Korea is projected to lose markets when Chinese and other facilities come online.

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Korea is projected to lose markets when Chinese and other facilities come online.

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There are worries about the future of the petrochemical industry in Korea, leading to calls for companies to restructure. Does it mean that the industry is at risk? Not exactly. Korea’s petrochemical industry is in its heyday, with its exports ranking third in monetary terms, after semiconductors and automobiles. Exports have increased on average 24 percent annually for the past five years. Sales at eight major firms went up almost 10 percent in 2006 compared to a year earlier.
Do the worries come from declining demand? No. The world’s demand for petrochemicals is growing everyday. Look around ― from pens and clothing to phones and computers ― there’s probably at least one petrochemical product near you. In petrochemical production, Korea ranks fifth worldwide.
So why are experts saying that the industry needs restructuring? The biggest reason is that China and Middle Eastern countries are starting to build their own petrochemical facilities with big production capacity. Petrochemicals is a facility industry. Just by surveying where the petrochemical factories are being built, the future of the industry can be predicted. When the factories in China and the Middle East are completed, Korean-made petrochemical products may lose their competitiveness.
China is the biggest buyer of Korean petrochemical products, but the country is going to have many factories ready soon. Korea will be losing one of its biggest markets. It will then have to sell its products somewhere else.
Middle Eastern factories are another potential threat to Korean firms. As early as later this year and the following year, factories in Iran, Saudi Arabia and Qatar will start to operate. These countries can obtain their raw material, oil, at a lower price than Korea, which lowers their costs. The production cost of ethylene is only $198 in the Middle East, one-fourth of that in Korea.
Industry watchers are predicting that there may be an industrial crisis in 2010 when Middle Eastern countries will see a jump in production capacity. This possibility is high. Korean factories produce two times more than the domestic demand. The petrochemical industry is one of the major sectors where economies of scale apply. The more that is produced, the cheaper it gets to produce each unit. The same goes for distribution costs. Petrochemical factories usually have to operate around the clock, so it is difficult to decrease the quantities. Soon, cheaper-than-Korean petrochemical products will be in the market. There might be no market for Korean products.
Obviously, restructuring is essential in this industry.

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There are two major approaches to restructuring. One is to close old plants and power up production levels. This is possible through mergers and acquisitions. But that approach is somewhat complicated. It is not easy for big companies to give up, expand or exchange in certain areas. Also, Korean regulations prohibit monopolies which may result from merging and acquiring companies.
Restructuring of the product itself is the other approach. Companies could produce general products which can be easily made in any facility, just enough for the domestic market, and transfer their focus to high-tech products. Research and development are essential, which calls for more investment.
Japan is a model case. Petrochemical firms in that country had been in a similar situation now facing Korean companies.
They faced risk when their products were losing ground to rival Korean products and when the economic bubble was bursting. But Japanese companies started their restructuring efforts in the 1990s. As a result, 14 polyethylene companies were reduced to eight in 2005 and 14 polypropylene firms gave way to four companies. They focused on high value-added items. They developed materials used for automobiles, fuel cells and medicine.
The risk in the industry here is already predicted. We can only prepare for it properly while the industry is flourishing.
What is the petrochemical industry?
Most petrochemical products are not consumed directly by the general public. They are generally used as materials for cars, computers, shoes and other items.
Most things around us are made from petrochemical materials, such as desks, TVs, subway trains and more.
The industry can be divided into two sectors. The first is naphtha cracking, which extracts ethylene, propylene and butadiene. The second sector of the industry is where plastic, nylon and rubber are made from the extracted material.
Naphtha production is a petroleum industry performed by oil refineries. Standard Oil in the United States is considered the world’s first to produce petrochemical products, in 1918. In the 1930s Dow Chemical Company came into the industry. DuPont in the United States and Basf of Germany also started producing petrochemical products.
Korean firms have participated in the market since the 1990s, with petrochemical complexes in Yeosu, South Jeolla and Ulsan.


By Hwang Young-jin Staff Writer [yhwang@joongang.co.kr]
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