[Business Restructuring in Petrochemicals] Government Also Launches Consultative Body and Support TF... Discussions Started but Stalled

Different Responses by Companies
Growing Bigger Is No Longer the Solution

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 mainly 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.

Restructuring is inevitable to overcome the slump in the petrochemical industry, but discussions appear to be at a standstill.

According to the industry on the 11th, the government has been holding unofficial meetings with industry stakeholders by topic through the public-private consultative body, the 'Petrochemical Emergency Response Council,' which began operating in the second half of last year. However, progress has been difficult because each company has different countermeasures for the sluggish market. LG Chem is requesting support for business restructuring, SK Geocentric and Lotte Chemical are asking for institutional improvements to secure stable supplies of waste plastics, and S-Oil is seeking expedited approval support for the Shahin project.

At the end of last month, a working-level meeting on the waste plastic pyrolysis oil business was held, attended by SK Geocentric, LG Chem, Lotte Chemical, and GS Caltex among the six NCC companies. Since the system is still in its early stages, opinions were exchanged regarding business issues and difficulties.

Office of the Ministry of Trade, Industry and Energy, Government Sejong Complex
Photo by Yonhap News

Earlier this month, the government launched the 'Petrochemical Investment Support Task Force (TF),' focusing on investment support. This includes support for the two major petrochemical industry investment projects: S-Oil's Shahin and SK Geocentric's ARC (Advanced Recycling Cluster). An official from the Ministry of Trade, Industry and Energy said, "We are considering areas where the government can provide support," adding, "Following the thematic meetings, we plan to meet individual companies soon at the working level to hear their opinions."

The government's approach to gathering opinions on restructuring directions from each company differs from previous restructuring methods. In 2008 and 2016, when the petrochemical industry was experiencing low profitability due to high oil prices, the government commissioned domestic and international consulting firms twice to explore ways to strengthen the competitiveness of the petrochemical industry. Both times, restructuring measures such as mergers and acquisitions (M&A) among domestic companies to create larger entities and reduction of overproduced items were proposed as strengthening strategies.

Based on the consulting results, the government established the 'Core Strategies for Strengthening Industrial Competitiveness' in 2016. The four main strategies were: inducing proactive business restructuring, securing competitiveness of Naphtha Cracking Complexes (NCC) and supporting the commercialization of operation and maintenance (O&M) services, acquiring core technologies for high value-added and functional materials, and creating a high value-added fine chemical industry cluster. However, before these measures could be implemented, the market began to recover, and restructuring was postponed.

Panoramic view of the petrochemical complex where SK Innovation Ulsan Complex is located [Image source=Yonhap News]

The industry believes that the current downturn is structurally different from the past. An industry insider said, "With China's rising self-sufficiency and the decarbonization trend, the petrochemical industry's crisis is unfolding differently than before," adding, "Especially with emerging international regulations related to carbon neutrality, it is becoming difficult to survive by continuing only the traditional petrochemical businesses." This means that growth through mergers is no longer the solution.

The insider added, "Support for commercialization of core decarbonization technologies, tax benefits, and regulatory improvements are needed, such as reflecting decarbonization-related technologies as new growth and source technologies under the 'Restriction of Special Taxation Act.'"