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Lotte Chemical Pakistan (LOTCHEM): Management Meeting Notes

• Topline Securities conducted Management Meeting  session with Lotte Chemicals (LOTCHEM), where company discussed future outlook of the company. Following are the key takeaways from the meeting,
• Management believes, PTA margins to remain better this year (2018) as compared to last year due to consolidation among major global producers.
• For PTA prices, company benchmarks China CFR prices, while for Paraxylene (PX) company benchmark South East Asia prices.
• In domestic market PTA prices are determined by looking at the average price of the respective month, while at time of the delivery provisional prices are given to the clients and then at the end of the month price settlement is done by the company. Same method is also applicable to PX.
• Company keeps average PX inventory of 10-12 days. While PTA inventory remains around 7-8 days.
• Conversion cycle of PX to PTA to consumers takes around 1 months, hence in case of upsurge in PTA prices during the month, company realizes inventory gains and vice versa.
• Raw material (PX) procurement in Pakistan is relatively easy and less costly, as various PX plants are now situated in middle east.
• Management was optimistic about PTA demand in Pakistan, as Pakistan is 6th largest populous country in world and demand for textile, bottles, and packaging is growing with rising income, population and urbanization.
• According to management, PTA demand in Pakistan is around 730k tons and company’s production capacity is 500k tons, (that is not extendable any further).
• Company remains short in supply to other customers, and is focused on four big groups in Pakistan namely, Novatex, Rupali, Ibrahim and ICI.
• Management indicated possibility of expansion by 1mn tons (estimated CAPEX US$400-500mn), once demand reaches near to 1mn tons. Post expansion, company can close its old plant and can restart later if demand matches supply of both plants. Moreover, new plant would be more cost effective.
• Expansion can take around 2-3 years from the day of announcement (if happens).
• Export market is not feasible for company as premiums are only realized  in domestic market due to custom duty protection . Additionally, extra cost is incurred by the company (mainly freight).
• Excess Power supply issue lies with NEPRA, where NEPRA is asking to link gas prices with LNG. To note, if settlement reaches over LNG linked prices company’s cost related to gas supply for PTA production will not increase and will always remain in line to natural gas.
• Company has approached highest level in FBR to address its minimum tax related issue. Company proposed to exempt PTA business from minimum tax regime due to high turnover and less margin nature of business.
• Initially, custom duties in Pakistan were 15% and then were reduced to 7.5%. Post reduction of duties ICI sold PTA business to Lotte Chemicals. Later, duties were even lowered to 3% (lowest in region) due to strong lobby of APTMA. Currently, custom duties are at 5%.
• At the time when Lotte entered Pakistani market, Indian PTA capacity was 750k tons and Pakistan’s capacity was 500k tons. Today Indian market has PTA capacity 7mn tons with duty protection of ~20%.
• Company hasn’t faced short supply of Gas from SSGC till now, however in case of any uncertain situation KEL is backup power supplier of the company.