The stocks of South Korean petrochemical companies such as Lotte Chemical, Kumho Petrochemical, and Korea Petrochemical, which had struggled in recent years, have shown strong performance.
This shift is being attributed to the potential end of the Russia-Ukraine war and the possibility of increased liquefied natural gas (LNG) exports from the United States. These developments could provide an opportunity for S. Korea’s petrochemical industry to overcome the unfavorable cost structures it had endured for the past three years.
In an industry analysis report released on Feb. 18, Yoon Jae-sung, a researcher at Hana Securities, noted that since Russia’s invasion of Ukraine, China had secured oil at $10 to $20 cheaper per barrel and also purchased Russian naphtha. In contrast, S. Korea has been paying higher prices for oil, and its imports of Russian naphtha dropped from 26% to zero.
Yoon pointed out, “Over the past three years, S. Korea’s petrochemical industry faced the most disadvantageous cost structure in the world.” He added that from 2022 to 2024, the operating rate for petrochemical plants in Northeast Asia fell 6.5 percentage points below the 2014-2021 average, while S. Korean naphtha cracking centers (NCC) such as those operated by Lotte Chemical saw their operating rate drop by as much as 29 percentage points.
However, Yoon suggested that if sanctions on Russia are lifted after a peace agreement, S. Korea’s petrochemical industry could start importing Russian naphtha again, restoring its cost competitiveness. An increase in NCC operating rates would also help reduce fixed costs.
The recent rise in stock prices of S. Korea’s petrochemical companies may also be linked to these geopolitical changes, along with the potential for increased U.S. LNG exports.
However, Yoon suggested that if sanctions on Russia are lifted after a peace agreement, S. Korea’s petrochemical industry could start importing Russian naphtha again, restoring its cost competitiveness. An increase in NCC operating rates would also help reduce fixed costs.
If oil prices stabilize, the possibility arises that petrochemical projects in the Middle East might be canceled, easing supply burdens. Yoon mentioned that reports in Oct. 2024 indicated that Aramco had canceled plans for the expansion of its refining and petrochemical facilities due to financial constraints.
Yoon also raised concerns about the long-term affordability of U.S. natural gas, questioning whether it will remain cheap if the country approves further LNG exports. He noted that this would likely reduce the amount of ethylene production in the U.S. that would be exported to Asia, as U.S. natural gas prices would no longer be as low.
He concluded, “In petrochemicals, when the premise of oil and gas markets changes, many factors can shift dramatically all at once. The potential for further stock declines in S. Korean NCC stocks is limited, and short-term rebounds are possible.”
