"There is about a 10–15% gap in cost competitiveness with China, and utility expense such as electricity rates, along with materials and supplies and labor costs, plays a big role in that. To compete in the global market, we need to ease the burden of industrial electricity rates."
Choi Hong-jun, head of external cooperation at the Korea Chemical Industry Association, delivered a presentation to that effect at a policy forum titled "How to enhance competitiveness through restructuring in the petrochemical industry," held on Dec. 9 at the National Assembly's Seminar Room No. 3 in Yeouido, Seoul.
Choi said, "Because of the Russia-Ukraine war, imports of Russian naphtha and crude oil, which domestic companies had largely relied on, have been blocked, and most of that is being taken by Chinese firms," adding, "If you exclude the war, an exogenous factor, and labor costs, which are hard to touch, electricity rates are an area where the government can provide support."
According to the Korea Chemical Industry Association, industrial electricity rates have steadily risen, accounting for 5.11% of petrochemical industry cost of goods sold as of the second quarter of this year. In particular, this year's industrial electricity rates by country were only 127 won and 116 won per kilowatt-hour (KWh) in China and the United States, respectively, while Korea came in at 192 won.
Companies have repeatedly appealed the burden from higher industrial electricity rates, but the "Special Act to Support the Petrochemical Industry," which passed the National Assembly's plenary session on Dec. 2, omitted measures to cut electricity rates. Choi said, "There needs to be a rate cut at least limited to designated industrial crisis zones."
Specific measures proposed included: ▲ easing regulations on a "direct power purchase system" that allows buying directly in the power market without going through KEPCO ▲ improving the calculation method for electricity rates based on the average peak load across entire business sites ▲ easing the application period for maximum demand power.
Choi said, "As competition intensifies, domestic companies' losses are unlikely to shrink next year," but forecast, "If, after the end of the Russia-Ukraine war, the benefits of importing Russian crude and naphtha materialize, productivity improves through business restructuring, and electricity rates are also reduced, we will no longer have to compete on an uneven playing field."
The Ministry of Trade and Industry (MOTI) said, "Regarding the association's proposals such as relief measures limited to industrial crisis zones, we will continue consultations with the Ministry of Climate, Energy and Environment." The Ministry of Climate, Energy and Environment then said, "On the condition of dispersing power demand, we will review measures such as time-specific rate cuts and regional preferential rates in a better direction."
Lawmakers including Park Sung-hoon of the People Power Party, as well as Choo Kyung-ho, Kim Gi-hyeon, Park Dae-chul and Park Su-young, attended the forum. With Park Ju-heon of Dongduk Women's University as the chair, officials from MOTI and the Ministry of Climate, Energy and Environment, Lee Deok-hwan, an emeritus professor at Sogang University, Kim Yong-jin, a professor at Dankook University, Oh Ok-gyun, deputy head at HD Hyundai Chemical, and Lee Kyung-mun, a senior vice president at S-Oil, joined as panelists for the discussion.
Minister Kim Jung-kwan of MOTI said in congratulatory remarks, "Through this petrochemical restructuring, we must go beyond simply rationalizing production facilities and shift the industrial structure toward high value-added and eco-friendly to secure global competitiveness," adding, "The government will work with the industry to accurately diagnose on-the-ground realities and seek solutions that can substantively strengthen the industry's competitiveness."
The petrochemical sector is currently accelerating restructuring. LOTTE Chemical and HD Hyundai Chemical recently submitted a reorganization plan to consolidate and merge the Daesan naphtha cracking center (NCC), and Yeochun NCC is reportedly reviewing a plan to scale back its third plant. Following Daesan and Yeosu, in Ulsan, Korea Petrochemical Ind. Co., SK geocentric and S-Oil are working to draw up a reorganization plan with advice from an external consulting firm.