With the Iran war cutting off supplies of naphtha (also called naphtha), the basic feedstock for petrochemical products, Korea's petrochemical corporations are grappling with the added burden of having to reorganize their businesses. As the government's deadline for petrochemical industry restructuring nears, corporations that have not yet submitted their final business reorganization plans are making last-ditch efforts to reach agreement.
On the 20th, the Ministry of Trade, Industry and Resources said the final version of the business reorganization plan for the Yeosu No. 1 project (hereafter Yeosu No. 1), joined by Yeochun NCC, Hanwha Solutions, DL Chemical and Lotte Chemical, has been submitted.
Yeosu No. 1 is expected to become the second government-supported target after the Daesan No. 1 project. Earlier, in Nov. last year, Lotte Chemical, HD Hyundai Oilbank and HD Hyundai Chemical at the Daesan Petrochemical Complex in Seosan, South Chungcheong Province, became the first in the industry to submit their final business reorganization plans and won government approval for support in Feb. this year.
In Aug. last year, the government set a goal of cutting 2.7 million to 3.7 million tons, or 18% to 25% of Korea's total NCC capacity of about 14.7 million tons, to strengthen the competitiveness of the petrochemical industry. A reduction of 1.1 million tons has been finalized at Daesan No. 1, and a cut of 1,385,000 tons has been proposed for Yeosu No. 1. The Ulsan industrial complex, cited as the next candidate, has new production facilities and is expected to see the smallest reduction.
At the Daesan and Yeosu industrial complexes, the biggest task was deciding which corporations' NCC units to shut down. The principle was set to "turn off the oldest and least efficient units first," but for the corporations that own those units, it is akin to losing the asset's value entirely. The older a petrochemical plant is, the more sharply its efficiency drops, and maintenance costs soar.
Of the three major industrial complexes, Ulsan has yet to submit a final restructuring plan. As S-Oil is building the latest "Shaheen Project," interests are tangled with incumbent companies operating older units, such as SK Geocentric and Korea Petrochemical Ind. SK Geocentric and Korea Petrochemical Ind agree on the need to streamline facilities, but they are reportedly far apart in valuing the plants each side has put forward.
The recent Middle East crisis blocking imports of naphtha, a key feedstock, is another factor complicating restructuring. With the Strait of Hormuz—through which more than half of the naphtha imported by domestic companies passes—shut, supplies are being disrupted. Naphtha is the key feedstock for ethylene, known as the "rice of industry." Ethylene serves as an intermediate across industries including autos, electronics, construction, textiles and plastics.
Corporations are effectively being asked to push restructuring from a mid- to long-term perspective while contemplating immediate shutdowns. According to the industry that day, the naphtha inventories held by Korea's petrochemical corporations amount to only about two weeks. In fact, major corporations such as Yeochun NCC have declared force majeure, saying they cannot supply products due to a shortage of feedstock, and key plant operating rates have fallen to the 60% range.
Valuing corporations for mergers also becomes more complicated. When plant operating rates fall and revenue becomes volatile, it gets harder to set a plant's price tag. Management is also more pressed to craft short-term response strategies. A petroleum industry official said, "Rather than mid- to long-term management strategy, we are prioritizing diversifying feedstock sources, inventory management and extending loans from financial institutions."
Some say restructuring could speed up. Another petroleum industry official said, "If higher oil prices and feedstock supply woes further worsen profitability, corporations with aging units will be more likely to decide to halt operations," adding, "It's a poor environment for corporate management, but it could help accelerate the resolution of oversupply."
The government initially suggested the end of this month for submitting final restructuring plans, but Ulsan's complex is likely to miss it. An authority official said, "Other corporations are also continuing talks on restructuring," adding, "We are working to swiftly support each issue by handling separately the mid- to long-term task of easing oversupply and the short-term difficulty in securing naphtha."