[Petrochemical Industry in a Quandary] Support Measures Hindered by Fair Trade Act and Impeachment... Outline to Emerge This Month

Government to Announce New Policies Based on Report
Confusion Amid Impeachment Turmoil... "Little Expectation from Government"
Experts Stress "Urgent Need for M&A and Consolidation"

Editor's NoteThe domestic petrochemical industry has fallen into an unprecedented structural downturn. This cyclical industry, which used to experience booms and busts depending on the economy and supply-demand, is now hampered by the dual challenges of oversupply from China and environmental regulations. Both the government and the industry emphasize that the 'golden time' to turn this crisis into an opportunity through 'selection and concentration' must not be missed. Asia Economy examines the current status and challenges of the domestic petrochemical industry in a three-part series.

Although the large-scale plant industry of the domestic petrochemical sector has been hit hard by sluggish market conditions, government support for related companies remains stagnant, hindered by the Monopoly Regulation and Fair Trade Act (Fair Trade Act) and the impeachment political turmoil. The industry is paying close attention to the consulting report that will serve as the cornerstone for petrochemical industry support measures.

Industry Begins Consulting... Outline to be Released This Month

According to the industry on the 4th, the Korea Chemical Industry Association commissioned Boston Consulting Group (BCG) to conduct a consulting project titled 'Petrochemical Industry Restructuring Plan,' with the results report scheduled for release on the 7th. The association and industry CEOs plan to use the report to assess the scale of domestic excess capacity and review future business restructuring and prioritization of excess capacity. The report is expected to be submitted to the government within this month and used as a standard for industry support.

The Ministry of Trade, Industry and Energy announced the 'Measures to Enhance Competitiveness of the Petrochemical Industry' last December, but clear policies have not emerged due to opposition from companies with conflicting interests. The government plans to announce new support measures within the first half of this year, reflecting the BCG report and research and development (R&D) support studies from the Korea Institute for Advancement of Technology.

The industry expects the BCG consulting report to include policies such as enhancing raw material competitiveness, tax relief, reductions in industrial electricity rates, and expansion of demonstration facilities. In particular, there is a high possibility of discussions on extending the duty-free period for petrochemical raw materials like naphtha and expanding raw material selection options.

Impeachment Turmoil and Fair Trade Act Hamper Restructuring

However, since the consulting report is released immediately after the Constitutional Court's impeachment trial of President Yoon Suk-yeol (on the 4th), the prevailing view in the industry is that active government intervention and measures are unlikely. An industry insider explained, "Even after the verdict, the political situation will remain chaotic for some time," adding, "Until complete stabilization, it will be difficult for the government to make bold decisions regarding petrochemical companies with sharply conflicting interests." Another insider said, "It is important for the industry to voluntarily restructure businesses or for refining companies to acquire naphtha cracking facilities (NCC), rather than expecting improvements through government pressure, which has its limits."

The Fair Trade Act is also an obstacle. Under the Fair Trade Act, support for specific companies can raise concerns about restricting market competition, so discussions are limited to regulatory easing and institutional improvements rather than direct financial support. In fact, the 'Measures to Enhance Competitiveness of the Petrochemical Industry' focused more on inducing facility conversion and technological investment rather than direct financial aid.

Discussions on restructuring among petrochemical companies have also stalled due to the Fair Trade Act. According to Article 9, Chapter 3 of the current Fair Trade Act, if a company holds the number one market share in a specific transaction field or meets the criteria of a market-dominant business operator (over 50% market share), mergers between companies are considered monopolistic acts subject to corrective actions by the Fair Trade Commission. An industry official pointed out, "Smaller companies sometimes shut down plants to improve efficiency, but the bigger the company, the greater the losses, making it harder to respond to the current situation."

A view of Hanwha TotalEnergies Daesan Plant located in Seosan, Chungnam. Provided by Hanwha TotalEnergies

Experts Stress Urgent Need for NCC Company M&A and Consolidation

The petrochemical industry repeatedly requested the government last December to relax the Fair Trade Act. However, the Ministry of Trade, Industry and Energy and the Fair Trade Commission, the responsible authorities at the time, expressed reluctance, citing potential fairness issues.

Experts agree on the need for restructuring and 'selection and concentration' on core areas. The main candidates for consolidation include leading domestic NCC operators such as LG Chem, Lotte Chemical, Hanwha TotalEnergies, and Yeochun NCC.

An industry expert emphasized, "Through M&A, securing economies of scale by becoming larger and reducing the number of companies, bold and swift restructuring should be carried out to enhance fundamental competitiveness." Professor Bae Jin-young of Sungkyunkwan University's Department of Chemical Engineering said, "To prepare for the onslaught of integrated refining and petrochemical complexes (COTC) from China and the Middle East, consolidation beyond M&A is necessary," adding, "Especially since Lotte Chemical and LG Chem have many overlapping basic feedstock products, these products should be merged or eliminated, and high-end specialty products should be strategically promoted."