[Heavy Industry ON] Petrochemical Restructuring Stalls Again... Calls Grow for Stronger Government Role

Only 68% of Reduction Target Achieved
Reorganization in Yeosu, Daesan, and Ulsan Stalls

The restructuring of the domestic petrochemical industry is once again losing momentum. Although the government presented a target for reducing the production capacity of NCC (Naphtha Cracking Center) last year, discussions on business reorganization at major industrial complexes in Yeosu, Daesan, and Ulsan have shown little progress. As expectations for a market rebound have grown following the Middle East conflict, even companies that took the initiative in restructuring have not experienced tangible improvements in their performance. This has led to calls from both inside and outside the industry for the government to take a more active role.

According to the industry on June 27, the Ministry of Trade, Industry and Energy proposed a plan last year to reduce domestic NCC production capacity by approximately 3.7 million tons. So far, concrete actions have included the integration of Daesan No.1 NCC by Lotte Chemical and HD Hyundai Chemical (1.1 million tons), and the adjustment of facilities by Yeocheon NCC and Lotte Chemical in the Yeosu region (1.4 million tons). The planned reduction amounts to about 2.5 million tons, which is only 68% of the government's target.

The challenge lies in what comes next. In the industry, there has been ongoing speculation about the possibility of business reorganization between LG Chem and Hanwha TotalEnergies in the Daesan area, as well as between LG Chem and GS Caltex in Yeosu. However, no concrete plans have yet been announced.

Companies do not deny the necessity of restructuring itself. However, the industry explains that a structure has formed in which companies that reduce production capacity first are forced to bear the burden of decreased market share and poor performance, making it difficult for anyone to make a decisive move.

In fact, companies that have proactively initiated restructuring are facing deeper concerns. Lotte Chemical is working on divesting non-core assets and reorganizing its business portfolio, but the prolonged industry slump has prevented any visible results. On the other hand, many companies are maintaining their facilities, taking a wait-and-see approach in the hope of market recovery.

The situation in Ulsan is even more complicated. The government, S-Oil, SK Geocentric, and Korea Petrochemical Ind. (KPI) are discussing business reorganization plans, but no clear conclusion has been reached. The biggest variable is S-Oil's Shaheen Project, which is scheduled to begin commercial operations within the year.

The Shaheen Project, with a total investment of 9 trillion won, is the largest petrochemical investment in Korea, featuring an annual ethylene production capacity of 1.8 million tons. While efforts are underway to reduce production capacity to address oversupply, a massive new facility is about to commence operations.

However, there are practical limitations to treating the Shaheen Project as a target for capacity reduction. This is because a huge investment has already been made and the latest processes have been applied to the new facility. As a result, the core issue in Ulsan’s restructuring is not what to cut, but how to include the Shaheen Project within the framework of restructuring.

The industry sees the improvement in business performance in the first and second quarters of this year as a temporary phenomenon. It is largely attributed to inventory valuation gains and lagging effects. There are concerns that, in the second half of the year, the combined impact of reverse lag effects, large-scale capacity expansions in China, and the commencement of the Shaheen Project could further intensify oversupply pressure.

The Shaheen Project is scheduled to produce 1.8 million tons of ethylene, 770,000 tons of propylene, 200,000 tons of butadiene, and 280,000 tons of benzene as basic feedstocks. The industry is concerned that, if China's additional capacity is factored in, the supply burden will inevitably increase.

For this reason, there are growing criticisms both inside and outside the industry that leaving restructuring entirely to companies' voluntary efforts has its limitations. There are calls for the government to provide stronger incentives to companies that take the lead in restructuring and to intervene more actively in businesses where reorganization discussions are stagnating.

Deokhwan Lee, Professor Emeritus of Chemistry at Sogang University, stated, "It is true that the momentum for restructuring has somewhat weakened after the Middle East conflict, but the fundamental market environment, such as China’s expansion trend, has not changed." He added, "The plan to reduce 3.7 million tons should proceed as scheduled, but now it is time for the Ministry of Industry to take a more proactive role in its implementation."

He continued, "The structure should not be such that companies participating proactively in restructuring end up being disadvantaged," emphasizing, "The government needs to support business reorganization through incentives and support measures."

Regarding the Ulsan Shaheen Project, he said, "It is practically impossible to reduce the latest facilities that have not even started operations under the same criteria as existing outdated facilities." However, he also noted, "It would not be desirable for the Shaheen Project to only enjoy the benefits of restructuring, so various forms of participation, such as cost-sharing, should be considered."

This content was produced with the assistance of AI translation services.