Chinese and Middle Eastern petrochemical companies are increasing production of general products such as ethylene, propylene, and butadiene, while South Korean firms are struggling to transition to specialty products, according to a recent report. The decline in structural competitiveness of general products is seen as inevitable, making the shift to specialty production a necessity for survival rather than a choice for South Korean companies.
On September 24, Korea Credit Rating Agency released a report titled 'Transition of K-Chemicals: Beyond General Products to Specialty,' highlighting the need for South Korean petrochemical firms to pivot from general products to specialty production linked to globally competitive industries such as semiconductors, displays, electric vehicles, and shipbuilding.
The report indicates that the export strategy focused on general products aimed at the Chinese market, which drove the petrochemical boom over a decade ago, is no longer effective. The expansion of general product facilities in China, including naphtha cracking and coal-to-olefins plants, is driven by government policies aimed at industrial self-sufficiency and supply chain stability, which differ from the profit-driven motives of private South Korean firms.
As a result, the current downturn in the petrochemical industry is unlikely to recover naturally over time, contrasting with past cycles of boom and bust, according to the agency.
In particular, the profitability of general products is influenced by global raw material supply and cost competitiveness. China benefits from large integrated refining and petrochemical complexes and a vast domestic market, while the Middle East leverages low-cost raw materials and innovative processes. In contrast, South Korean companies face challenges due to high dependence on imported naphtha and limited domestic demand.
This situation necessitates a shift for South Korean petrochemical firms toward specialty products that Chinese and Middle Eastern companies are unable to produce due to technological or demand limitations.
Specialty products are priced based on the added value they provide to customers, requiring tailored designs and lengthy evaluation and certification processes. This means that Chinese and Middle Eastern firms will take considerable time to enter the market, allowing South Korean companies to establish differentiated competitive advantages during this period.
Historically, Japanese and European petrochemical firms, which lost price competitiveness to South Korean companies, have shifted their business structures toward specialty products such as high-performance resins and electronic materials over the past few decades.
In South Korea, the growth of advanced industries such as artificial intelligence, semiconductors, electric vehicles, batteries, and biotechnology is continuously generating new demand for high-performance materials. Areas where South Korean companies can excel in specialty products include functional resins and adhesives derived from C4 fractions and BTX.
Korea Credit Rating Agency noted, 'As industries become more advanced, materials are required to have higher performance and multifunctionality, such as high purity, heat resistance, insulation, and heat dissipation.' It added that companies with differentiated technological capabilities in high-spec materials and new functional materials can secure high added value and stable growth.
However, the level of transition to specialty products among South Korean petrochemical firms remains insufficient. According to the agency's analysis of eight major domestic petrochemical companies based on three criteria—current transition status, medium- to long-term plans, and financial capacity—the average score was approximately 2.1 out of 5.
In terms of current transition status, all companies reported specialty sales accounting for less than 50% of their total revenue, with only LG Chem nearing that threshold. For medium- to long-term plans, Lotte Chemical and LG Chem received high marks for publicly announcing specific execution plans involving business restructuring and new investments. In terms of financial capacity, companies with relatively stable financial indicators and those pursuing asset sales were rated more favorably.
The approach to transitioning to specialty products varies among companies based on their business foundations and financial conditions. LG Chem and Lotte Chemical are reallocating resources from general products to specialty and new growth businesses in a 'portfolio restructuring' model. H&L Advanced (a joint venture between HD Hyundai Chemical and Lotte Chemical) and Yeocheon NCC (a joint venture among Hanwha Solutions, DL Chemical, and Lotte Chemical) are focusing on integrating upstream (general product) facilities and improving operational efficiency while expanding high-value downstream (derivative product) offerings in an 'integration and efficiency' model.
SK Geo Centric is diversifying its approach by establishing joint ventures to spread investment burdens and business risks while expanding its high-value product lines in a 'collaborative diversification' model. Kumho Petrochemical, SK Picglobal, and Hyosung Chemical are enhancing the competitiveness of their existing core product lines and increasing their value through a 'core business enhancement' model.
* This article has been translated by AI.
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