With LOTTE Chemical and HD Hyundai Chemical expected to officially submit their business restructuring plans this week, attention is turning to the timelines for other petrochemical corporations to reorganize. Industry officials say that once the government rolls out concrete support measures corresponding to the plans from LOTTE Chemical and HD Hyundai Chemical, the rest of the corporations will likely accelerate their restructuring. In particular, they agree that measures are needed to adjust the rise in debt ratios that occurs during capacity reductions and to provide funding to shift toward specialty product production.
According to the industry on the 25th, LOTTE Chemical will approve the business restructuring plan with HD Hyundai Chemical at a board meeting this week. Immediately after, the two companies plan to submit the plans to the Korea Chamber of Commerce and Industry's Business Restructuring Comprehensive Support Center and make related disclosures.
The two companies submitted a draft restructuring plan to the Ministry of Trade, Industry and Energy and then coordinated the specifics. They will submit the finalized plan to KORCHAM this time. A restructuring plan is recognized as officially submitted only when it is filed with KORCHAM.
KORCHAM's Business Restructuring Comprehensive Support Center is an institution that supports the implementation of the Special Act on Corporate Vitality for Raising Corporate Vitality (Corporate Vitality Act), which grants various special exceptions to help corporations swiftly proceed with restructuring when they seek to enhance competitiveness through structural changes or business innovation activities.
Behind the government's push to restructure the petrochemical sector is a market slump caused by oversupply from China. Reflecting self-conducted consulting results, the industry has decided to cut 2.7 million to 3.7 million tons of naphtha cracking center (NCC) capacity—18% to 25% of total production capacity (14.7 million tons). The question is which corporations will bear the burden.
The reason the two companies submitting restructuring plans are reaching agreement faster than other corporations is that coordinating interests was relatively easier given their intertwined equity structure. The two companies are both located in the Daesan petrochemical industrial complex, and HD Hyundai Oilbank holds 60% of HD Hyundai Chemical's equity, while LOTTE Chemical holds 40%.
However, LG CHEM, LOTTE Chemical, and Yeochun NCC in the Yeosu industrial complex, and SK Geocentric, Korea Petrochemical Ind., and S-Oil in the Ulsan complex share no common denominator. A hard-fought numbers game without concessions over NCC cuts is highly likely.
NCC reductions are difficult because they affect more than just sales or profit. To cut NCC capacity, some facilities must be sold or scrapped (closed) or shut down. In that case, part of the NCC facilities becomes idle, the recoverable amount falls below book value, and an impairment loss must be recognized as an expense on the income statement.
This directly leads to a decline in retained earnings → a reduction in capital → a rise in the debt ratio, worsening the company's financial soundness. An industry official said, "The moment NCC facility reductions proceed, the corporation's debt ratio rises, creditworthiness falls, and a paradox emerges in which borrowing conditions worsen."
Still, it seems hard for corporations to avoid cutting NCC capacity. Beyond government pressure, there is a sense of crisis that doing nothing would lead to mutual destruction. Multiple industry officials said, "Separate from the government's call for restructuring, there is a shared perception across the petrochemical industry that NCC facilities must be reduced," adding, "It's a chicken game where if you stay still, everyone dies."
Another industry official said, "If the government tells you to restructure and you do not, banks may move to recover claims, liquidity could dry up, and defaults could follow," adding, "With many petrochemical companies suffering losses, operating funds still have to go in, so companies have no choice but to follow the government's intention to prepare support measures if they present restructuring plans."
In the industry, the support package the government presents to LOTTE Chemical and HD Hyundai Chemical, which will file the first restructuring plans, is seen as a milestone for cutting petrochemical NCC capacity. So far, the government has not clearly laid out either support tied to restructuring plans or penalties for free-riding without submitting plans.
An industry official said, "To resolve the rise in the debt ratio that occurs when NCC facilities are reduced, it is necessary for the government to provide a guarantee for the company's credit rating or compensate for investments in facilities being cut. If such measures are prepared, the industry is more likely to move."
Another industry official said, "If the support measures the government proposes for LOTTE Chemical and HD Hyundai Chemical win industry backing, restructuring will gain speed," adding, "If the measures are weaker than expected, restructuring will inevitably remain sluggish as it is now."