On March 21, Bloomberg published an article stating that for South Korean plastic chemical companies, China, once their largest market, is becoming a strong competitor. As Chinese companies rapidly develop, South Korean companies have suffered losses of hundreds of millions of dollars and are now being forced to explore new markets.

The report states that Korean plastic giants such as LG Chem and Lotte Chem, which rely on exports, once profited handsomely by outcompeting their Japanese rivals, thanks to the explosive growth of the Chinese economy and the massive demand for imported products. However, in recent years, the fortunes of these Korean companies have changed. Data shows that Korean chemical companies are experiencing increasingly difficult times, with the industry's exports declining by more than 15% in 2023.

Paul Joo, Executive Director of Olefins and Olefins Derivatives Research at S&P Global Commodity Insights, analyzed: "China is rapidly expanding its production of polyethylene and polypropylene, reducing its dependence on imports from South Korea, and has even begun exporting to other countries in Asia and South America."

He believes that unless decisive restructuring is carried out, "Korea may fall behind."

BloombergNEF analyst Philip Geritz said that this year, the global capacity for chemicals such as ethylene and propylene is expected to grow at a level close to record-breaking, with the vast majority of this growth occurring in China.

In recent years, the global production capacity of chemicals such as ethylene and propylene has rapidly increased Bloomberg chart (as below)

Bloomberg noticed that some South Korean companies have already begun to make adjustments. For example, LG Chem has closed some of its plants and exited the styrene monomer market used for plastic and rubber production. Meanwhile, Lotte Chemical is selling its shares in its Pakistani subsidiary and suspending operations at its synthetic rubber plant in Malaysia to limit losses.

But the report points out that these asset divestitures are unlikely to significantly reduce Lotte Chemical's record annual operating loss of nearly 900 billion won (617 million US dollars) last year. The profitability of other Korean companies such as LG Chem has also declined significantly. This has hit company valuations, with the chemical industry being the worst-performing sector on the Korea Exchange over the past 12 months, falling by about a quarter.

Korean chemical manufacturers' stock prices continue to plummet

LG Chem and Lotte Chemical both stated that in order to recover, they are turning to more specialized products in the renewable energy sector. LG Chem said that the company "will continue to develop climate-friendly businesses, restructure its product portfolio, shift towards high-value products, and strive to overcome the stagnation of profitability through regional diversification."

However, Bloomberg is not optimistic about the development prospects of LG Chem and Lotte Chemical. Firstly, Chinese companies are also increasing their production capacity in the renewable energy sector; secondly, Chinese companies have newer production facilities than Korean companies. In addition, Chinese companies have other advantages, such as being able to more easily obtain cheaper raw materials from some production locations that are difficult for their Korean counterparts to access.

The report mentioned that as an ally of the United States, South Korea followed suit in imposing sanctions on countries such as Russia and Iran, not participating in oil product transactions with sanctioned countries. Data shows that since April last year, Russia has not exported naphtha to South Korea for use as fuel or for the production of chemicals.

Chua Sok Peng, a petrochemical analyst at the London Stock Exchange Group, said: "Due to US sanctions, South Korea cannot purchase liquefied petroleum gas from countries like Iran, which in turn gives China a significant cost advantage."

Bloomberg also mentioned that with the booming development of electric vehicles, China is accelerating changes in its energy structure, and chemical companies are beginning to reduce fuel production and increase petrochemical production. This shift towards "refining and petrochemical integration" (a production model combining oil refining and naphtha cracking for chemical production) in China is not a good omen for South Korean chemical companies.

Paul Joo of S&P Global said, "Thanks to lower costs and strong government support, China is rapidly achieving refining and petrochemical integration. In comparison with China, South Korea is losing its edge."