South Korea Announces Petrochemical Industry Restructuring Plan! Crude Oil Market Faces Record Surplus, Plastic Spot Prices Fluctuate

The South Korean petrochemical industry is facing a "severe" situation.

The government announced an industry restructuring plan.

On August 14, Zhuansu Vision reported that South Korea’s Minister of Trade, Industry and Energy, Ahn Duk-geun, stated on Thursday that the government will announce a plan this month to restructure the country’s petrochemical industry, which is facing severe challenges. Ahn said that Korean petrochemical companies must learn from the restructuring of the Korean shipbuilding industry in the late 2010s by liquidating assets and streamlining business areas during periods of sharply declining orders. The Ministry of Trade, Industry and Energy quoted Ahn’s remarks at a shipyard, stating that the petrochemical industry needs to take voluntary measures, including adjusting facilities. Over the past decade, the continuous increase in capacity has led to an oversupply of petroleum products, resulting in a sharp decline in profit margins for both Korean and global petrochemical companies. In the past three to four years, demand has also remained sluggish.

Located in the Yeosu National Industrial Complex in Jeollanam-do, South Korea, Yeocheon NCC's ethylene annual production capacity ranks third in South Korea. According to the Korean newspaper The JoongAng Ilbo, due to overreliance on stable ethylene production, the company has incurred consecutive losses since 2022, with cumulative losses reaching 820 billion KRW. In early August, the company suspended operations of its third plant. If it fails to repay a loan of 310 billion KRW due on the 21st of this month, it will face the risk of default.

The crisis is not an isolated case. According to The Chosun Ilbo, South Korea's four major petrochemical giants—Lotte Chemical, LG Chem, Hanwha Solutions, and Kumho Petrochemical—earned a combined profit of 9 trillion won in 2021, but posted a loss of 878.4 billion won last year, and lost nearly 500 billion won in the first half of this year, with annual losses expected to widen. Kim Ji-hoon, a representative partner at Boston Consulting Group, which was commissioned to provide consulting services for the restructuring of the petrochemical business, predicted: "If the current downturn continues, only 50% of companies will be able to sustain operations three years from now."

Multiple experts have pointed out that the current predicament is different from previous cyclical downturns and is instead caused by a structural decline in competitiveness. Ethylene production in South Korea primarily relies on NCC (Naphtha Cracking Center) facilities, which have higher costs compared to the direct ethylene production processes in resource-rich regions. Middle Eastern energy companies participate in global competition with lower costs through integrated refining projects that produce ethylene directly from crude oil. Industry estimates suggest that the cost of Middle Eastern production is only about 30% of that in South Korea, while Chinese product prices are also 15% to 20% lower than those of South Korean products. South Korean companies find themselves in a predicament of "the more they sell, the more they lose," as the market for generic chemical products has been almost entirely squeezed.

The South Korean newspaper "JoongAng Ilbo" stated that the petrochemical industry directly and indirectly supports about 400,000 jobs. If one or two large companies cease production or go bankrupt, it will affect dozens of upstream and downstream partner companies and cause a severe impact on local finances.

According to the Korea Economic Daily, against this backdrop, multiple companies are maintaining cash flow by suspending or reducing production or divesting non-core assets. Over the past year, ten factories in the Ulsan Industrial Complex have suspended operations or shut down. LG Chem plans to sell its stake in the Yeosu NCC Plant No. 2 and announced in August that it would spin off its water treatment filtration business, which it has operated for more than a decade.

The "JoongAng Ilbo" stated that petrochemicals, along with semiconductors, steel, and shipbuilding, are fundamental industries in South Korea. If overseas competitors capture the market, they could potentially choke the "throat" of the manufacturing supply chain at any time. The academic community generally believes that the government should intervene to "bail out" the market. Professor Yoo Seung-hoon from Seoul National University of Science and Technology suggests that the government should lead efforts to promote corporate integration and industrial upgrading, otherwise local economies may fall into systemic recession.

Latest Plastic Quotation on August 14

Wednesday,International oil prices have fallen to a more than two-month low.Previously, the supply forecast data released by the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) were bearish. Meanwhile, investors are paying attention to U.S. President Trump's warning: if Russian President Putin obstructs the Ukraine peace process, he will face "serious consequences."

The U.S. Energy Information Administration (EIA) stated on Wednesday that due to slowing demand growth and a surge in supply.The global oil market will experience a record supply surplus next year.This imbalance indicates that oil prices will face sustained pressure and pose severe challenges to oil-producing countries. According to the monthly report released by the International Energy Agency on the 13th, with OPEC+ accelerating the restoration of idle capacity and production in the Americas continuing to grow, global supply is significantly expanding.Crude oil inventories reached a 46-month high in June.At the same time,The demand growth rate has slowed down to less than half of the 2023 level for this year and the next two years.The above content translates to: "resulting in a severe imbalance in market fundamentals."

In early trading today, plastic futures were all in the red, with PVC dropping more than 1% and coking coal plummeting 5%. The spot market showed mixed trends.