With the government and the industry responding actively to supply disruptions in petrochemical products caused by the Middle East crisis, Korea's petrochemical sector appears to have caught its breath. Until early this month, corporations were considering halting plant operations because they could not procure petrochemical feedstock, but conditions have eased somewhat. Still, the measures are only sufficient through the first half at best, and there are concerns that profitability is deteriorating as prices of the key feedstock naphtha and ocean freight rates have surged.
According to the petrochemical industry on the 24th, recent operating rates at major domestic naphtha cracking centers (NCCs) are understood to be in the 60%–70% range. That is down about 10 percentage points from the 70%–80% range before the Middle East crisis. An NCC is a facility that thermally cracks naphtha to produce basic petrochemical feedstocks such as ethylene, propylene and butadiene.
Last month was so urgent that, after Yeochun NCC, even Hanwha Total declared force majeure to customers this month because they could not procure naphtha, the key feedstock, but the industry assesses that it has escaped that situation. Force majeure is a clause whereby, if performance under a contract becomes impossible due to external events beyond the parties' prediction or control, such as war or natural disasters, the supplier can be exempted from liability for nonperformance.
While there are differences by company, most firms are understood to have secured inventories sufficient to last through the first half if operating rates are adjusted to the 60%–70% range. LG Chem halted operations at its Yeosu Plant 2, and Lotte Chemical moved up its regular maintenance schedule, among other self-imposed output cuts by the industry that helped first and foremost. If an NCC is shut down once, it takes about a week to restart and entails considerable losses.
On top of that, it was decisive that the government and corporations joined forces on all fronts to secure crude oil and naphtha. On the 14th, the government said it would import 273 million barrels of crude oil and 2.1 million tons (t) of naphtha from four countries—Saudi Arabia, Oman, Kazakhstan and Qatar—by the end of the year.
There is also a possibility that more India-sourced naphtha will come in. Since the 20th, President Lee Jae-myung, on a state visit to India, met with Indian Prime Minister Narendra Modi and agreed to cooperate for a stable naphtha supply. Korea imported 2,214,000 t of naphtha from India last year.
Corporations also worked on their own to secure non–Middle East naphtha. Until now, Korea imported about 45% of its naphtha demand, 77% of which came from the Middle East. Recently, they have been widening procurement channels to Southeast Asia, the United States and Africa.
The issue is expense. According to statistics from the Ministry of Trade, Industry and Resources, as of the 20th, the naphtha price was $971 per ton, up 80% from the start of the year. Prices for spot (short-term) volumes that corporations procure are said to be even higher. Ocean shipping costs have also surged since the Middle East crisis. From a corporate standpoint, sourcing feedstock from Southeast Asia is relatively better than from Africa or the United States, where shipping distances are longer.
The petrochemical industry says that while immediate supply instability has been resolved, it is not time to relax because the situation is still in "survival mode." An industry official said, "Buying expensive naphtha indiscriminately raises a profitability problem," adding, "We are checking multiple offers and holding on, but it is unclear how long we can endure."
Domestic petrochemical corporations are expected to post weak results in the first half of this year. LG Chem's first-quarter operating loss consensus (securities estimates) was tallied at 167.1 billion won, and Lotte Chemical's at 147.3 billion won. Results in the second quarter, when the impact of the Middle East war is reflected, are likely to be worse.