After the government unveiled support measures for the "Yeosu No. 1" project, the second batter in the domestic petrochemical business restructuring, the math became more complicated for the remaining corporations planning their own overhauls. Although Yeosu No. 1's ethylene reduction exceeds that of Daesan No. 1, the government's support package is about one-third the size of Daesan No. 1's.
The government said it set the size of support in light of the self-rescue efforts of the Daesan No. 1 and Yeosu No. 1 corporations. Going forward, it plans to consider the timing of when restructuring plans are submitted. The next in line—Ulsan industrial complex and the Yeosu/Daesan No. 2 corporations—appear to be weighing their self-rescue plans.
According to industry sources on the 23rd, the Ministry of Trade, Industry and Resources the previous day gave final approval to the final version of the petrochemical business restructuring plan for the Yeosu industrial complex submitted by four companies—Yeochun NCC (naphtha cracker), Lotte Chemical, Hanwha Solutions, and DL Chemical. As the first plan filed from the Yeosu complex, it is called the Yeosu No. 1 project.
Under the plan, in addition to Plant 3—already shut down among Yeochun NCC's Plants 1 to 3—Plant 2 will also halt operations, and the remaining Plant 1 will be combined with Lotte Chemical's Yeosu plant to establish an integrated corporation. As a result, Yeochun NCC's ethylene output will shrink by 1.4 million tons per year from the previous 2.28 million tons, down to about 880,000 tons.
The government decided to provide roughly 700 billion won as a customized package for Yeosu No. 1. Of this, more than 650 billion won will be financial support, including new funding.
Compared with the more than 2.1 trillion won package Daesan No. 1 received, it is about one-third. In particular, Daesan No. 1 secured up to 2 trillion won in financial support, including new funding of up to 1 trillion won and converting existing liabilities into perpetual bonds of up to 1 trillion won.
Conversion of existing loans into perpetual bonds was excluded from Yeosu No. 1. Perpetual bonds are bonds with no maturity that pay interest in perpetuity without repaying principal. They are recognized as capital rather than a liability in accounting, which lowers the debt ratio.
As of the end of the first quarter this year, the debt ratio of HD Hyundai Chemical, a joint venture between Lotte Chemical and HD Hyundai Oilbank and the Daesan No. 1 entity, was 493%. Once the conversion of 1 trillion won in liabilities into perpetual bonds and capital injections by shareholders are completed, the debt ratio is expected to fall into the 200% range. Yeochun NCC's debt ratio as of the end of the first quarter this year was 223%, relatively better than Daesan No. 1's but still high.
Daesan No. 1 also received better benefits in cost reduction. The Daesan No. 1 area was designated a distributed energy special zone, allowing electricity rates 4% to 5% cheaper than Korea Electric Power Corporation's existing tariffs. Directly imported liquefied natural gas (LNG) for fuel can also be used. Because petrochemical plants run 24/7, power rates significantly affect profits. By contrast, Yeosu No. 1 only received short-term tax benefits such as a naphtha tariff exemption.
The Ministry of Trade and Industry (MOTI) said it set the support scale according to corporations' self-rescue efforts. Self-rescue efforts refer to the extent of painful measures—such as major shareholders injecting personal funds and restructuring—undertaken by a corporation with signs of distress to receive support from its creditor group.
In other words, Daesan No. 1's self-rescue push was stronger. HD Hyundai Oilbank and Lotte Chemical, the Daesan No. 1 corporations, each injected 600 billion won for a total of 1.2 trillion won. In the case of Yeosu No. 1, Hanwha Solutions and DL Chemical, major shareholders of Yeochun NCC, participated in a paid-in capital increase of 272.5 billion won each, raising a total of 545 billion won.
In the Yeosu community, some are voicing dissatisfaction that despite Yeosu No. 1's larger ethylene production cut than Daesan No. 1's, the benefits are far smaller. Shutting down Yeochun NCC's Plants 2 and 3 under Yeosu No. 1 would reduce ethylene output by 1.4 million tons per year, while Daesan No. 1's cut is about 1.1 million tons per year. Yeosu Mayor Seo Young-hak expressed regret over the size of support and employment stabilization measures regarding the Yeosu No. 1 restructuring plan.
Some observers say the government trimmed its support package as petrochemical corporations posted strong first-quarter results. Although they had continued losses due to oversupply from China and falling prices, major corporations posted first-quarter profits, shifting the considerations.
Due to a lagging effect from the Middle East crisis, major corporations—including Lotte Chemical, LG Chem's petrochemical business, and Hanwha Solutions' chemical institutional sector—all posted first-quarter profits. Using cheaper naphtha stocks secured earlier, they produced petrochemical products and sold them at higher prices, sharply improving earnings.
◇ Yeosu/Daesan No. 2 and Ulsan No. 1, which include LG Chem, Korea's No. 1 in ethylene, wrestle with self-rescue plans and timing of submissions
For corporations in the Ulsan industrial complex that have not yet drawn up restructuring plans and for the later entrants in the Yeosu and Daesan complexes, the calculations have grown even more complex. They must include sufficient self-rescue measures as the government demands and submit their plans as soon as possible. Interests diverge sharply among corporations over capacity cuts.
Particular attention is on the restructuring plans for Yeosu/Daesan No. 2 and Ulsan No. 1, which include LG Chem. LG Chem has more than 3.3 million tons in annual ethylene capacity, combining Yeosu (2 million tons) and its Daesan plant (1.3 million tons). Its domestic market share is about 26%, ranking No. 1. Only when a concrete restructuring plan emerges from LG Chem will it be possible to meet the government's reduction target of up to 3.7 million tons.
LG Chem is reportedly discussing business restructuring with GS Caltex in the Yeosu complex and with Hanwha TotalEnergies in the Daesan complex. An LG Chem official said, "We submitted a restructuring plan to the government late last year and continue consultations with other corporations on business restructuring."
However, meaningful coordination with GS Caltex and Hanwha TotalEnergies is said to have not materialized. GS Caltex operates a refining business and can feed naphtha from its own facilities into petrochemical processes, making its feedstock procurement expense relatively low. Unlike LG Chem, whose core business is petrochemicals, it has less incentive to participate in restructuring.
Each corporation's foreign shareholders are also a variable. GS Caltex is 50% owned by U.S. Chevron, and Hanwha TotalEnergies is 50% owned by France's TotalEnergies Holdings. With foreign corporate representatives on their boards, differences reportedly remain over asset valuation and forming joint ventures.
Ulsan No. 1 plans to draw a blueprint for its restructuring plan early next year. The corporations involved—S-Oil, Korea Petrochemical Ind, and SK Geo Centric—plan to review efficiency after the trial run of S-Oil's Shaheen project and then formulate specific restructuring measures.
The timing of submitting restructuring plans is also expected to affect support measures. Minister Kim Jung-kwan of the Ministry of Trade, Industry and Resources has repeatedly stressed that corporations that move quickly under pressure for swift restructuring in the petrochemical sector will receive clear benefits. With the government signaling a strong response to free-riding corporations, industry consensus is that participation in restructuring is inevitable.
A Ministry of Trade and Industry (MOTI) official said, "We are taking into account that petrochemical corporations continue to face tough negotiations. Submissions of restructuring plans may be slightly delayed, but not doing them is not an option," adding, "However, if there is no willingness to consult at all, penalties may apply under the original guidelines."