Not an Economic Crisis, Yet Basic Oil Production Falls Below 10 Million Tons [Business Restructuring in Petrochemicals]

NCC in Crisis... Lowest Level Since COVID-19
Burden of Expansion in China... High Oil Prices Lower Cost Competitiveness

Editor's NoteThe domestic petrochemical industry, represented by Naphtha Cracking Complexes (NCC), is facing a crisis. As exports to China, the largest market, have declined, domestic production has also turned red. Experts warn that if the current business, which focuses on general-purpose products, is not restructured, survival will be threatened. If high oil prices persist, the profitability of domestic petrochemical products, which heavily rely on petroleum-based raw materials, is expected to deteriorate. The era-defining shift toward carbon neutrality is also pushing petrochemical companies toward restructuring. We have examined the current status and solutions for the domestic petrochemical industry.

The production volume of Naphtha Cracking Complexes (NCC) fell below 10 million tons last year, marking the lowest level since the COVID-19 pandemic. This is due to China, the largest petrochemical market, falling into an economic slump and approaching 100% self-sufficiency through large-scale capacity expansions, which has also affected domestic petrochemical product production.

In particular, with the development of new technology that produces ethylene directly from crude oil, the competitiveness of NCC is expected to decline further. Since some companies are pushing for the sale of NCC facilities, there is an increased possibility of structural reorganization in the petrochemical industry.

According to the Korea Petrochemical Industry Association on the 11th, domestic NCC production last year was 9.47 million tons, a 9.6% decrease from 10.38 million tons the previous year. In 2020, production dropped to 8.75 million tons due to the spread of the COVID-19 pandemic, but last year's drop below 10 million tons occurred in a non-crisis situation.

NCC is a process that produces basic raw materials for petrochemical products such as ethylene, known as the "rice of petrochemicals," and propylene. Domestic ethylene production capacity increased by 35.3% over five years, from 9.46 million tons in 2018 to 12.8 million tons last year. LG Chem has the largest capacity domestically at 3.3 million tons per year, followed by Lotte Chemical and Yeochun NCC with 2.33 million tons and 2.28 million tons, respectively.

Corporate NCC operating rates fell to the 70% range last year. The NCC operating rate was 93% in 2021 but dropped by 19 percentage points to 74% last year.

Considering weak demand in China and increased production, domestic NCC production is likely to remain below 10 million tons for the second consecutive year. According to the Export-Import Bank of Korea, global ethylene production capacity centered on China is expected to expand by about 45 million tons over four years from 2020 to this year.

China, in particular, has continued large-scale capacity expansions every year. China's ethylene production capacity nearly doubled from 25.65 million tons in 2018 to 51.74 million tons last year, surpassing the United States (45.83 million tons) to become the global leader.

If the oversupply situation in China continues, exports of domestic petrochemical products to China are expected to shrink further. Recently, technology has emerged that produces ethylene directly from crude oil without going through NCC. For the domestic petrochemical industry, which imports crude oil and undergoes cracking processes, competitiveness is inevitably weakened.

Therefore, concerns have arisen that domestic NCC itself has lost competitiveness. Jo Yong-won, a research fellow at the Korea Institute for Industrial Economics & Trade, said, "Since petrochemicals start from naphtha and are connected through processes, NCC cannot be abandoned," adding, "We need to find ways to secure cost competitiveness downstream."