LOTTE Chemical, HD Hyundai Oilbank, and HD Hyundai Chemical jointly drew up a business restructuring plan to reduce facilities at the naphtha cracking center (NCC) they operate in the Daesan petrochemical industrial complex in South Chungcheong Province and officially submitted it to the government. The scale of reduction will be finalized through consultations with the government, and it is expected to influence the moves of other petrochemical corporations.
If procedures proceed as scheduled, the physical combination of the two companies is expected to take place in the second half of next year, raising concerns that the momentum for restructuring could weaken. To dispel such concerns, the industry says a special law on petrochemicals needs to pass quickly.
According to the government and the petrochemical industry on the 26th, the three companies applied to the Ministry of Trade and Industry (MOTI) for approval of a business restructuring plan related to reorganizing the petrochemical industry. At the same time, LOTTE Chemical and HD Hyundai Chemical applied to the Fair Trade Commission for a preliminary review of a corporations combination. A preliminary review is a system in which companies planning a corporations combination request the Fair Trade Commission to review, before the reporting period, whether the combination substantially restricts competition.
The business restructuring plan proposed by LOTTE Chemical and HD Hyundai Chemical centers on LOTTE Chemical hiving off the Daesan plant as a physical partitioning and merging the spun-off company with HD Hyundai Chemical. The newly established corporate entity for LOTTE Chemical's Daesan plant created by the physical partitioning will cease to exist after the merger with HD Hyundai Chemical, leaving only HD Hyundai Chemical. LOTTE Chemical will then acquire additional shares in the merged entity so that HD Hyundai Oilbank and LOTTE Chemical each hold 50% equity in HD Hyundai Chemical.
This is a preliminary step to reduce NCC facilities. Currently, LOTTE Chemical and HD Hyundai Chemical operate NCC facilities with capacities of 1.1 million tons (t) and 850,000 t, respectively, at the Daesan complex.
An NCC is a facility that produces petrochemical feedstocks such as ethylene and propylene by cracking naphtha, a byproduct of crude oil refining, at high temperatures and pressures. Ethylene, a basic petrochemical product often called the "rice of petrochemicals," is used not only in everyday products like plastics and vinyl, but also to make various components in key industries such as autos and electronics.
With the economic downturn cutting demand for ethylene, the petrochemical industry is struggling with oversupply. In Aug., MOTI signed a voluntary agreement on business restructuring with 10 petrochemical corporations. They agreed to cut 2.7 million to 3.7 million tons, or 18% to 25% of total NCC production capacity (14.7 million tons). At the time, the petrochemical industry agreed to submit voluntary business restructuring plans by the end of this year. LOTTE Chemical and HD Hyundai Chemical are the first in the industry to submit business restructuring plans.
◇ MOTI: "Approve business restructuring plans within 60 days and announce support measures at the same time"… reduction scale to be set accordingly
The size of the NCC reduction that will be carried out "after the merger" through HD Hyundai Chemical by LOTTE Chemical and HD Hyundai Chemical has not yet been finalized. LOTTE Chemical, HD Hyundai Oilbank, and HD Hyundai Chemical proposed an NCC reduction scale when submitting their business restructuring plan to MOTI.
The amount of the NCC reduction is expected to be finalized when MOTI approves these companies' business restructuring plan. Since MOTI plans to offer incentives such as tax support and special provisions under the Commercial Act, the reduction scale is likely to be set in line with the level of support.
A representative of LOTTE Chemical and HD Hyundai Oilbank said, "The currently submitted NCC reduction volume may be adjusted as rejections and supplements occur during the review process."
An industry official said, "The market expects LOTTE Chemical to halt operations at the Daesan NCC facility itself, effectively reducing 1.1 million tons, but the scale proposed by these companies is smaller than 1.1 million tons."
Going forward, MOTI plans to review whether the business restructuring plan submitted by LOTTE Chemical, HD Hyundai Oilbank, and HD Hyundai Chemical meets the requirements for restructuring under the Corporate Vitality Act and whether goals such as productivity and financial soundness can be achieved.
MOTI also plans to announce support measures such as tax benefits, research and development (R&D), cost reduction, and deregulation when approving the business restructuring plan.
A MOTI official said, "As the procedures for reviewing and approving the business restructuring plan must be completed within 60 days, we will proceed as quickly as possible," adding, "When approving the business restructuring plan submitted by LOTTE Chemical, HD Hyundai Oilbank, and HD Hyundai Chemical, we will also announce support measures for the plan."
◇ "After the merger," HD Hyundai Chemical to be established in the second half of next year… "Petrochemical special law needs to pass the National Assembly to accelerate"
Even if MOTI approves the business restructuring plan and the NCC reduction volume is finalized, the "post-merger" HD Hyundai Chemical, which will lead the NCC reduction by LOTTE Chemical and HD Hyundai Chemical, is likely to be established in the second half of next year.
An industry official said, "If you add the time it takes to physically partition LOTTE Chemical's Daesan plant, officially report a corporations combination, undergo the Fair Trade Commission's review, and for the two companies to hold board meetings and shareholders' meetings for the merger, the establishment of the merged entity will be completed only in the second half of next year."
In this case, the momentum of the petrochemical restructuring being pushed by MOTI could weaken. In response, MOTI and the petrochemical industry hope that the Special Act on Strengthening Competitiveness and Support for the Petrochemical Industry (hereinafter the petrochemical special law) will clear not only The National Assembly's Legislation and Judiciary Committee but also the National Assembly's plenary session.
The petrochemical special law, which passed the full session of the National Assembly's Trade, Industry, Energy, SMEs, and Startups Committee on the 21st, includes a special provision applying the Monopoly Regulation and Fair Trade Act.
The petrochemical special law contains a provision that if a petrochemical corporation that applied for restructuring under the Special Act on Corporate Vitality, the legal basis for business restructuring, or a corporation whose restructuring has been approved requests a review at least 60 days before the date of filing a corporations combination report in accordance with the business restructuring plan, the Fair Trade Commission must complete the review within 30 days from the date of filing and notify the result to the corporation. If deemed necessary, the Fair Trade Commission may extend the period within a 60-day range, but results can be obtained faster than a general corporations combination review.
The petrochemical special law also includes a special provision that allows management activities related to business restructuring even before the merger procedures between corporations are completed, provided the law is in effect. A MOTI official said, "Since we included many special provisions to support restructuring, even if the petrochemical special law takes effect early next year, business restructuring in the petrochemical industry can proceed quickly," adding, "We are waiting for passage at the National Assembly's plenary session."