As international oil prices rise, the cost of naphtha, a key raw material for petrochemicals, is also increasing, presenting challenges for South Korea's petrochemical industry amid allegations of price fixing. With ongoing adverse conditions, major domestic petrochemical companies are losing momentum for transitioning to specialty products and may miss critical opportunities for survival.
According to industry sources, the price of naphtha, the core raw material for petrochemicals, reached $927 per ton in the fourth week of September, approximately 17% higher than the previous month. This increase reflects the rise in international oil prices due to escalating conflicts involving the U.S., Iran, Saudi Arabia, and the Houthi rebels in Yemen.
This past June, the government ended its subsidy policy for naphtha imports, which had been implemented to stabilize the petrochemical supply chain, as market conditions improved. While petrochemical companies had reported a return to profitability in the first quarter and maintained stable profits in the second quarter due to high ethylene refining margins and subsidies, analysts predict a decline in profits or a return to losses in the third quarter.
In this context, major domestic petrochemical firms, including PKC, OCI, LG Chem, Hanwha Solutions, Aekyung Chemical, Lotte Fine Chemical, and Unid, are under investigation by prosecutors for alleged large-scale price fixing. The Seoul Central District Prosecutors' Office is investigating claims that these seven companies coordinated the timing and extent of price increases for eight petrochemical products, including polyvinyl chloride (PVC), plasticizers, caustic soda, and hydrochloric acid, over several years. On September 18, arrest warrants were requested for eight current and former executives, with two warrants granted by the court.
The prosecutors are particularly focused on PVC and caustic soda, which are estimated to be involved in a price-fixing scheme worth approximately 15 trillion won. The domestic PVC market is primarily dominated by Hanwha Solutions and LG Chem, while caustic soda production involves Hanwha Solutions, LG Chem, Lotte Fine Chemical, PKC, and OCI. This investigation poses a significant burden for Hanwha Solutions and LG Chem, which are investing heavily in restructuring the petrochemical sector.
Lee Deok-hwan, an emeritus professor of chemistry at Sogang University, stated, "While it is right to investigate illegal activities, the current situation in the petrochemical industry is extremely difficult. If the government strictly enforces fair trade laws, it could jeopardize the planned restructuring of the petrochemical industry. It may be necessary to relax the strict application of the law during this restructuring process, taking cues from Japan's experience."
Some in the petrochemical industry argue that the nature of generic petrochemical products makes it difficult to differentiate products, leading to sensitivity to competitors' price changes rather than explicit collusion. The petrochemical market is characterized by high barriers to entry due to the need for significant capital investment, making implicit collusion likely as companies follow competitors' pricing strategies. Analysts suggest that proving explicit agreements or communications between companies will be challenging.
Under current fair trade laws, companies found guilty of collusion can face fines of up to 20% of their related sales. While petrochemical companies plan to invest heavily in reducing capacity and transitioning to specialty products despite operating at a loss to counter oversupply from China and the Middle East, the imposition of government fines in the trillions of won could halt these efforts.
Korea Credit Rating Agency assessed the level of specialty transition among eight major domestic petrochemical companies, giving an average score of about 2.1 out of 5, indicating that the industry's response is still lacking. Only LG Chem has approached a 50% share of specialty sales, showing a relatively strong performance.
As a result, there are concerns in the business community that petrochemical companies, unable to withstand government pressure and declining performance, may abandon their specialty transition plans and pivot to exit strategies such as divesting business units. Analysts suggest that Chinese and Middle Eastern oil and petrochemical companies, which have recently acquired European petrochemical firms, may also seek to acquire South Korean petrochemical companies.
A business community source noted, "I understand that several corporate groups have already established exit strategies for their petrochemical businesses. They plan to halt new investments and allow human and material resources to age naturally, eventually shifting their focus to new ventures like real estate development."
* This article has been translated by AI.
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