As the government has ordered the petrochemical industry to present restructuring plans by the end of the year, the possibility of vertical integration with refiners is being discussed. Refineries produce naphtha, a key material and supply in the petrochemical industry, as a byproduct in the crude oil refining process. If a petrochemical company with naphtha cracking center (NCC) merges with a refinery, it can secure price competitiveness.
There is an assessment that if they collaborate with downstream companies that produce various petrochemical products from ethylene and propylene derived from NCC facilities, the best combination could emerge.
A petrochemical industry official said on the 21st, "As the government has set the NCC reduction target at a maximum of 25% of the current scale, restructuring among petrochemical companies is unavoidable," and noted, "If vertical integration occurs with refiners in addition to horizontal integration among petrochemical companies, good effects can be expected."
The Ministry of Trade, Industry and Energy and 10 corporations in the petrochemical sector held a voluntary agreement ceremony for the restructuring of the industry to revive the petrochemical industry the day before and decided to reduce the NCC scale by 2.7 million to 3.7 million tons (t) annually. The reduction scale is about 18-25% of the total production capacity (14.7 million tons). This creates a situation where corporate mergers are unavoidable among companies located in the three major petrochemical industrial complexes in Yeosu, Ulsan, and Daesan.
Currently, domestic petrochemical companies source about half of their materials and supplies, naphtha, from the four major local refiners. The rest has been imported from the Middle East and Russia. However, following the Russia-Ukraine war, Russian naphtha supply has been cut off. Russia has exported naphtha to China at low prices, making China's price competitiveness heightened.
Discussions on integration among companies are ongoing. LOTTE Chemical and HD Hyundai Oilbank have signed a memorandum of understanding (MOU) to integrate NCC facilities in the Daesan petrochemical industrial complex. According to industry sources, a plan to jointly operate the NCC facilities of the joint venture (JV) HD Hyundai Chemical and LOTTE Chemical is under review.
In the Ulsan industrial complex, the predominant outlook is that SK Geocentric, a petrochemical company under SK Innovation, and Korea Petrochemical Ind. will integrate their NCC operations. SK Geocentric buys naphtha from SK Energy to produce and sell ethylene and propylene. Korea Petrochemical Ind. is an NCC company located in the same Ulsan industrial complex and sources naphtha from S-Oil.
However, apart from SK Energy and HD Hyundai Oilbank, the possibility of GS Caltex and S-Oil teaming up with domestic petrochemical companies remains uncertain. GS Caltex is located in the Yeosu industrial complex, which hosts LG Chem, LOTTE Chemical, and Yeochun NCC, but decision-making is complicated as U.S. Chevron holds a 50% equity.
S-Oil also has a majority shareholder, Saudi Arabia's state-owned company Aramco, and plans to produce ethylene and propylene directly instead of selling naphtha generated in the crude oil refining process, making the likelihood of integration with petrochemical companies low.