Concerns are rising that the domestic petrochemical industry's failure to accelerate restructuring could lead to prolonged losses due to oversupply. The government is pushing for a reduction of up to 3.7 million tons in naphtha cracking facilities (NCC), but the approved reduction plans so far fall short of 70% of the target. Additionally, the activation of the large-scale petrochemical facility known as the 'Shahin Project' in early January could significantly diminish the effects of restructuring.
According to industry sources on October 22, the government's reduction target for domestic NCC facilities is between 2.7 million and 3.7 million tons annually. The approved reduction plans for the Daesan No. 1 (1.1 million tons) and Yeosu No. 1 (1.39 million tons) facilities total 2.49 million tons, which is 1.21 million tons below the maximum target of 3.7 million tons.
The longer the restructuring is delayed, the greater the operational burden on companies. The industry estimates that maintaining a 1 million-ton NCC facility without reduction could lead to an additional annual operating loss of about 150 billion won. Applying this to the shortfall of 1.21 million tons against the government target suggests an annual loss of approximately 180 billion won.
Moreover, the approved restructuring plans will take time to translate into actual supply reductions. For instance, the Daesan No. 1 project will see a 1.1 million-ton NCC facility reduction implemented over three years, making immediate benefits unlikely.
Criticism is mounting regarding the government's passive response during the restructuring planning process. If some companies reduce their facilities while others maintain their existing production capacity, fairness issues could escalate. This could lead to certain companies bearing a heavier restructuring burden while others benefit disproportionately.
LG Chem is among the companies most actively participating in the government's restructuring efforts. In Daesan, it launched a merged entity called 'H&L Advanced' with HD Hyundai Chemical in September and is working to suspend NCC operations. In Yeosu, it is also participating in production capacity adjustments by integrating Yeocheon NCC and its basic materials business.
In contrast, other restructuring projects remain stalled. In Yeosu, LG Chem and GS Caltex are discussing business restructuring, but they need to reconcile asset valuations and the governance structure of the merged entity.
In Daesan, additional restructuring between LG Chem and Hanwha TotalEnergies remains a task. The two companies have differing facility competitiveness and product portfolios, complicating negotiations over the selection of facilities for reduction and asset valuations.
The situation in Ulsan is even more complex. SK Geo Centric, Daehan Oil Pipeline Corporation, and S-Oil are discussing restructuring, but they have been unable to narrow differences regarding reduction methods and cost burdens. Meanwhile, S-Oil's Shahin Project is set to begin operations in January, which could further undermine the effects of restructuring, as it has an annual ethylene production capacity of 1.8 million tons.
Experts argue that the current situation is a result of government actions. Lee Deok-hwan, an emeritus professor of chemistry at Sogang University, stated, "The Ministry of Industry bears significant responsibility for the petrochemical industry's crisis, having approved the Shahin Project amid an already emerging oversupply from China. It is contradictory to demand facility reductions from existing companies while allowing new large-scale facilities and then emphasizing voluntary restructuring in the industry." He added, "The Ministry has a duty to protect and nurture national key industries, and it should actively mediate rather than merely observe the negotiation processes among companies."
* This article has been translated by AI.
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