South Korea Faces Its Most Severe Survival Crisis

Located in the Yeosu National Industrial Complex in Jeollanam-do, South Korea, LYCHEM NCC's ethylene annual production capacity ranks third in South Korea. According to South Korea's JoongAng Ilbo, due to excessive reliance on stable ethylene production, the company has been operating at a loss since 2022, with cumulative losses reaching 820 billion KRW. In early August, the company suspended operations of its third plant, and if it fails to repay a 310 billion KRW loan due by 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—collectively made a profit of 9 trillion won in 2021, but last year they incurred a loss of 878.4 billion won, and in the first half of this year, they lost nearly 500 billion won again. The annual loss is likely to expand. Kim Ji-hoon, a partner representative of Boston Consulting Group, which was commissioned to provide consulting services for petrochemical business restructuring, predicted: "If the current downturn continues, only 50% of companies will be able to maintain operations in three years."

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

According to South Korea's "JoongAng Ilbo," the petrochemical industry directly and indirectly creates approximately 400,000 jobs. If one or two large enterprises 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, in this context, many companies have maintained cash flow by halting or reducing production or divesting non-core assets. Over the past year, 10 factories in the Ulsan Industrial Complex have ceased production or closed; LG Chem plans to sell its stake in the Yeocheon NCC Plant 2 and announced in August the divestment of its water treatment filtration business, which it has operated for over a decade.

The "JoongAng Ilbo" reported that petrochemicals, along with semiconductors, steel, and shipbuilding, are fundamental industries in South Korea. If taken over by foreign competitors, they could potentially choke the "throat" of the manufacturing supply chain at any time. The academic community generally believes that the government should step in to "rescue the market." Professor Yoo Seung-hoon from Seoul National University of Science and Technology suggested that the government should lead efforts to promote corporate consolidation and industrial upgrading; otherwise, the local economy might fall into systemic recession.

According to a report by Yonhap News Agency, the South Korean Ministry of Trade, Industry and Energy is accelerating the implementation of follow-up support measures. Based on the "Petrochemical Industry Competitiveness Enhancement Plan" released last December, the ministry aims to guide enterprises in promoting facility integration, business divestiture, equipment closure, and mergers and acquisitions. This will be supported by approximately 3 trillion Korean won in policy financial support, including a special fund of 1 trillion Korean won for structural transformation.