Downward trend in petrochemicals set to continue
Published: 06 Jul. 2023, 18:21
Petrochemicals, previously one of Korea’s three largest export items alongside semiconductors and petroleum products, are stranded between lagging demand and a supply glut.
While periodic ups and downs are part of the petrochemical industry, the current downtrend seems here to stay amid an industry-wide shift driven by China.
On Monday, tenant signs for closed-down retail spaces covered a commercial district near the Yeosu Industrial Complex which houses petrochemical companies in South Jeolla.
“Some of the owners put the retail spaces up for rent even without demanding any occupant premium fee, but no one has been interested in about half a year so far,” said a real estate broker in the region.
Housing units nearby are also becoming increasingly vacant.
Such a dismal atmosphere was largely driven by the latest downturn in the petrochemical sector. Major petrochemical companies, including LG Chem, Lotte Chemical and Hanwha Solutions, saw losses in their chemical segments last year, and are expected to report weak performances for the second quarter this year too.
The petrochemicals sector has been running in boom and bust cycles, affected by the fluctuations in the global crude prices and macroeconomic situation. The industry expects the cycle to repeat itself every three to four years, but the recent downturn is considered to be driven by more of a fundamental shift in the industrial paradigm, rather than a short-term dip in demand.
China, the biggest importer of Korea’s petrochemical products, is the major contributor to the recent shift, as the country ramped up its local production capacity through the pandemic era.
“If the current pace continues, China will achieve 100 percent self-sufficiency in the production capacity of basic petrochemical feedstock such as ethylene by 2025,” said an industry source.
Amid the gloomy outlook, LG Chem is reportedly considering selling off its naphtha cracking facility in Yeosu.
At the 330,000-square-meter (82-acre) Yeosu NCC Complex 2, LG Chem has been producing ethylene and propylene, yet halted the operation of the plant after a maintenance break in April.
“The supply is already enough, and under the current circumstance, the loss will only grow bigger if we operate the facility,” said a source from LG Chem.
Ethylene-naphtha spread, which refers to the margin between prices of ethylene and naphtha, remained below the break-even point of $300 for more than 15 months. The figure is a major indicator of profitability in the petrochemical industry.
LG Chem’s chemical segment posted an operating loss of 50.8 billion won ($38.8 million) in the first quarter of this year, staying in the red for the second consecutive quarter after reporting an operating loss of 165.9 billion won between October and December last year.
Following reports that the company is reviewing the sale of the facility, LG Chem said on Monday that the company is “considering various measures to improve its competitiveness in petrochemicals and ramp up business value, yet nothing has been decided yet.”
Other companies are also scrambling to expand their business portfolio outside the traditional petrochemicals sector, eyeing high-value-added chemical products and electric vehicle component materials.
“The rule of the game is changing in the industry with China flooding the market with low-priced products,” said an industry source, forecasting that “most of the domestic companies will change their key products in a decade.”
BY LEE HEE-KWON [shin.hanee@joongang.co.kr]
with the Korea JoongAng Daily
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