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Amid the global economic downturn and challenges such as weakened demand for petrochemical products as well as increased self-sufficiency in China, which is the largest market for domestic companies, the South Korean petrochemical industry is accelerating business restructuring.
According to Korea Credit Rating on Nov. 14, the average cumulative operating profit margin of eight major domestic petrochemical companies, including LG Chem, Lotte Chemical, SK geo centric, SKC, Kumho Petrochemical, Yeochun NCC, HD Hyundai Chemical, SK Advanced, and Hyosung Chemical is 2.1 percent for the first half of this year, significantly down from 5.3 percent during the same period last year. This assessment indicates that domestic companies are struggling in the face of the prolonged downturn since the end of 2021.
The current poor performance of domestic companies is attributed to factors such as persistent high crude oil prices, slackening demand and expanding supply pressure. After the Russia-Ukraine war last year, the persistent high crude oil prices have increased raw material costs, leading to a decline in profitability. Particularly in the current situation of weak demand, the industry explains that it is challenging to pass on the cost increases to the selling prices.
The downturn in demand from China, which was the largest export market for the domestic petrochemical industry, is another adversity. In the past, the domestic petrochemical industry grew by supplying approximately 50 percent of its total petrochemical products exports to China, thanks to China’s high-growth trend. However, China’s strengthened zero-COVID policy in 2022 significantly reduced demand, and this year demand has not recovered to previous levels due to the delayed reopening of economic activities in China.
Moreover, the issue of oversupply from China is emerging due to large-scale facilities that have been completed in China since 2019. General products produced in upstream facilities in China are entering the market, affecting not only China’s self-sufficiency but also price competitiveness. In the case of polypropylene (PP), there is an outlook for achieving 100 percent self-sufficiency in China, especially considering the focus on expanding propane dehydrogenation (PDH) facilities in the country.
In response, domestic petrochemical companies are trending towards reducing the production of general-purpose petrochemical products. In September, Lotte Chemical sold its stake in Lotte Chemical Jiaxing, a local factory in Jiaxing, China, to a local partner. Lotte Chemical Jiaxing has been producing raw materials such as ethylene oxide derivatives (EOA) and ethanolamine (ETA), which are used in cement and detergents, as well as ethylene oxide (EO), used in plastics and other products by Lotte Samkang Chemical. However, as Chinese companies aggressively increased the production of general-purpose products, the company faced tough competition in terms of price competitiveness. The industry reports that, after several years of such circumstances, it eventually decided to sell its stake in the factory.
In addition, SKC developed polyester (PET) film in 1977 for the first time in the country and had been growing it as a core business. As China emphasized low-cost products, however, maintaining profitability became challenging, leading to the divestment of the business. Hyosung Chemical, which has been engaged in nylon film production since 1996, closed down an aging plant in Daejeon for the purpose of enhancing product competitiveness and reduced the number of nylon film production facilities to two.
Domestic petrochemical companies are restructuring low-profit businesses to secure resources and are now focusing on strengthening new growth drivers.
Lotte Chemical plans to expand the production of high value-added products such as batteries, separator materials, and solar materials, differentiating itself from Chinese companies. The company aims to increase the share of high value-added product sales from last year’s 47 percent to 60 percent by 2032. Through its subsidiary, Lotte Energy Materials, it plans to increase the production of copper foil, a key material for batteries, from the current 60,000 tons to 240,000 tons by 2028.
Furthermore, SKC plans to invest up to 6 trillion won (US$4.57 billion) in batteries, semiconductors, and eco-friendly materials by 2027, aiming to increase revenue to 11.4 trillion won. The company is also considering entering new businesses through mergers and acquisitions. SK geo centric plans to build an annual recycling capacity of 250,000 tons of waste plastics by 2025, and Kumho Petrochemical aims to expand revenue from new businesses, such as eco-friendly vehicles, bio-materials, and high value-added specialties, to 2 trillion won by 2026.
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