[Exclusive] Petrochemical Industry Facing Restructuring Crisis Requests 0% Nafta Tariff Extension from Ministry of Economy and Finance

Struggling to Secure Competitiveness Amid China's Ultra-Low Price Offensive
Our Government Also Making Efforts... "Will Provide Maximum Support"

The petrochemical industry has requested the government to further extend the zero tariff rate on naphtha, which is set to expire next month. The zero tariff rate means applying a 0% tax rate to taxable items, essentially asking for no customs duties on imports. Naphtha is a basic raw material for petrochemical products, and according to the Korea Petroleum Association, 252.883 million barrels were imported into the country in 2022 alone. The industry's request comes amid a crisis of restructuring, seeking consideration for their difficulties, drawing attention to the government's response.

Lotte Chemical Daesan Plant
[Image source=Yonhap News]

According to the industry on the 14th, LG Chem, Lotte Chemical, and the Korea Petrochemical Industry Association recently attended a bureau-level working meeting hosted by the Ministry of Economy and Finance, requesting an extension of the 0% tariff rate on naphtha and crude oil used for naphtha production.

An official from the Ministry of Economy and Finance said, "The petrochemical industry is facing a global oversupply crisis originating from China and is undergoing restructuring, so this meeting was to understand the current situation," adding, "Discussions covered not only the extension of the zero tariff rate but also ways to enhance competitiveness and efforts to respond to the crisis." The ministry is meeting with industries to hear about their current status and difficulties. This was the third meeting following the steel and automotive industries.

The petrochemical industry's request to the Ministry of Economy and Finance to extend the zero tariff rate on allocated tariffs is the most urgent issue. The deadline is next month. It significantly affects competitiveness, accounting for about 70% of the cost of petrochemical products. Petrochemical companies produce basic olefins such as ethylene and propylene through naphtha cracking (NCC). Ethylene, known as the "rice of petrochemicals," is used to make various daily necessities such as plastics and synthetic fibers. In a situation where cost competitiveness is declining, they aim to secure profits by at least being exempt from tariffs. The effect of the zero tariff rate on naphtha is estimated at about 100 billion KRW annually.

Allocated tariffs are temporarily lowered tax rates applied to imported goods by the government to stabilize prices. Earlier, Kang Kyung-sung, the first vice minister of the Ministry of Trade, Industry and Energy, stated at a petrochemical industry meeting last month, "We will discuss with tax authorities the possibility of further extending the tariff exemption on naphtha, a key raw material." Since July last year, the government has reduced the tariff rate on all naphtha imports from the previous 0.5% to 0%. Although it was scheduled to end last year, the government extended it until June this year to ease the industry's cost burden.

Attention is focused on the Ministry of Economy and Finance's response. When announcing the zero tariff rate plan for naphtha in July last year, the ministry assessed the petrochemical industry by saying, "Since Korea does not produce oil, it imports manufactured naphtha or crude oil to produce naphtha. The prolonged Russia-Ukraine war has disrupted relatively cheap Russian imports, significantly increasing companies' cost burdens." It also noted, "Competitor countries in the petrochemical sector such as China, India, and Middle Eastern countries have recently greatly expanded production facilities, threatening the export competitiveness of our companies."

This situation has not improved even after a year. China, a major importer of petrochemical products, has reached an all-time high ethylene self-sufficiency rate through large-scale expansions, leading to a structural recession. Lotte Chemical, the top domestic ethylene producer, has halted its Ulsan Plant 1, which produces high-purity isophthalic acid (PIA) used in paint and PET bottles, and partially suspended its PET production plants in Yeosu and Ulsan. LG Chem has stopped operations at its Daesan and Yeosu plants that produce styrene monomer (SM), a petrochemical raw material.

Workforce redeployment is also ongoing. Lotte Chemical plans to reduce Ulsan plant staff from 486 to 400, transferring 86 employees to other sites. LG Chem sold its non-core IT film materials business to China last year and is currently offering voluntary retirement to employees in its advanced materials division as a follow-up measure. Kumho Petrochemical also accepted voluntary retirements from late last year to early this year.

LG Chem Jeonnam Yeosu Plant panorama.
[Photo by LG Chem]

There are also rumors about integrating NCC facilities between Lotte Chemical and LG Chem. A petrochemical industry insider said, "A plant swap between Daesan and Yeosu might be possible, but it is difficult to realize due to the Monopoly Regulation and Fair Trade Act, as it would be considered a dominant market player," adding, "Other domestic NCC operators also seem unlikely to pursue this." Both Lotte Chemical and LG Chem reported to the government last month that the facility integration rumors are not true.

While listening to the industry's situation, the Ministry of Economy and Finance is also concerned about tax revenue shortages. With corporate tax revenues declining due to worsening corporate performance, further extension of the zero tariff rate could be a burden.

Kim Seo-yeon, senior researcher at NICE Credit Rating, said, "The financial burden of domestic petrochemical companies is generally increasing," adding, "If uncertainties about recovering investment funds are not resolved, credit risk is expected to continue rising."