Still the 3rd Largest Exporter Despite Turmoil... "Closing Down Is Not the Answer" [Petrochemical Industry in Crisis]

Ranked Third in Exports Last Year, Still a Major Pillar
Hopes for China's Economic Recovery and Completion of the Shahin Project
Government and Industry Must Unite for a 'Transition for Survival'

Editor's NoteThe domestic petrochemical industry has fallen into an unprecedented structural recession. The 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. Voices from both the government and 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 domestic petrochemical industry is staggering under an unprecedented downturn, it is still regarded as the 'big brother' playing a pivotal role in the export market. Appropriate support and restructuring across the entire industry not only protect individual companies but also uphold one pillar of Korea's exports. Experts view the current period, as the global market is being reshaped by the U.S.'s mutual tariff announcements, as a 'golden time' to seek a transition to high value-added petrochemical products.

According to the Korea International Trade Association on the 4th, last year, the export value of the domestic chemical industry was $94.7 billion (approximately 140 trillion KRW), accounting for 13.9% of Korea's total exports ($683.6 billion). It ranks third after electronics and electrical products (36.0%) and machinery (27.2%). Among chemical products, petrochemical and fine chemical products predominated. By February this year, the chemical industry's export share had risen to about 14.8%.

Meanwhile, President Trump's '25% mutual tariff card' shook the domestic petrochemical industry once again. A representative from the Korea Petrochemical Industry Association expressed dismay, saying, "Even a 2-3% tariff affects us, so tariffs exceeding 20% are unprecedented." Another industry insider lamented, "We had no choice but to rely on U.S. sanctions against China to counter China's low-price offensive. But now, we face a situation where we must reduce the share of petrochemical products entering the U.S." This underscores the need for decisive action from both the government and industry ahead of a major global market transformation.

Despite the Slump, a 'Reversal Card' Remains

There are hopeful indicators. The export value trend of chemical products to China has shown a decreasing rate of decline: from -14.1% in 2023 to -7.2% in 2024, and -5.5% this year. Positive variables for future business conditions include expectations of China's economic recovery, the potential end of the Russia-Ukraine war, and the completion of the 'Shahin Project' being promoted by Saudi Aramco and S-Oil. Upon the war's end, domestic petrochemical companies could secure cost competitiveness through imports of Russian crude oil and naphtha, and upon completion of the Ulsan Shahin Project, through reduced transportation costs.

Since the outbreak of the Russia-Ukraine war, the average price of Russian crude oil flowing into China is estimated at $77 per barrel. Compared to Korea's average crude oil import price from Saudi Arabia and others last year, which was in the low to mid-$80s per barrel, this is about $5-10 cheaper. The volume of Russian naphtha imports, which ranked first in domestic naphtha imports before the war, is also expected to recover. For domestic petrochemical companies with naphtha cracking facilities (NCC), procuring naphtha, the raw material, at a low cost is key to reducing production costs. As of 2021, the average price of Russian naphtha was about 5% cheaper than Middle Eastern naphtha.

Experts agree that now, when some positive factors are emerging, is precisely the time to accelerate the transition to high value-added products. Jo Yong-won, a research fellow at the Korea Institute for Industrial Economics & Trade, said, "For high value-added transformation, diversifying raw materials for general-purpose products, improving facility efficiency, and maintaining economies of scale to secure price competitiveness are key," adding, "The business structure should gradually shift from focusing on general-purpose products to increasing the proportion of high value-added products." Lee Deok-hwan, emeritus professor of chemistry at Sogang University, said, "In the past, the petrochemical industry had to neglect investments for structural improvement due to unreasonable regulatory pressures from the government. Now is the time for the government to lead the transition to high value-added products."

"Transition for Survival"… Government and Companies Must Join Forces

Last month, the government deliberated and approved the 'Power Grid Expansion Act (Special Act on Expansion of National Power Grid).' This established a policy foundation to support the growth of industries requiring large-scale power, such as artificial intelligence, while ensuring stable power supply to petrochemical companies. The industry is increasingly demanding direct policy funding in addition to this.

Local governments such as Seosan City in Chungnam recently requested the 'new designation' of Daesan, the only one among Korea's three major petrochemical complexes (Ulsan, Yeosu in Jeonnam, and Daesan in Chungnam) not designated as a national industrial complex, and requested 'preemptive designation as an industrial crisis response area' for Ulsan and Yeosu, where local tax revenues have sharply declined. If designated as a national industrial complex, they receive tax benefits such as corporate and income tax reductions under the 'Industrial Location and Development Act.' If designated as a crisis area, they can receive financial support such as funds and loans.

As Korea enters a macro-level transition period, not only the government's role but also the determination of business leaders is crucial. No Guk-rae, former Vice President and Head of Petrochemical Business at LG Chem, expressed his commitment to industry restructuring starting in 2023, stating, "We cannot delay restructuring uncompetitive marginal businesses," and "We will reorganize business structures through shutdowns, business withdrawals, and equity sales, and promote workforce redeployment," showing his resolve for improving the industry's structure.