Concerns are growing that the drive for restructuring will weaken as talks on overhauling Korea's petrochemical industry structure are delayed beyond the original plan. In particular, the Ulsan industrial complex, the last remaining piece of the puzzle, is said to be effectively at an impasse because corporations have failed to narrow their differences ahead of the completion of S-Oil's "Shaheen project."
According to the industry on the 25th, three companies at the Ulsan complex — S-Oil, SK Geocentric and Korea Petrochemical Ind — are discussing a restructuring plan that includes cutting facilities, but have not reached a conclusion. After passing the government's original deadline of the first quarter of this year to submit a final plan, the companies are continuing negotiations without setting a new cutoff.
SK Innovation said at its first-quarter earnings briefing on the 13th that "we are aiming to draw up a final plan within the year, but discussions are being delayed due to differences among stakeholders and cost and supply uncertainties stemming from the Middle East situation."
At the Ulsan complex, S-Oil's Shaheen project is set to complete its facilities next month. S-Oil is investing more than 9 trillion won to build a large-scale petrochemical complex in Ulsan. After facility completion and test runs, commercial operations are scheduled to begin next year.
When the Shaheen project comes online, it will produce 1.8 million tons (t) of ethylene per year. While discussions on restructuring Korea's petrochemical industry are focused on reducing naphtha cracking center (NCC) capacity that produces ethylene, S-Oil alone would be increasing output. Because of this, S-Oil's interests diverge from those of other companies, delaying restructuring talks.
Various options have been floated for restructuring the Ulsan complex, including integrating certain production lines, facility exchange, and establishing a joint venture (JV), but talks have shown no progress for months starting from the stage of valuing equity in aging facilities. While S-Oil's Shaheen project is a new facility, the NCCs of SK Geocentric and Korea Petrochemical Ind have run for more than 30 years. Even aging facilities are valued in the trillions of won as an asset, making the calculations on both sides complicated.
Detailed talks on the Yeosu No. 2 project, which involves LG Chem and GS Caltex, are also underway with the goal of final approval within the year, but drawing up the final plan is being delayed over issues such as governance.
There are also concerns that the longer the talks drag on, the less effective the industrywide restructuring will be. That is because the business reorganization process takes considerable time after final plans are submitted.
In the case of the Daesan No. 1 project (Lotte Chemical-HD Hyundai Chemical), which submitted the first business reorganization plan in November last year, government approval alone took three months, and a corporations combination review is still underway. Assuming the integrated entity launches within the year, it would take at least one year from submitting the final plan to establishing the entity.
Complaints are growing that corporations that submit their final plans first will be at a disadvantage. If the petrochemical market improves while NCC operating rates have fallen due to business reorganization, the corporations that cut output first would be worse off.
With oil prices surging after the war between the United States and Iran broke out in February, the ethylene spread (ethylene-naphtha price) — a key profitability indicator for the petrochemical industry — rose, and the first-quarter results of major Korean petrochemical corporations improved markedly.
At Daesan No. 1, Lotte Chemical's NCC facility (1.1 million t per year) will gradually be halted starting in September. If NCC operations were reduced first under the business reorganization while the petrochemical cycle improved, it would likely be difficult to capture such practical gains.
Some predict that incentives for corporations that hold out until restructuring hits an impasse will be greater than the support measures the government initially presented. In that case, only the corporations that submitted final plans first and cut production would shoulder the burden, while other corporations would reap the benefits, making it difficult to achieve the intended restructuring effect.
A representative from a petrochemical corporation that joined the restructuring early said, "If the major NCC corporations first take part in restructuring, that will give later entrants an incentive to join," adding, "we hope all petrochemical corporations will participate equally in restructuring and help shift to high value-added industries going forward."
A Ministry of Trade and Industry (MOTI) official said, "As securing the naphtha supply chain has taken precedence due to the Middle East situation, restructuring talks are somewhat delayed, but the need to overhaul the structure has not diminished," adding, "we are working as closely as possible with corporations and are considering support measures to ensure that corporations that submitted final plans first are not disadvantaged."