Dec. 22 last year at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul. Minister Kim Jung-kwan of the Ministry of Trade, Industry and Resources and the chief executives of 12 petrochemical corporations who gathered for a petrochemical industry meeting stood side by side, clenched their fists, and shouted together, "Fighting!" It was meant to encourage one another after, four months since discussing a government-led restructuring of the petrochemical industry in Aug. last year, corporations in the Daesan, Ulsan, and Yeosu industrial complexes all submitted business reorganization plans containing scenarios for facility closures and consolidations.
The government judged that Korea's petrochemical industry had fallen into a structural slump of oversupply and weak demand and would collapse together unless it fundamentally overhauled its structure. It decided, for the first time in the 50-year history of Korea's petrochemical industry, to cut total output by 30%. After the meeting, the Minister encouraged them, saying, "Sound petrochemical corporations have made a big decision to save one another's future."
◇ Oversupply from China through next year… Middle Eastern oil producers with state-of-the-art facilities join in
Global output of petrochemical products is expected to keep increasing through next year. S&P Global, a global credit rater, estimated that the world's ethylene production capacity this year would rise to 242 million tons, up 8.01 million tons (3.4%) from a year earlier, and increase by 10.5 million tons (4.3%) to 253 million tons next year. Ethylene is a basic chemical obtained by refining petroleum fractions. Called "rice of industry," it becomes the raw material for almost all chemical products such as plastic, vinyl, and fiber.
Until now, domestic petrochemical corporations grew by exporting about half of their product output to China. But since the 2010s, China's petrochemical industry has squeezed their position by raising its self-sufficiency rate on the back of full government support and low labor costs. As China began producing petrochemical products on its own, Korea effectively lost its largest export market. According to the Korea Petrochemical Industry Association, the share of exports to China in Korea's petrochemical product exports fell from 47.8% in 2010 to 36.9% in 2024.
As production has outpaced product demand, domestic corporations are in a situation where the more they run their plants, the more they lose. In the first half of this year, the average cost of goods sold ratio of major petrochemical corporations rose to 98.6%, bringing profitability close to "0." The average cost of goods sold ratio has steadily climbed: 87.6% in 2021, 92.3% in 2022, and 93.8% in 2023.
The ethylene-naphtha spread—the key indicator that determines a petrochemical corporation's profitability (the price gap between materials and supplies and the final product)—has hovered in the low $200 per ton for the fourth year since 2022. That is well below the break-even level of $250–$300.
China plans to keep expanding petrochemical facilities through next year. China's ethylene output this year is expected to rise 9.1% from a year earlier to 63.54 million tons, and 9.8% next year to 69.76 million tons. Choi Young-gwang, an analyst at NH Investment & Securities, said, "In July last year, the Chinese government mentioned a 'counter-involution' policy to curb the recent excessive production race, but facilities have not been noticeably downsized," adding, "Because the newly added facilities are large in scale, the weak ethylene-naphtha spread is expected to continue."
To make matters worse, Middle Eastern oil producers such as Saudi Arabia, Qatar, and Kuwait are also increasing petrochemical facilities. The Middle East enjoys high profitability because it can obtain crude oil, the raw material for chemical products, at low cost. According to IBK Economic Research Institute data, major projects in the Middle East will add 11.23 million tons per year of ethylene capacity by 2030. That is on par with Korea's total ethylene output.
The Middle East uses the latest COTC (Crude Oil To Chemical) process, an integrated method that can produce petrochemical products directly from crude oil. In the conventional method, crude oil is refined to make naphtha, the raw material for chemical products, and then naphtha is cracked to produce basic feedstocks such as ethylene and propylene. COTC skips these intermediate steps and produces basic feedstocks directly from crude oil, which can significantly cut production costs.
COTC also has a conversion rate of 60%–80% from crude oil to chemical products. The S-Oil Shaheen Project, set for completion in the first half of this year, also applies the COTC process. By contrast, domestic petrochemical corporations use existing NCC facilities, with conversion rates of only about 10%–20%.
◇ Even with cuts in the U.S. and Japan, it's not enough… The end of the Russia-Ukraine war is a variable
This year, supply driven by expansions in China and the Middle East is expected to far exceed demand for petrochemical products such as ethylene. Lee Chung-jae, an analyst at Korea Investment & Securities Co., said, "Ethylene demand this year is estimated to increase by 6 million tons from a year earlier," adding, "The scheduled capacity additions in countries such as China and India alone amount to 9 million tons, so oversupply is expected to worsen."
Following Korea recently, the United States, Japan, and Europe are also reducing petrochemical output. The United States shut the 1.9 million tons-per-year Westlake facility in 2024, while Japan saw a consolidation of Mitsui and Sumitomo facilities (500,000 tons), and Europe had the closure of an INEOS Group Holdings S.A. facility (450,000 tons). But the industry agrees that a rebound is unlikely unless China's oversupply is resolved.
Noh Woo-ho, an analyst at Meritz Securities, said, "With China and the Middle East continuing to invest in the petrochemical industry, it is hard to expect the domestic petrochemical industry's fundamental strength to revive." Jeon Woo-je, an analyst at KB Securities, said, "Countries are cutting output, but it only barely offsets the net increase in supply," adding, "The current conditions will likely persist through 2028."
Many also expect that even if crude oil prices, the materials and supplies, fall, the effect on revenue improvement will be limited. Choi said, "When oil prices drop, petrochemical product prices fall in tandem, so the spread does not improve," adding, "Rather, due to the reverse lagging effect (profitability worsens because of the time gap between raw material input and product sales) and inventory valuation losses, petrochemical corporations' sluggish results could be prolonged."
Some say that whether the Russia-Ukraine war ends this year will determine the direction of domestic petrochemical industry results. Lee Chung-jae said, "Right now, petrochemical companies around the world, except in some countries, are reducing supply due to worsening profitability," adding, "If international oil prices fall further when the Russia-Ukraine war ends, domestic companies' cost competitiveness will improve, and their results could improve significantly."