As Korean petrochemical industry faces collapse, gov't jumps into action

The government will likely accelerate efforts to restructure the struggling petrochemical industry under its own leadership.

White steam rises from the Yeosu National Industrial Complex in Yeosu, South Jeolla, where petrochemical companies are concentrated, on Dec. 7, 2020. [YONHAP]

The government will likely accelerate efforts to restructure the struggling petrochemical industry under its own leadership.

While the government had initially hoped for voluntary restructuring by the private sector, progress has been slow, raising concerns that the “golden time” for action could be lost.

“The petrochemical industry is facing a serious crisis,” said President Lee Jae Myung on Thursday, calling for “a swift, comprehensive plan encompassing business restructuring, facility adjustments and technology development.”

Also on Thursday, Minister of Trade, Industry and Energy Kim Jung-kwan said the “government will announce its policy on restructuring the sector within August.”

“The government seemed reluctant to make a quick decision due to the difficulty of aligning corporate interests and the burden of an artificial restructuring,” said an industry source. “But with the situation worsening — as seen with Yeochun NCC, a joint venture of Hanwha and DL Group that recently faced a default crisis — the government appears to have finally drawn its sword.”

The domestic petrochemical industry is suffering from the effects of oversupply in China. Since the 2020s, China has pursued the goal of achieving an energy and chemical self-sufficiency rate of more than 70 percent, aggressively building and expanding large naphtha cracking centers (NCCs) and propane dehydrogenation (PDH) facilities.

As a result, China’s ethylene production capacity nearly tripled from 19.5 million tons in 2014 to 52.74 million tons last year. In the Yeosu National Industrial Complex, where petrochemical plants are concentrated, operating rates fell from 87 percent in 2021 to 78.5 percent in 2024, and to the 60 percent range this year.

First Vice Minister of Trade, Industry and Energy Moon Shin-hak, far left, speaks at a meeting with middle-sized corporations for a ″scale-up″ method roundtable at a venue in Mapo District, western Seoul on Aug. 13. [NEWS1]

Boston Consulting Group (BCG) has warned that without restructuring, half the domestic petrochemical companies could go bankrupt within three years.

Six of the country’s 10 largest conglomerates, including LG, Lotte, Hanwha and DL, have petrochemicals as a core business, fueling concerns that the crisis could spread to entire corporate groups.

In December 2023, the government unveiled a “Plan to Enhance the Competitiveness of the Petrochemical Industry” (translated), aimed at encouraging voluntary restructuring through legal reform and financial and tax support.

Based on that plan, major companies such as LG Chem and Lotte Chemical began selling noncore assets to streamline operations, but industry players say this alone will not get them through the downturn.

Sensing urgency, the government has reportedly been holding behind-the-scenes talks since last month, with First Vice Minister of Trade, Industry and Energy Moon Shin-hak meeting representatives from about 10 petrochemical companies to discuss restructuring directions.

Former First Vice Minister of Trade Park Sung-taik speaks at a meeting of petrochemical industry officials to discuss countermeasures against U.S. reciprocal tariffs, held at the Korea Productivity Center conference room in Jongno District, central Seoul on April 7. [YONHAP]

The restructuring plan is expected to come in three parts. First, to promote “big deals” between companies based on a government-designed restructuring blueprint, and secondly, to combine the elimination of unprofitable businesses with a shift toward high-value-added products, while applying a package of policy, financial and regulatory incentives modeled after successful restructuring in Korea’s shipbuilding sector and Japan’s petrochemical industry. The final third part is expected to provide tax and financial incentives to proactive participants while excluding “free-rider” companies.

Experts say that for restructuring to succeed — as in the shipbuilding and Japanese petrochemical examples — it must involve bold consolidation of businesses and facilities, big deals between companies, conversion to high-value-added industries, government policy support and shared sacrifice among stakeholders.

“Korea’s shipbuilding industry overcame the order drought of the late 2010s through self-help measures such as asset sales and business adjustments, combined with restructuring, and later contributed as a key sector in Korea-U.S. tariff negotiations,” Industry Minister Kim noted.

During that restructuring, midsize shipbuilders shed loss-making sectors like container ships to focus on tankers and special-purpose vessels, while large shipbuilders overhauled their portfolios to focus on LNG carriers and environmentally friendly ships. Many companies returned to profitability and reentered the global market.

Japan’s government-led petrochemical restructuring also offers guidance. In November 2014, Tokyo’s Ministry of Economy, Trade and Industry released a report on market structure, setting a target of reducing ethylene production capacity by 30 percent within six years.

Minister of Employment and Labor Kim Young-hoon, center, poses for a commemorative photo with attendees at the signing ceremony for the expansion of cooperation between Incheon city and the petrochemical industry held at the SK Incheon Petrochem headquarters in Incheon on Aug. 6. [YONHAP]

It supported corporate big deals by easing regulations, including exceptions to antitrust laws. As a result, capacity was reduced by about 800,000 tons within three years, by 2017, and leading companies emerged in various fields.

A bill introduced on June 11 by Democratic Party (DP) Rep. Ju Chul-hyun — the “Special Act on Petrochemicals” — also reflects a government-led restructuring approach.

This bill includes tax credits and deferred taxation for mergers, spinoffs and facility reductions; subsidies for R&D and facility investment; electricity bill discounts; streamlined procedures for facility construction, expansion and closure; special exemptions from environmental regulations; and exemptions from antitrust law when adjusting production cuts between companies.

It also allows the government to directly induce restructuring for companies unable to do so voluntarily.

Above all, experts stress that successful restructuring will require strong self-help efforts from major petrochemical firms.

Members of the Yeochun NCC branch of the National Chemical, Fiber, and Food Industry Workers' Union hold up a banner with the message, ″We deeply appreciate Hanwha Group's trust and support for Yeochun NCC,″ in front of the Hanwha Building in Jung District, central Seoul, on Aug. 12. Yeochun NCC, a joint venture between Hanwha Group and DL Group, recently faced a crisis of bankruptcy due to the deteriorating petrochemical industry. While Hanwha Group is taking the position that it will prevent Yeochun NCC from defaulting even through additional support, Hanwha Solutions approved an additional loan of 150 billion won to the company at its board meeting in late July. [YONHAP]

“The government will respond firmly across ministries to companies that attempt to free-ride,” Kim also stressed.

However, some caution that a full-scale restructuring modeled on shipbuilding could have adverse effects.

“Unlike shipbuilding, the petrochemical sector has about 10 large companies producing dozens of different products, so mechanical consolidation is virtually impossible,” an industry expert noted.

“Warning signs for the petrochemical sector appeared years ago, but the government’s response was too slow,” said Lee Duck-hwan, a professor emeritus of chemistry at Sogang University. “While deregulation to promote voluntary, private-sector-led restructuring is ideal, at this stage the government must take the lead.”

Prof. Lee emphasized the need to swiftly reduce oversupply capacity and shift to high-value-added fine chemicals.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom. BY KIM WON [lim.jeongwon@joongang.co.kr]