Lotte Chemical chief financial officer (CFO) Seong Nak-sun called for measures to reduce this year’s investment and spending. Seong requested a reassessment of the investment plan outlined last Oct. and put a hold on further investment and expenditure. “Every department is busy cutting the budget, and executive meetings are mostly comprised of a re-evaluation of investment and an analysis of the business outlook,” said an official from Lotte Chemical, underscoring that the corporation is well aware of the crisis.
Amid a two-year recession, the domestic petrochemical industry is in a state of crisis, with growing concerns over a potential long-term structural downturn rather than a rebound. The anxiety comes after China aggressively expanded its infrastructure to boost supply and exports, while Middle Eastern countries, once advocating “De-oiling,” now venture into the petrochemical industry. In Korea, Petrochemicals led the exports in 2021 and was the fourth-largest export item in 2022. The shift to high-value products is inevitable for a turnaround, said an expert.
◇ From China to the Middle East
China emerged as the primary threat to the national chemical firms. China expanded its self-sufficiency and exports extensively, prompting competition with Korean petrochemical firms that were once heavily dependent on China as their primary export market.
Indeed, the production ability of Chinese firms has doubled over the past five years, surpassing a world record of 50 million tons. Firms at even 80 percent capacity are over-stocked and are compelled to export excesses to East Asia, leaving limited room for Korean products in the market.
Meanwhile, Middle East nations are adopting the “Oil to Chemical” strategy, redirecting their focus to petrochemicals. In refining crude oil to produce main oils, they internally crack naphtha - a raw material for chemicals - and produce essential oils such as ethylene and propylene at low prices. This integrated systematization strategy aims to enhance profitability in response to the downsized oil industry resulting from the decarbonization trend.
Aramco, Saudi Arabia’s state-owned oil giant is the one most aggressively investing in the sector. The oil giant announced the following year after the company acquired Saudi Basic Industries Corp (SABIC), the largest petrochemical company in the Middle East, for 80 trillion won ($607.6) in 2017 that it would invest 132 trillion won ($100 billion) in the “chemical industry” over the next decade. To date, Aramco is carrying out projects of more than 50 trillion won ($38.07 billion), mainly in China and South Korea. In South Korea, the 9-trillion-won ($6.85 billion) “Shaheen project” is underway by the company in Ulsan. The project will have a total capacity of 3.05 million tonnes of basic petrochemicals, including 1.8 million tonnes of ethylene when completed in 2026. The domestic production capacity of ethylene stood at 12.8 million tonnes last year (including 3.3 million tonnes from LG Chem and 2.33 million tonnes from Lotte Chemical), and the Shaheen project could exacerbate the current oversupply.
There is another growing concern about Aramco’s close relationship with China, as the company and Chinese major petrochemical firms have invested in each other’s shares. The Saudi Arabian oil tycoon has investments worth about 40 trillion won ($30.45 billion) in the petrochemical sector, starting with the “Second Phase of Fujian Gulei Refining & Chemical Integration Project,” where the company is financing 13 trillion won ($9.89) in December 2022 with Sinopec, China’s largest oil company. “Middle Eastern refiners that directly source crude oil are bound to be cost-competitive,” said an industry insider, adding, “It is unclear whether South Korea can survive the “Chicken Game” of who can last the longest in the industry.”
◇South Korean NCC plant utilization rates are around 70%. The way to get out of the deficit swamp is...
According to the Korea Petrochemical Industry Association, the average utilization rates of Naphtha Cracking Center (NCC) plants in major petrochemical industrial complexes in Ulsan, Yeosu, and Daesan have hovered around 74% so far this year. “The 70% utilization rate is the minimum threshold to keep the plants running,” said Kim Pyung-joong, head of the Korea Petrochemical Industry Association, adding, “We are operating the plants due to contracted volumes, but with high oil prices at $80, costs are high and demand is sluggish, so the more we operate, the more we lose money.”
South Korean chemical companies are also looking for a way out. LG Chem is seeking to divest some stakes in its general-purpose products business through a physical division. Lotte Chemical sold all of its general-purpose product plants in China last year and is also seeking to sell its Malaysian unit Lotte Chemical Titan. However, industry players predict that it will not be sold, or it will be sold at a low price. Lee Duk-hwan, professor emeritus of chemistry at Sogang University, pointed out that “The collapse of the petrochemical industry means the collapse of the refining industry which is its foundation,” adding, “The government should recognize the importance of the refining and oil chemical industrial ecosystem and come up with policies to protect the key industries.”
