How Did the Billion-Won Salary Petrochemical Industry Get Caught in a 'Chicken Game'? [Tech Talk]

Experiencing Oversupply Since 2018
China and Middle East COTC Chicken Game
Wave After Wave... Tough Outlook Ahead

Petrochemicals remain one of the most important pillars of the domestic manufacturing industry. Exporting over $45 billion (approximately 63 trillion KRW) annually, it is the staple industry that supports numerous industrial complexes.

Therefore, the current crisis faced by domestic chemical companies inevitably feels even harsher. Although the wave of overproduction from China is being overcome, the next challenge will be enduring the fundamental chicken game triggered by technological innovation.

Petrochemical Oversupply Since 2018

The National Yeosu Industrial Complex, a major petrochemical industrial complex in Korea. Asia Economy DB

The oversupply problem in the petrochemical industry began as early as 2018. At that time, Chinese companies’ facility utilization rates exceeded 80%, and their expansion of facility investments added about 8 to 9 million tons of new production capacity annually. As chemical products far exceeding the market’s capacity were supplied, prices dropped, causing Korean companies’ profit margins to suffer.

However, the current crisis in the petrochemical industry is not only due to overproduction. COTC (Crude Oil To Chemical) plants, developed since the early 2010s, are about to be introduced in large numbers. Once this technology is fully operational, price competition could become even more severe, and only companies that survive the chicken game may dominate the market, resulting in a winner-takes-all oligopoly.

The COTC Tsunami Led by China and the Middle East

Saudi Aramco has developed its proprietary COTC technology called 'Thermal Crude to Chemical' in collaboration with several refining and petrochemical companies. This technology uses advanced separation equipment to extract olefins from crude oil, omitting the conventional crude oil distillation process while achieving much higher yields than existing methods. It is reported that this technology will also be applied to the S-Oil Shaheen project. Aramco

COTC refers to technology that directly converts crude oil into petrochemical products. Typically, the oil industry is divided into upstream (crude oil drilling) and downstream (refining and various petrochemical manufacturing). The oil we usually think of is actually not very useful by itself. It must be refined into fuel or decomposed into petrochemical products from the remaining byproducts to be marketable.

Previously, petrochemical products were made using a technology called 'steam cracking.' This process requires naphtha, a high-molecular carbon compound refined from crude oil, as raw material. However, COTC is significant because it can produce petrochemical products directly from crude oil without the naphtha refining process. This is usually achieved by integrating a refinery and a steam cracker into a single operation.

Korea’s Shahin Project 9 Trillion KRW vs Saudi Arabia’s COTC 128 Trillion KRW

Groundbreaking ceremony for the Shahin Project held on March 9 last year at the Ulsan plant in Ulju-gun, Ulsan City. Photo by S-Oil

Since the first COTC plant was commissioned in Singapore in 2014, the technology has been researched for over a decade. The biggest advantage of COTC is its yield. Steam cracking alone produces basic feedstock at a rate of only 8-10%, whereas COTC achieves an impressive 50-80%. The amount of chemicals extracted from the same amount of crude oil, as well as additional costs such as freight, are incomparable.

However, COTC requires enormous initial investment costs. Therefore, countries capable of large-scale COTC investments are those with massive domestic demand like China, and Middle Eastern countries such as Saudi Arabia that can directly extract various crude oils including condensates. Currently, eight COTC plants are being constructed simultaneously in places like Kuwait and Saudi Arabia, with project costs reaching $91 billion (approximately 128 trillion KRW).

Korea is also attempting COTC investment. The S-Oil 'Shahin Project' is expected to be the country’s first COTC plant. Although the Shahin Project’s investment scale of 9.258 trillion KRW is the largest in Korea’s petrochemical history, it is inevitably insufficient compared to the Middle East and China, which currently lead the COTC sector.

The Shadow of the Chicken Game

Chinese polypropylene factory. Photo by EPA Yonhap News

The term 'chicken game' commonly describes a situation where opposing groups rush forward without any concession. With COTC plants joining the already oversupplied petrochemical market, the chicken game between China and the Middle East risks drastically disrupting the global supply chain. Chinese chemical products, already competing with low prices, will become even cheaper, and Middle Eastern countries, once only in the upstream sector, are now poised to penetrate the downstream sector as well.

The chicken game is a familiar term in Korea. The Korean semiconductor industry reached its current position through several rounds of the 'memory chicken game' since the early 2000s. As innovation in process technology caused memory prices to plummet, many overseas memory companies went bankrupt or merged with others. During this process, Samsung Electronics and SK Hynix captured the vacant market share, creating today’s Korea as a 'memory powerhouse.'

This chicken game is now being replayed in the petrochemical industry. Given that the global petrochemical industry far surpasses the semiconductor and telecommunications industries in scale, its impact and importance may be even greater. The problem is that this time, one of the 'chickens' that will fall and disappear might be us.