Not so hot for petrochem

MALAYSIA’S listed petrochemicals companies are in a precarious position. A global overcapacity and sluggish demand has left them grappling with losses.

At the macro level, the global petrochemical sector is undergoing cyclical and structural issues driven by overinvestments in new capacity.

Many inefficient older non-integrated facilities are also facing closure but new capacity build-up is only set to slow post-2026, after which there needs to be a demand-led recovery phase.

Hence, relief could be a while away.

This bearish demand and supply fundamentals in the petrochemical sector across Asia Pacific will persist in the near future, says Mohit Soni, director of Corporate Ratings at Fitch Ratings,

“We generally expect the Asia Pacific petrochemical industry conditions to remain weak through the rest of 2025 and 2026 with uncertain Chinese demand, slowing global growth and persistent industry overcapacity.

“Consumer demand in Asia Pacific is likely to be sluggish, especially as we expect China’s gross domestic product growth to remain below pre-pandemic levels until at least 2026.

Escalating trade tensions could put further pressure on demand.

We expect margins to gradually improve to mid-cycle levels by 2027-2028 as inefficient capacity is rationalised and new capacity additions slow down, demand starts improving, and falling crude oil prices make feedstock cheaper,” he tells StarBiz 7.

He added that industry margins have been weak in the last two to three years as China demand slowed down, as China is focused on energy transition by extending its petroleum products downstream of the value chain, partly to achieve chemical self-sufficiency.

Meanwhile, feedstock (naphtha) costs were higher than usual, in-line with elevated crude prices over 2023-2024.

While average crude prices have fallen in 2025, the demand-supply conditions still remain unfavourable.

With such an industry backdrop, the losses posted by local listed petrochemical companies in the past nine months or more could likely persist.

Malaysia’s industry heavyweight PETRONAS Chemicals Group Bhd (PetChem) reported a net loss of RM289mil for the recent third quarter of financial year 2025 (3Q25) due to negative spread from its olefins and polymers as well as specialty chemicals.

This was offset by profits from its fertilisers and methanol segment.

Its fertiliser and methanol have ready buyers domestically and abroad, helping the segment to remain profitable but olefins and polymers are commodity chemicals and tied to feedstock prices and supply demand cycles.

PetChem’s quarterly losses were partly due to an aromatics plant being offline for 45 to 50 days to facilitate an upgrade in equipment and propylene prices falling 8% quarter-on-quarter.

The group’s loss-making integrated refinery and petrochemical complex in Pengerang, Pengerang Petrochemical Complex (PPC), however could be the asset that ensures the return to sustainable profits beyond 2026 after it undertakes a six months turnaround in the first half of next year that could keep PPC’s losses elevated, according to CGS International (CGSI) Research.

CGSI Research, which has a “reduce” call on Petchem with a target price (TP) of RM2.94 sen a share, forecast the group to post a core net loss of RM16mil in financial year 2026 (FY26) and core loss of RM798mil in FY25.

The loss will also be due to PetChem’s olefins and derivatives division likely experiencing weaker earnings due to a downtrend in polymer prices.

Lotte Chemical Titan Holding Bhd (Lotte Chemical), meanwhile, was in the red to the tune of RM197.9mil in 3Q25 due to weak product spreads.

The olefins and polyolefins producer’s operations have been weighed down by negative margin since 2024 leading it to mothball one of its two naphtha crackers in Johor late last year.

Whether the closure becomes permanent or temporary is still a question.

Maybank IB Research noted Lotte Chemical was making losses per unit sales (at gross level) in 3Q25 due to weak product spreads and expects this to prolong over the next 12 months.

It added that the company’s new ethylene project in Indonesia, which achieved commercial operations date in mid-October, could weigh on Lotte Chemical’s earnings as it begins recognising annual depreciation of about RM700mil based on its estimates and interest costs.

“Given current market conditions and subdued olefin prices, achieving break even may be an immediate challenge and we anticipate continued pressure on earnings, with net losses likely to widen further in FY26 to FY27,” Maybank IB forecast in a recent report on Lotte Chemical.

It has a “sell” call on the company with a TP of 35 sen a share.

For the nine months, PetChem’s net loss totalled some RM1.4bil while Lotte Chemical’s net loss amounted to RM496.7mil, underscoring the severity of the downturn.

As bulk petrochemical plants are highly dependent on feedstock economics (compared to niche products which are more sensitive to application demand), one positive for Lotte Chemical and PetChem is the possibility of their cracker facilities enjoying cheaper naphtha feedstock.

“Naphtha prices generally track crude oil prices as naphtha is a direct product of crude oil refining. Fitch’s commodities team expects Brent crude oil prices to average US$70 a barrel in 2025, US$65 in 2026 and 2027.

“So, naphtha prices should trend slightly lower next year,” Soni said.

While recovery timelines of the various chemicals remain uncertain, Fitch Ratings does not anticipate significant divergence between polyethylene and polypropylene trends.

Specialty chemicals, by contrast, may withstand the downturn better, offering some stability to producers.

The artificial intelligence and data centre boom across the world however could present a challenge for chemical plants that run on natural gas.

The explosive demand for energy needed to run digital infrastructure across the world could push up demand for natural gas or liquefied natural gas.

If the demand outstrips existing supply, the fallout could be seen in higher natural gas prices. That could impact Petchem’s Kerteh operations in a few years.

That said, Asia’s positive demographics, sustainable economic growth prospects driven by urbanisation and industrialisation, offers a positive backdrop for the petrochemical industry.

For Malaysia’s petrochemical sector, the path to recovery will hinge on global demand revival, rationalisation of excess capacity, and easing feedstock costs – a process that may take several years to unfold.

So, investors and shareholders who think PetChem and Lotte Chemical low share prices offer an opportunity to accumulate may have to be prepared to hold them for some time.