Lotte in dire straits

Lotte Chemical is witnessing its fortunes slip again this year. The leading manufacturer of Purified Terephthalic Acid (PTA)-an essential raw material for the downstream polyester industry-has recorded yet another quarter of hefty losses, which took the half-yearly losses, as of June 30, to Rs423 million.
Its not that last year was any good. Profit margins were all in the red same period of last year, too. However, the extent of losses has increased for Lotte, whose woes in CY13 owe much to a sluggish top line.
The PTA manufactured by Lotte is used in the manufacturing of Polyester Staple Fiber (PSF) which is used as a substitute for cotton yarn. PTA is also used as raw material for making the polyethylene terephthalate chemical, which is used in the production of synthetic fibers and plastic bottles. Apparently, the slowdown in PTA purchases by the textile firms led to a 2.4 percent dip in Lottes 1H CY13 revenues.
If the cost of production had remained in check, the situation may not have been as precarious. The prices of Paraxylene (Px), a major raw material used in PTA production, did not come down during the six-month period, along with the costs of acetic acid and electricity. The cost of production, already consuming all of revenues, came down only 94 bps in 1H CY13 over last year, rendering all ensuing profits margins red.
The half-yearly performance wasn without a few positives. Lotte cut down on its distribution expenses by 40.3 percent, curbed its administrative expenses by 0.68 percent, and slashed its other operating expenses (mainly workers profit participation and welfare funds) by 64.4 percent year on year. Its other operating income, which includes dividends from its subsidiary Lotte Powergen, also increased by eight times.
However, these positives were nullified by a near doubling of finance cost and an 85 percent decline in finance income, which was probably due to limited foreign exchange gains and probable fall in cash deposits and declining returns on them. In any case, the major, unrecoverable damage had already been inflicted at the start of the income statement.
Lottes profitability depends on the price differential between PTA (its sales product) and paraxylene (its raw material). The PTA-Px margin, however, will likely remain under pressure due to current trend of high Px prices in the Asian markets. However, the December 2012 imposition of a higher anti-dumping duty on imported Chinese PSF may benefit Lotte more if domestic textile production intensifies in coming months.

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Lotte Chemical Pakistan Limited

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Rs (mn)                            1HCY13    1HCY12       Chg

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Revenues                          25,893    26,538      -2.4%

Cost of sales                    (26,460)  (26,712)     -0.9%

Gross margin                       -2.19%    -0.66%         -

Operating loss                      (499)     (399)     25.2%

Finance income                        30       198     -84.9%

Loss after taxation                 (423)     (294)     43.6%

Net margin                         -1.63%    -1.11%         -

EPS (Rs)                            -0.28     -0.19     47.4%

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