The LG Chem announcement may be a hollow victory for a while, and we would use the analogy of being the “best-looking horse in a glue factory”, given the weakness in the Asia ethylene and derivative markets right now. In this case, being the biggest means you lose the most in a down-cycle (see chart below and more on today's daily report). The significant capacity adds in China have collided with lower than anticipated demand growth, and driven prices down to costs (or below in the case of polyethylene in China). However, one thing we have learned over the last few decades is that you should never underestimate China’s ability to grow its way out of oversupply, and to assume that the surplus in Asia is here for the long-term is probably wrong. However, it could last a year or so and this is very unfortunate for LG Chem as making a loss in your first year of operation is very hard to come back from when looking at the project on a DCF basis.
Source: Bloomberg, C-MACC Analysis, June 2021