From World No.1 to Top Sale Candidate... Survival Threatened for Korean Petrochemicals [Business Restructuring Petrochemicals]

NCC Competitiveness Hits Limit
High Proportion of Domestic General-Purpose Products
COTC Introduction Threatens Competitiveness
Difficult to Find Alternative Market in China

Editor's NoteThe domestic petrochemical industry, represented by Naphtha Cracking Complexes (NCC), is facing a crisis. As exports to China, the largest market, decline, domestic production has also turned red. Experts warn that if the current business, focused 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.

From the Flower of the Petrochemical Industry to an Underdog

In 2013, Solomon Associates, a U.S.-based consulting firm specializing in Naphtha Cracking Complexes (NCC), evaluated the competitiveness of 115 NCC facilities worldwide. At that time, LG Chem's Yeosu NCC plant ranked first, outperforming competitors from the U.S., Japan, China, and others. However, in just 10 years, this company's NCC has become the top candidate for sale.

NCC is a facility that thermally cracks naphtha, distilled from crude oil, at temperatures above 800°C using high-temperature steam to produce basic petrochemical feedstocks such as ethylene, propylene, butadiene, benzene, toluene, and xylene. NCC has been called the starting point and the flower of the petrochemical industry.

▲LG Chem Yeosu NCC Plant Panorama

Recently, NCC has become an underdog. LG Chem, which owns the largest NCC production facility in Korea, is pushing for a stake sale, and Lotte Chemical, which divested all its basic material production subsidiaries in China last year, is considering selling its Malaysian NCC subsidiary. Yeocheon NCC recently received only 25 billion KRW in orders during a 150 billion KRW corporate bond demand forecast, showing neglect from the capital market.

Changed Petrochemical Cycle

The petrochemical industry is a typical cyclical business that experiences booms and busts according to economic cycles. However, many evaluations suggest that the recent slump hitting the petrochemical sector is fundamentally different from past cycles. Technologies that produce petrochemical products without going through NCC have emerged, and the global trend of 'decarbonization' darkens the outlook for heat-intensive industries like NCC. Using heat means emitting a significant amount of carbon.

Causes of the Petrochemical Industry Crisis ① Domestic Business Structure

The reasons for the crisis in the domestic petrochemical industry can be largely found in the domestic business structure and external factors. Although domestic petrochemical companies have been pursuing the development of high value-added products, the proportion of general-purpose products, which can be substituted by China or the Middle East, remains high.

According to a survey by KDB Future Strategy Research Institute, the proportion of general-purpose petrochemical products among the four major domestic petrochemical companies (LG Chem, Lotte Chemical, Hanwha Solutions, Kumho Petrochemical) was 59% as of 2022, higher than leading companies in Japan and Germany with similar cost competitiveness.

The proportion of general-purpose products among major German petrochemical companies is 34%, and among major Japanese petrochemical companies (Mitsubishi, Sumitomo, Shin-Etsu) it is 45%. Notably, BASF in Germany reduced its general-purpose product ratio from 42% in 2005 to 17% in 2022, indicating diversification into high value-added businesses.

Naphtha, the raw material, is linked to oil prices. As international oil prices rise, cost competitiveness has significantly declined. In the mid to long term, NCC's cost competitiveness is also under threat.

Experts say that with 'carbon neutrality' emerging as a key issue, the fundamental competitiveness of NCC must be enhanced. In the past, competitiveness was increased by expanding NCC scale through facility investment or corporate mergers, but now such methods no longer work.

Also, the global trend toward 'COTC' facilities, which produce petrochemical products directly from crude oil, is unfavorable for NCC. Youngkwang Choi, a researcher at NH Nonghyup Investment & Securities, said, "As the introduction of COTC facilities, which directly use crude oil as raw material, accelerates, NCC's cost competitiveness will be further eroded."

Causes of the Petrochemical Industry Crisis ② Shrinking Chinese Market

The prospect that China will soon achieve 100% self-sufficiency in petrochemicals is also unfavorable for us. Shin Hak-cheol, Vice Chairman of LG Chem and Chairman of the Korea Petrochemical Industry Association, warned earlier this year that "China will achieve 100% self-sufficiency in basic feedstocks within three years" and urged a "re-examination of supply chain strategies."

[Image source=Yonhap News]

Moreover, the delay in China's economic recovery has affected our exports. According to the Korea Petrochemical Industry Association, the share of petrochemical exports to China, which was 48.8% in 2010, gradually declined to 42.9% in 2020 and sharply dropped to 36.3% last year.

It is also difficult to find a market that can replace China. India has recently emerged as a new petrochemical export market but is unlikely to become a 'second China.' According to the Korea Institute for Industrial Economics & Trade, India's ethylene production capacity was about 7.5 million tons in 2022, making it a net import market with insufficient supply capacity relative to demand. However, Chinese petrochemical companies are turning their eyes overseas after expanding their facilities. China has higher cost competitiveness than us, making competition in the Indian market difficult.

Shinhyung Lee, a senior researcher at KDB Future Strategy Research Institute, pointed out in a recent report that "India's Modi government's strengthened import regulations and domestic product prioritization policies, among other protectionist trends, are risk factors for entering the Indian market."