From "World’s Factory" to "High-End Material Supplier," Japan and South Korea Are Breaking Through!

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Over the past thirty years, Japan and South Korea, especially South Korea, have successfully played the role of the "world's factory" in the global chemical industry chain. The core of this model lies in:

1. Import raw materials, export finished products.

Japan and South Korea have a scarcity of domestic fossil fuel resources, and their petrochemical industries heavily rely on importing light feedstocks like naphtha from the Middle East and other regions. These feedstocks are processed in highly efficient local cracking units to produce basic olefins such as ethylene and propylene, which are then used to manufacture large quantities of polyolefin products like polyethylene (PE) and polypropylene (PP). A significant portion of these products, especially high-end grades, are exported to global markets, particularly to China, known as the "world's factory." Data shows that South Korea's annual export volume of synthetic resins consistently accounts for over 60% of its total production. This "large import and large export" model achieved great success in an era of rapid globalization and surging demand from China.

2. Technology-driven and high-end positioning

Japanese and Korean companies do not merely engage in low-end processing. Through continuous technological research and development, they have established significant advantages in high-value-added product areas such as high-end polyolefins and engineering plastics. Examples include LG Chem's ABS and SK Chemical's high-end transparent polypropylene. This allows them to some extent to avoid direct price competition with basic commodities. However, this model has inherent vulnerabilities: its profitability is highly dependent on the price difference between imported raw material costs and export product prices. When the global supply-demand balance is disrupted, especially with the emergence of powerful competitors with lower cost structures, the foundation of this model begins to waver.

The core driving force behind the current dramatic changes lies in the leapfrog development of China's petrochemical industry, which has fundamentally reshaped the global cost curve and competitive logic for polyolefins.

1. The Dimensionality Reduction Impact of China's Large-scale Refining and Petrochemical Integration Model

Since 2015, private giants such as Hengli Petrochemical, Zhejiang Petrochemical, Shenghong Petrochemical, and central enterprises like Sinopec have invested in numerous world-class integrated refining and chemical projects. These projects, akin to being equipped with "Porsche engines," possess significant advantages.

• Scale and cost advantages: The refining capacity of tens of millions of tons is matched with ethylene units of millions of tons, achieving unprecedented economies of scale. Material inter-supply within the integrated park greatly reduces logistics, energy consumption, and production costs.

• Raw material flexibility: The integrated unit can flexibly adjust the output ratio of naphtha, aromatics, gasoline, diesel, and other products according to market demand (i.e., "blending logic") to maximize economic benefits. This enables Chinese enterprises to deliver a "dimension-reduction strike" in terms of cost against the traditional naphtha cracking routes of Japan and South Korea.

Supply Chain Extension: From crude oil directly to PTA, polyolefin, and even to downstream new materials, Chinese companies have achieved deep integration of the industrial chain, controlling more profit segments.

From import dependency to self-sufficiency, and moving towards export.

China's ethylene production capacity is expected to grow from over 50 million tons in 2023 to approximately 72.25 million tons by 2027. The explosive growth in capacity has enabled China to quickly achieve self-sufficiency in polyolefin products and begin large-scale exports.

3. The Challenges and Responses of Japanese and Korean Enterprises

Facing cost disadvantages and loss of market share, Japanese and Korean companies are trapped in a structural dilemma of "the more they produce, the more they lose."

In 2023, the combined losses of South Korea's four major chemical giants (Lotte Chemical, LG Chem, Hanwha Solutions, and Kumho Petrochemical) were significant. South Korea was forced to strategically retreat, with the government strongly intervening to promote "vertical integration" (merging petrochemical companies with refineries to obtain lower-cost naphtha) and capacity reduction (such as YNCC shutting down its No. 3 cracking unit and Lotte discussing the merger of the Daesan plant with Hyundai). The goal is to withdraw from the commodity market and maintain a foothold in high-end products. Japanese companies started their transformation earlier, with a strategy focused on continuously reducing commodity chemical capacity and concentrating on high-performance chemicals and specialty materials.

Japan and South Korea are strategically abandoning most of the general product market, focusing entirely on high value-added, high technical barrier fields such as high-performance polyolefins, specialty chemicals, and new energy materials, relying on technology premiums for survival.

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China is becoming the new "world factory" with lower costs and larger scale, while Japan and South Korea are being forced to shift their roles from "general-purpose goods processors" to "high-end material suppliers." Their "processing" attributes are weakening, while their "specialized, refined, and innovative" characteristics are strengthening.

The global polyolefin industry is standing at a historic turning point, with a global overcapacity being inevitable. In China, policies are being implemented to promote "anti-involution" and eliminate outdated capacities, focusing on upgrading old facilities. In South Korea, the government-led capacity reduction is just the beginning, with more mergers, restructurings, and even exits among companies likely to occur in the future. This is a painful but necessary process of industry self-purification.