[Reporter's Notebook] Can Cutting 3.7 Million Tons Beat China's 30 Million?

China continues expanding capacity despite domestic cuts
Capacity cuts alone cannot close the cost gap
Process innovation and high-value-added products are key

"At most, we are cutting 3.7 million tons of ethylene capacity, while China has added nearly 30 million tons in just the past few years. What difference will cutting it make?"

A petrochemical industry official I recently met said this about the government-led restructuring. The question was whether the industry could survive competition with China simply by cutting capacity.

In August last year, the government and industry agreed to reduce ethylene production capacity at naphtha cracking centers (NCCs) by 2.7 million to 3.7 million tons. This represents 18% to 25% of domestic capacity. The goal is to ease oversupply and restore profitability by removing inefficient facilities.

The problem is that the competitive arena is not limited to the domestic market. According to the industry, South Korea's petrochemical sector exports more than 60% of its products. Even if domestic capacity is cut, South Korean companies still have to compete with China in overseas markets.

China's capacity expansion has been overwhelming. The country's ethylene production capacity stood at 35.18 million tons in 2020, according to China's Ministry of Ecology and Environment. It rose to 62.7 million tons last year, an increase of about 27.5 million tons in five years. China added 8.15 million tons of new capacity last year alone, more than twice South Korea's maximum reduction target.

Given the oversupply, capacity cuts are unavoidable. But the industry must not focus solely on the scale of the cuts. Shutting down aging plants and concentrating production at efficient facilities can reduce costs, but it will not eliminate the cost gap with China's new facilities. Cutting immediate losses and regaining competitiveness in the global market are two different challenges.

The industry official I met earlier compared NCCs to feature phones. "If feature phone companies had been told that cutting output would save them, would they have survived? In the end, the winners were the companies that made smartphones." The point was that cutting capacity and building competitiveness are not the same thing.

What is needed is process innovation to make the same products more cheaply, along with the development of high-value-added products. The industry must go beyond capacity cuts, improve cost competitiveness, and differentiate its products. The government has also pledged support for technology development and the shift to high-value-added products. From now on, performance should be measured not only by the scale of the cuts, but also by how much the remaining facilities' cost competitiveness and product competitiveness improve.

The impact of plant closures on local economies and employment will be substantial. For that reason, restructuring must deliver clear results. What matters is not how much capacity is cut, but how much stronger the remaining companies become. If the industry fails to improve its competitiveness, the outcome of restructuring will not be a revived industry, but simply a smaller South Korean petrochemical sector.

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