The South Korean government will end its naphta import subsidy program, which was implemented to ensure a stable supply of plastics and other products amid the recent conflict in the Middle East. With the cessation of subsidies and a decline in prices for essential materials like ethylene, petrochemical companies may face deteriorating performance in the second half of the year. Discussions regarding the reduction of naphta cracking facilities (NCC), which had been stalled for six months due to the war, are expected to resume.
According to industry sources on June 18, the Ministry of Trade, Industry and Energy has decided to discontinue the temporary naphta import subsidy program, which was in effect from April to June.
A government official stated, "With the end of the Middle East conflict, we anticipate stabilization in naphta supply, so we will not provide import subsidies starting in the third quarter. However, we will continue to subsidize contracts made by companies until the end of June."
The naphta import subsidy policy was designed to cover 50% of the increase in import prices for companies. The goal was to ensure a stable supply of essential goods, such as plastic bags and other products made from naphta, even during the conflict. Following the implementation of the policy, the operating rates of NCC, which had dropped to as low as 60%, recently recovered to around 80%, similar to pre-war levels. This stability allowed South Korea to navigate the war period with relatively fewer issues, even as packaging material shortages arose in China and Japan.
The immediate impact of the subsidy ending may not be severe for petrochemical companies. Given that it takes about a month for naphta to arrive in South Korea from regions like the Middle East, the production for July is expected to still benefit from the subsidies for refining ethylene, propylene, and butadiene.
However, as expectations grow regarding the end of the conflict, the price of ethylene, which constitutes a significant portion of the essential materials, has plummeted. Ethylene, which reached a record high of $1,440 per ton during the war, is currently trading around $870 per ton and is projected to fall to approximately $700 per ton in the second half of the year.
Concerns are rising within the petrochemical industry that NCC operating rates may decline again after August. A senior industry official remarked, "The ethylene spread, a key profitability indicator for the petrochemical industry, is already below the breakeven point without government subsidies. Given the unavoidable decline in profitability, discussions among companies in the Yeosu industrial complex regarding NCC reductions will likely become more active again."
* This article has been translated by AI.
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