South Korea Petrochemical Industry's Self-Rescue: To Cut 25% Naphtha Production Capacity

Lead: South Korea's ten largest petrochemical companies have agreed to cut up to 25% of their annual naphtha cracking capacity in response to industry difficulties. Each company is required to submit specific reduction plans by the end of the year.

According to foreign media reports, the ten largest petrochemical companies in South Korea have agreed to undergo business restructuring, including...Cut naphtha cracking capacity by up to 25%.The government is urging the industry to accelerate large-scale restructuring to save this troubled sector and prevent a complete collapse.

On Wednesday, these corporate executives signed an industry-wide restructuring agreement at a meeting attended by Minister of Trade, Industry and Energy Kim Jeong-kwan.

According to the statement from the ministry,Petrochemical companies agree to cut 2.7 to 3.7 million tons of naphtha cracking capacity annually.This means that it will be inOut of the national annual production capacity of 14.7 million tons, up to 25% will be shut down.The statement said,All companies must submit specific production reduction plans by the end of the year.

Finance Minister Ju Yunzhe warned companies not to delay. After presiding over a meeting of ministers related to the economy, he issued another statement pointing out: "The key to overcoming the current crisis is very clear—to address the long-standing oversupply through production cuts and to enhance industry competitiveness."

He said, "The company and its shareholders must promptly present a binding restructuring and competitiveness enhancement plan. It would be better to submit it by next month rather than waiting until the end of the year." He also urged petrochemical companies to learn from the shipbuilding industry, which has improved its financial situation through restructuring in recent years.

Provide financial, tax, and regulatory support, but refuse to "free ride."

Ju Runzhe stated that the government will relax regulations and provide financial and tax support to companies that are genuinely striving to "rescue themselves." However, he warned that...The authorities will not tolerate any "free riders" who expect government assistance without making restructuring efforts.

South Korea is one of the world's largest importers of naphtha, a type of oil that can be cracked into plastic raw materials used in automobiles, electronics, clothing, and construction. However, South Korean companies are largely impacted by the massive expansion of production in other Asian countries. For example, Chinese factories can produce at significantly lower costs, increasing the financial pressure on South Korean companies.

Three Major Restructuring Objectives

A recent study conducted by the Boston Consulting Group, commissioned by the Korea Petrochemical Industry Association, warns that if the current downturn continues, nearly half of South Korea's petrochemical companies may not survive over the next three years due to their fragile financial conditions.

The South Korean government has set three goals for the restructuring of the petrochemical industry:1. Reduce excess capacity and facilities; 2. Shift to producing high value-added specialty products; 3. Improve the financial situation of enterprises and minimize the impact on the local economy and employment.

The South Korean government also stated that it will simultaneously promote the restructuring of the three major petrochemical industrial complexes in Yeosu, Daesan, and Ulsan, and provide a comprehensive support plan for the industry. The Ministry of Trade, Industry and Energy is considering designating the main petrochemical center, Seosan, as an industrial crisis area so that the government can provide subsidies or loans to communities affected by the restructuring.

Major mergers and reorganizations are anticipated.

Analysts pointed out thatThe highly anticipated restructuring may trigger nationwide discussions on large-scale collaborations or mergers.

In Daesan, Lotte Chemical and Hyundai Oilbank are discussing the merger of their respective naphtha cracking center businesses. Hyundai Oilbank's subsidiary, Hyundai Oilbank Petrochemical, is expected to contribute either cash or physical assets in exchange for capacity integration.

In Ulsan, SK Innovation and Korea Petrochemical Company are also discussing reducing capacity and merging facilities. Analysts say that since S-Oil (South Korea's third-largest refinery) is advancing the multi-billion-dollar Shaheen project,The project is expected to exacerbate the surplus after 2027, making capacity cuts almost inevitable.

As South Korea's largest petrochemical hub, Yeosu is also seen as a key area for integration. The area has seven cracking units but only one refinery. Industry executives anticipate that GS Caltex, LG Chem, and Lotte Chemical will explore joint operations.

Since another major petrochemical company, Yeochun NCC (YNCC), suspended operations at its third plant this month due to liquidity issues, the pressure for industry restructuring has further intensified, according to industry insiders.The device may be permanently shut down to reduce capacity.However, the negotiations were complicated by the dispute between YNCC's two major shareholders, DL Chemical and Hanwha, over the solution.

An industry executive stated, "Even if YNCC closes its third plant, further consolidation of major companies in Yeosu is still required to achieve the industry's reduction targets. Now that the specific figures are on the table, restructuring negotiations will inevitably accelerate."