The prolonged conflict in the Middle East has heightened uncertainty over raw material procurement and profitability in South Korea's petrochemical industry. The recent termination of government naphtha subsidies has intensified restructuring pressures within the sector. In Yeosu, discussions about corporate mergers are accelerating, raising expectations for production capacity reductions. However, in Ulsan, disagreements over the Shahin project have led to complications regarding capacity cuts.
According to industry sources, the government ended the subsidy for imported naphtha at the end of last month. Concerns are growing that the ethylene spread, a key profitability indicator for basic petrochemical products, will fall below $100, well below the breakeven point, starting in August when the unsubsidized imports arrive.
The decline in profitability for ethylene, propylene, and butadiene derived from naphtha has increased the need for business restructuring in Yeosu and Ulsan. However, differing interests among companies in each region have resulted in varying speeds of restructuring.
In Yeosu, LG Chem and GS Caltex are currently discussing restructuring plans, aiming to finalize them in the second half of the year. If both mergers are successful, approximately 2 million tons of ethylene production capacity could be reduced in the Yeosu complex.
However, there are differences in positions regarding the merger targets and business scope. A simple merger of LG Chem's naphtha cracking facility and GS Caltex's mixed feedstock cracking facility could disadvantage GS Caltex, which has more advanced equipment. Therefore, it is reported that both companies want to include some specialty sectors in their collaboration to ensure the merged entity's sustainability.
In Ulsan, discussions on restructuring involving SK Geo Centric, Daehan Chemical, and S-Oil face significant challenges. SK Geo Centric and Daehan Chemical have already reduced production capacity through facility shutdowns and cuts, arguing that S-Oil, which is launching new production facilities, should bear the burden of reductions.
Conversely, S-Oil emphasizes that including the new Shahin project, which has higher cost and energy efficiency than older facilities, in the reduction plan contradicts the purpose of restructuring the petrochemical industry. The rationale is that the goal of government-led restructuring is to phase out older, less efficient facilities and transition the industry toward high-efficiency operations, making it illogical to reduce competitive new facilities.
The issue is that once Shahin is fully operational, the domestic supply of basic petrochemical products like ethylene, propylene, and butadiene will significantly increase. Even if companies in Daesan and Yeosu close or merge facilities to reduce production, the influx of new supply from Shahin could largely offset the intended reduction effects. Ultimately, the restructuring in Ulsan will test the government's priorities between total capacity reduction and facility competitiveness.
An industry insider stated, "Significant social costs arise during the restructuring process, and if S-Oil is the only company increasing production capacity, measures to share the corresponding burden are necessary. This situation cannot be resolved solely through voluntary negotiations among companies; the government must actively mediate and clearly indicate its commitment to maintaining petrochemicals as a national key industry."
* This article has been translated by AI.
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