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Lotte Chemical Pakistan Limited (LOTCHEM) suffered a notable profit drop for the nine months ended September 30, 2024, compared to the corresponding period of the previous year as soaring energy prices and persistent inflation continued to weigh on the local manufacturing industry, reports WealthPK.

The company posted a profit-after-tax of Rs2.66 billion in 9MCY24, down from Rs4.84 billion during the same period of 2023. Rising operating costs and intense competition in the market were the driving factors behind the decrease in the company’s profit. According to the company’s financial results available with the Pakistan Stock Exchange (PSX), its revenue reached Rs88.98 billion in 9MCY24 against Rs62.14 billion in 9MCY23, driven by increased sales volumes. Despite this revenue growth, the company's gross profit dropped by 69% to Rs5.03 billion in 9MCY24 from Rs9.86 billion in 9MCY23.

This sharp decline was primarily due to rising gas prices and other input costs, which resulted in a hike in the cost of sales to Rs83.95 billion during the period under review. Lotte Chemical was established in Pakistan on May 30, 1998. The company's core operations include producing and selling pure terephthalic acid (PTA). Additionally, along with the high production costs, the high inflation also increased the company's distribution and administrative expenses. Distribution expenses rose to Rs164 million, while administrative costs grew to Rs552 million in 9MCY24, reflecting the broader effect of high inflation on the company's costs. Additionally, LOTCHEM faced challenges due to weak demand in the local polyester market, which operated at only 70% of its capacity during the third quarter of 2024.

The decline in demand for polyester was due to seasonal changes and high energy costs, which further strained the local manufacturers to become less competitive compared to cheap import alternatives. The company's earnings per share dropped to Rs1.76 in 9MCY24 from Rs3.20 in the same quarter of the previous year, highlighting the financial strain during the period under review. Furthermore, tight monetary policy and a surge in borrowing costs pushed down the finance costs from Rs1.36 billion in 9MCY23 to Rs615 million in 9MCY24. The crude oil market is expected to have difficulties in the future due to possible surplus caused by weak demand despite OPEC+ output cuts. However, US interest rate cuts and Chinese fiscal stimulus could boost demand and support prices.

Furthermore, paraxylene and PTA prices are expected to follow energy market trends but may remain subdued due to oversupply. Thus, domestic polyester operations are expected to recover as inflation eases and borrowing costs decrease. Government measures to reduce energy prices and boost local manufacturing competitiveness could relieve the stress of LOTCHEM and other companies dealing with high operational costs. The company’s management is also focused on exploring cost-saving initiatives and improving efficiency across its operations to ease some of these financial burdens.

Credit: INP-WealthPk