The government-led restructuring of the petrochemical industry is expected to be delayed more than anticipated. Earlier, the government expected the corporations concerned to submit their final business restructuring plans by the end of the first quarter, but corporations in the Ulsan and Yeosu regions have yet to draw up final plans.
According to the petrochemical industry on the 31st, the industrial complexes in Ulsan (S-Oil, Korea Petrochemical Ind, SK Geocentric) and Yeosu (LG Chem, GS Caltex) are continuing to negotiate petrochemical business restructuring measures. Although the de facto deadline set by the government was through this day, differences over governance structures, the scale of production cuts, and corporate value have widened among corporations, preventing a final agreement.
Since Aug. last year, the government has encouraged corporations to pursue voluntary restructuring with the goal of "enhancing competitiveness in the petrochemical industry." To escape structural oversupply, it proposed cutting domestic naphtha cracking center (NCC) capacity by up to 3.7 million tons (25% of total output) and shifting to the production of high value-added chemical products.
First, Daesan No. 1 (Lotte Chemical, HD Hyundai Chemical, HD Hyundai Oilbank) in the Daesan Petrochemical Complex in South Chungcheong submitted a restructuring plan, and the government pledged support worth 2.1 trillion won. This month, Yeosu No. 1 (Lotte Chemical, Yeochun NCC, Hanwha Solutions, DL Chemical) submitted its final restructuring plan and is awaiting government approval.
Talks on restructuring in the Ulsan industrial complex are slow because the math among corporations is complex. While the petrochemical industry is considering reducing ethylene output, S-Oil's new facility, the "Shaheen Project," is about to start operations. Given the government's reduction target, more than 1 million tons must be cut in the Ulsan area.
Currently, annual ethylene production by company is 660,000 tons for SK Geocentric, 900,000 tons for Korea Petrochemical Ind, and 180,000 tons for S-Oil. If the Shaheen Project, into which Aramco invested 9.258 trillion won, goes online within the year, S-Oil will produce an additional 1.8 million tons of ethylene annually.
S-Oil argues that its new facility should be excluded from the reduction target to build an efficient production structure. That would leave Korea Petrochemical Ind and SK Geocentric, whose facilities are older, to curtail operations, but there are major differences over the value of NCC assets. It is reported that the Ulsan area has not even prepared a plan to optimize downstream facilities.
Yeosu No. 2 is also running in parallel. Earlier, LG Chem proposed selling part of its NCC to GS Caltex and setting up a joint venture, but there has been no progress since. The two companies' differing interests are said to be making coordination difficult.
Yeosu is the largest petrochemical complex in Korea, with annual ethylene production reaching 6.5 million tons. Of that, LG Chem's Yeosu plant has a capacity of 2.08 million tons, and GS Caltex has 900,000 tons. GS Caltex is relatively better off because its ethylene output is small and it also runs a refining business. By contrast, LG Chem's core business is petrochemicals.
GS Caltex's governance structure is another factor complicating negotiations. GS Holdings has GS Energy as a subsidiary, and GS Energy and U.S. Chevron each hold 50% equity in GS Caltex. If a joint venture is established, it would be a great-grandchild company of GS Holdings. Under the current Fair Trade Act, a grandson company must hold 100% of a great-grandson company's equity, making it structurally impossible to set up the joint venture. Chevron's consent is also required.
Although the corporations have missed the government's deadline, they say they will continue discussing restructuring. However, in the industry, frustration with "free-riding" corporations has reached a peak. A petrochemical industry official said, "The idea was that everyone would bear losses together, but in the end, there is concern that only the corporations that selfishly did not submit restructuring plans will enjoy the windfall from competitors' production cuts."
Another official said, "Last year the government said it would respond firmly across ministries to corporations that free-ride, and that principle should be applied," adding, "Since participation is voluntary and even the deadline has been missed, won't corporations that haven't submitted yet have even less incentive to join?"