fell 1.5 percent to 305,500 won at the close of trading in Seoul before the announcement. The stock has declined 3.8 percent this year, compared with a 1.7 percent drop in the benchmark Kospi index. Of the 43 analysts tracking the company, 40 have “buy” ratings on the stock, according to data compiled by Bloomberg. None has a “sell” rating.

Naphtha Price

The price of naphtha, an oil product used in petrochemicals, gained to $1,090 a ton in the first quarter from $912 a year earlier, LG Chem said today in a statement. The company said production typically lags behind raw material purchases by two or three months.

Operating profit, or sales minus the cost of goods sold and administrative expenses, dropped 35 percent to 503 billion won, LG Chem said. The petrochemical division, which accounts for 75 percent of sales, had an operating profit of 343.6 billion won, 47 percent less than that of a year earlier.

Prices for acrylonitrile butadiene styrene, or ABS, used to make cosmetic cases and sport goods, fell 13 percent to $1,944 a ton in the second quarter from a year earlier, LG Chem said. ABS accounted for 22 percent of second-quarter sales.

Operating profit for LG Chem’s information technologies division, which makes polarizers and other electronics materials, rose to 129.1 billion won from 115 billion won a year earlier. The rechargeable battery business for electric cars and notebooks reported a 61 percent gain in operating profit to 30.7 billion won.

Earnings from the petrochemical business may improve in the third quarter as feedstock prices are stable and product prices are rising, Chief Executive Officer Kim Bahn Suk told investors in Seoul today.

The company may lower its full-year sales forecast for electric car batteries by 30 percent from the 800 billion won projected in January because of weak demand at automakers, Kim said today. Last year, LG Chem posted 300 billion won in sales of car batteries.

To contact the reporter on this story: Sangim Han in Seoul at sihan@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net