S Korea’s petchem industry hits impasse, government to step in for drastic restructuring

South Korea’s petrochemical sector has been floundering since 2023 with plant closures, selloffs and mergers in place as major companies have been strained by negative margins. Business Korea recently argued that the Korean government plans to help restructure the country’s petrochemical industry with extraordinary measures by increasing the competitiveness of Korean products.

Government support is around the corner for petrochemical sector

The Korean government aims to collect industry opinions and come up with a restructuring plan by the end of June.

According to Business Korea, the Ministry of Trade, Industry and Energy (MOTIE) launched a task force (TF) that will assist major Korean petrochemical producers such as LG Chem, Lotte Chemical, and SK Geocentric. The government’s measures will include tax incentives, financial aid, and regulatory easing to address oversupply through mergers, acquisitions (M&A), and divestitures.

The Korean government is contemplating a two-track support strategy for the petrochemical industry, categorizing its needs into short-, medium-, and long-term. Short-term measures include extending an exemption on import duties for naphtha and crude oil used in naphtha production.

The measures are aimed at helping South Korean producers which are facing financial problems due to cheap Chinese products. Major producers in South Korea considered selling their units and announced operating losses on their chemical and petrochemical divisions due to weak demand and supply glut from China.

A brief look at LG Chem

Earlier this year, sources reported that LG Chem was in talks with Kuwait Petroleum Corp. (KPC) to sell a share in a domestic naphtha cracking facility. Accordingly, the company plans to split off its second naphtha cracking plant in Yeosu, South Jeolla Province, to a separate entity. The company aims to sell a 49% stake of the facility to Kuwait Petroleum Corp., while retaining the remaining 51%. LG Chem had previously tried to sell the facility to Middle Eastern oil and investment companies.

LG Chem also unveiled plans to close its styrene monomer (SM) line in Yeosu in March. The company previously closed another styrene plant in Daesan. The closures were attributed to the pressure from competitive Chinese products.

However, regarding possible selloffs, LG Chem’s Vice Chairman Shin Hak-cheol stated that the company is considering various strategic options including joint ventures to ensure competitiveness in raw materials, thus sale is not the right expression.

There were also rumors about LG Chem merging its naphtha cracker business with Lotte Chemical, but they were later denied by the company.

A quick delve into Lotte Chemical

Meanwhile, Lotte Chemical was reported to consider selling its Malaysian unit Lotte Chem Titan due to financial challenges. The Malaysian subsidiary recorded a net loss of RM780.28 million ($164 million) in 2023.

Lotte Chemical sold its entire stake in joint ventures with Chinese partners in October last year to focus on other profitable markets with rising sales of value-added, specialty products. With the sale of its stakes in the two joint ventures, Lotte Chemical pulled out of its base petrochemical product manufacturing business in China. The company attributed the decision to the supply glut they faced in China amid weak demand.

SK and GS Caltex join the list

SK Geocentric decided to stop operating its naphtha cracking facility with a 200,000 tons/year of ethylene capacity in 2020 due to increasing supply from China. The company since aimed to focus on recycled plastics; however, decided to postpone the construction of its Advanced Recycling Cluster (ARC) project in Ulsan due to financial reasons as well.

According to The Korea Times , SKC is negotiating with multiple potential buyers to divest SK Pucore, a polyurethane subsidiary. This decision follows the sale of its industrial film business to Hahn & Company realized last year fo $1.3 billion.

GS Caltex’s utilization rate of paraxylene (PX) have been declining since the second quarter of 2022 as the company could not keep up with the availability from China.

Major producers incur losses as Chinese competition bites

Full year 2023 results

LG Chem’s net income for the full year 2023 fell by 6.5% to 2.05 trillion won ($1.5 billion) from 2.19 trillion won ($1.6 billion) reported in 2022. Meanwhile, the company’s petrochemical division registered an operating loss of 143 billion won ($106 million). The slowdown in global demand for petrochemicals was cited as the main reason behind the yearly loss.

Lotte Chemical registered an operating loss of 333.2 billion won ($250 million) in the full year 2023. The company registered an operating loss of 166 billion won ($124 million) in its basic chemicals segment including aromatics and olefins in Q4.

First quarter of 2024

Major producers LG Chem and Lotte Chemical reported yearly declines in their first quarter results. Accordingly, LG Chem reported a net profit of 341.69 billion won ($248 million), down by 49% from 669.05 billion won ($493 million) in the same quarter the previous year.

Meanwhile, Lotte Chemical registered an operating loss of 60 billion won ($43.7 million) for the first quarter. This loss was a sharp contrast to 225 billion won profit reported in Q1 2023. In the basic chemicals segment including aromatics and olefins, the company registered an operating loss of 130 billion won ($95 million) in the first quarter.

Both companies have announced better results quarter-over-quarter though. LG Chem’s Q1 net profit was 341.69 billion won ($248 million), up from the fourth quarter’s 128.52 billion won ($96.34 million). Also, Lotte Chemical’s Q1 net loss of 60 billion won ($43.7 million) narrowed from 154 billion won loss in the previous quarter. The company attributed the quarterly increase to monomer product spread improvement, ethane price stabilization, and decreased inventory valuation loss.

Hanwha Solutions’ chemicals segment, meanwhile, posted an operating loss of 19 billion won ($14 million) in the first quarter of 2024. The company had reported an operating profit of 34 billion won ($25 million) in the same quarter the previous year. Meanwhile, the company’s loss narrowed from 79 billion won ($59 million) loss announced in the last quarter, just like Lotte and LG.