Korean manufacturing inventories pile up rapidly, boding ill for Q4 earnings

Korean manufacturing inventories

Manufacturing inventory levels are fast rising in South Korea’s mainstay industrial fields such as for chips, electronics, chemicals and steel, posing a threat to their financial health and the manufacturing and export-reliant economy amid worsening cash flows and growing debt from subdued demand.

LG Chem Ltd. on Monday announced that its inventory assets expanded 56 percent on year to 12.49 trillion won ($8.8 billion) in the third quarter ended September due to plunged demand for petrochemical products from its biggest buyer China due to the country’s strict zero-Covid policy and growing global recession fears.

To prevent a deterioration in cash flows from rising inventory levels, LG Chem’s borrowed fund also increased to 17.1 trillion won from 14 trillion won during the period.

But market analysts expect that inventory levels at petrochemical companies will inevitably increase further in the second half of the year after a big jump in the first half.

Lotte Chemical Corp.’s inventory assets grew to 3.12 trillion won as of the end of the first half from 2.79 trillion won as of the end of last year. Hyosung Chemical Corp. also saw its inventory assets rise to 456.6 billion won from 401 billion won over the same period, Kumho Petrochemical Co. to 281.5 billion won from 211.3 billion won, and Hanwha TotalEnergies Petrochemical Co. to 2.38 trillion won from 1.86 trillion won.

Steel makers share the same concern due to waning demand. Posco Holdings reported 17.43 trillion won in inventory assets as of the end of third quarter, up 26 percent from a year ago.

“The average selling price retreated 50,000 won per ton in the third quarter, but the prime cost increased, causing steel makers to report poor earnings results,” said Park Hyun-wookn an analyst at Hyundai Motor Securities.

Worse is that rising inventory assets have hurt third-quarter earnings results of listed companies.

Combined third-quarter operating profit of 68 listed manufacturers that already reported earnings for the quarter declined 28 percent on year to 26.15 trillion won, and their net profit also were down 32 percent to 19.96 trillion won, according to Seoul-based financial data tracker FnGuide.

Most of the companies with solid earnings results in the third quarter reported low inventory assets.

LG Energy Solution Ltd. that successfully swung to an operating profit and net income in the July-September period posted its inventory assets plunged to 1.47 trillion won in the first half from 3.9 trillion won at the end of last year. The improvement is largely owed to robust demand for its batteries amid structural growth of the secondary battery market.

Hyundai Rotem Co.’s inventory assets also fell by 15 percent to 214.4 billion won during the period. The company closed the third quarter with a 302 percent growth in operating profit and 424 percent jump in net income.

Analysts expect semiconductor, electronics, chemicals and steel making industries would report worse results in the fourth quarter while their earnings and stock prices would bottom out by next year.

LG Electronics Inc. weighed down by rising inventory assets in the upcoming slow season is expected to suffer from poorer results in the final quarter, said Kwon Seong-ryul, an analyst at DB Financial Investment, expecting it would recover in 2023.

As for Samsung Electronics, Daishin Securities’ analyst Wui Min-bok forecast a fall of more than 20 percent in the average selling price in the fourth quarter.

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