Credit risk grows for petrochemical makers with Chinese walkaway

Korea's petrochemical manufacturers face growing credit risks as China pulls back and persistently high capital expenditures plague the industry.

Kim Myoung-soo, NICE Investors Service CEO, speaks during the NICE Credit Seminar 2024 held in western Seoul on Thursday. [SHIN HA-NEE]

Korea's petrochemical manufacturers are facing growing credit risks with Chinese competitors fast expanding their presence in the market, a credit rating agency has said.

For major conglomerates such as LG and Lotte, the slow demand in the petrochemical market and high capital expenditures are expected to continue to weigh on their long-term performance.

The forecast was presented during the annual NICE Credit Seminar 2024, hosted by NICE Investors Service at the Korea Exchange building in western Seoul on Thursday.

This year’s seminar focused on three areas — petrochemicals, construction and retail — where credit risks are growing despite robust economic growth driven by rebounding exports.

“Korea remained China’s biggest petrochemical exporter [since the 2000s], yet such mutual dependency has been faltering since 2019” when China began to push for self-sufficiency, said Kim Seo-yeon, chief credit analyst at Nice Investors Service.

As a result, “Korean petrochemical manufacturers’ debt capacities have been declining rather significantly since 2021, when investments [in new growth businesses] began in full swing,” said Kim.

“An increase in net debt along with shrinking business operations and cash flow will continue to fuel credit risks in general,” Kim said, adding that “while the market situation is expected to improve by 2025, the debt capacity is likely to remain below the 2022 level."

Among SK Group, SKC is forecast to suffer from a growing financial burden from its weak performance in the chemical business. For the group as a whole, the debt burden is expected to remain heavy due to major investments that have yet to generate profit, but the recent rebound in chip demand and the resulting improvement in the performance of SK hynix will mitigate credit risks, according to NICE.

For LG Group, which includes LG Chem and LG Energy Solution, NICE pointed out that it will need to mitigate its financial burdens as it plans to spend over 9 trillion won ($6.5 billion) this year and next.

Meanwhile, liquidity concerns regarding project financing loans in the real estate sector continue to remain significant, suggested Youk Sung-hoon, a credit analyst at NICE.

Youk predicted potential losses related to project financing loans to reach up to 10.1 trillion won.

“Even minor liquidity losses related to completion guarantees can become a huge burden for construction companies,” the analyst said.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]