Gokongweis exit loss-making petrochemical business
In what is seen as the “best decision” under challenging market conditions, conglomerate JG Summit Holdings Inc. has decided to shut down its petrochemicals unit, which has been dragging down the group’s profitability.
The Gokongwei-led company said in a statement on Thursday that JG Summit Olefins Corp. (JGSOC) was now “on an indefinite commercial shutdown,” although it would continue to sell from its existing product inventory.
“JGSOC continues to evaluate various options to mitigate the adverse effects of challenging market conditions, and will make the appropriate decision in due course,” JG Summit said.
JG Summit clarified, however, that trading of liquefied petroleum gas under Peak Fuel Corp. “will remain unaffected by the shutdown.”
This comes as JGSOC, which operates a naphtha cracker plant, among others, continues to incur losses due to “unfavorable global market conditions.”
In the first nine months of 2024, JGSOC’s net loss widened by 30 percent to P11.4 billion as industrywide polymer spreads “dropped to historic lows.”
JG Summit, in hopes of reviving its subsidiary, earlier planned to inject up to P17.1 billion in fresh capital into JGSOC via share subscription.
Still, analysts warned that JGSOC, a pet project of the late patriarch John Gokongwei Jr., may suffer from the existing supply-demand gap in the market.
Earnings drag
April Lynn Tan, chief equity strategist at COL Financial, pointed out in a December 2024 market commentary that JGSOC would “continue to be a drag given the weak outlook of the industry,” noting that it would likely take five years for weak demand to catch up with existing supply.
Naphtha crackers, commonly used in plastic production, are already less favored compared with the more cost-efficient ethane crackers, Tan said.
“Because of the poor demand-supply dynamics, margins are now way below their historical average and could stay depressed for the foreseeable future,” she added.
Tan also noted that if JGSOC’s operating results were excluded from the overall financial results of the conglomerate, JG Summit’s profits and earnings
before interest, taxes, depreciation and amortization would have been higher by 7.7 percent.
At the same time, Juan Paolo Colet, managing director at investment bank China Bank Capital Corp., sees JGSOC’s closure as “the best decision under the circumstances.”
“After years of massive losses and no clear prospects for a sustainable turnaround, there was really no other rational choice but an indefinite shutdown,” Colet said in a text message.
“This should be ultimately positive for JG Summit as the group can now channel more time and resources to their other businesses,” he added.
