As domestic corporations in the petrochemical industry face a crisis due to the low-cost offensive from Chinese corporations, opinions are emerging within the government and ruling party that a fund should be established using private financial companies to promote restructuring. Financial companies are also in a position to contribute large amounts to the restructuring fund following the government's pressure for harmonious finance.
According to the financial sector on the 11th, the Democratic Party of Korea's Institute for Democratic Research suggested in a recently published report that a public-private partnership loan-type private equity fund (PDF) should be established to facilitate the restructuring of vulnerable sectors such as petrochemicals. The report states that investments should be made in the assets, manufacturing facilities, and sales receivables of companies that require restructuring through the PDF.
It was suggested that the fund's resources should come from national policy banks such as the Industrial Bank of Korea and the Corporations Bank, along with major financial groups. The institute also mentioned that incentives should be provided to financial institutions that invest in the PDF, such as relaxing risk weighting or offering tax reductions.
The PDF is a private equity fund that generates revenue by using funds collected from institutional investors for corporate loans and corporate bond investments, rather than equity investments. It shows a difference in investment form compared to private investment funds (PEF) that primarily invest in corporate stocks.
The report stated that "a government-wide industrial restructuring task force (TF) should be operated on a permanent basis."
Recently, it has been reported that government departments discussed the formation of a fund to assist the restructuring of petrochemical companies and support the transition to smart factories. A source familiar with the meeting said, "Due to the unfavorable conditions in the petrochemical market, it is impossible to make large investments, such as transitioning to smart factories," and added, "There was a suggestion to support the turnaround of the domestic petrochemical industry through the fund."
Currently, the domestic petrochemical industry is facing a crisis due to China's low-cost offensive. Yeochun NCC, a representative corporation, is at risk of bankruptcy if it cannot repay 310 billion won by the 21st of this month. Yeochun NCC has consistently shown strong performance since its inception, recording sales of 5.416 trillion won and operating profit of 1.124 trillion won in 2017. However, it turned to deficit in 2022 and reported a net loss of 236 billion won last year.
Not only Yeochun NCC but also major domestic petrochemical corporations such as LOTTE Chemical and LG CHEM have begun to suspend operations at some factories since last year. LOTTE Chemical reported an operating loss of 244.9 billion won in the second quarter, marking its seventh consecutive quarter of losses.
However, if the petrochemical restructuring fund materializes, financial institutions are expected to hesitate to participate. This is because there is a prevailing opinion that recovery in the domestic petrochemical industry will not be easy. With low-cost volumes from China encroaching on the global market, it is difficult for domestic corporations to find a breakthrough. China has recently continued its offensive by increasing its petrochemical production facilities.
A petrochemical industry official stated, "Even if we introduce smart factories to increase productivity, it is essentially impossible to overcome China's offensive," and added, "Instead of expecting a turnaround, we need to consider ways to achieve the soft landing as much as possible."
A financial sector official noted, "Once restructuring in the petrochemical industry begins, large banks may have to set aside provisions and provide additional financial support," and added, "If a trillion-won fund is also established, it will inevitably be a burden."