Why South Korea’s petrochemical industry faces major restructuring

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On Wednesday, government officials announced that ten South Korean petrochemical companies have reached an agreement to restructure their operations. This will involve significant reductions in their naphtha-cracking capacity, according to a Reuters report.The South Korean government is urging its petrochemical industry, which it considers to be in “crisis,” to accelerate restructuring efforts. This push aims to enhance efficiency and improve declining profit margins.At a meeting attended by Kim Jung-kwan, the Minister of Trade, Industry and Energy, company executives signed an industry-wide restructuring agreement.Reducing naphtha-cracking capacityThe ministry announced that companies have agreed to cut their annual naphtha-cracking capacity by 2.7 million to 3.7 million metric tons. This reduction could amount to as much as 25% of the country’s total annual capacity of 14.7 million tons, based on Reuters’ calculations.The ministry further announced that companies must submit a plan outlining their proposed cuts by year-end.“The key for overcoming this crisis is clear – reducing capacity and restoring fundamental competitiveness,” Finance Minister Koo Yun-cheol said in a statement.He attributed the petrochemical industry’s misstep to two factors: enabling overcapacity and neglecting to transition towards the production of higher-value goods.Additionally, he announced that the government plans to relax regulations and provide financial and tax assistance to companies actively working towards their own recovery.Koo stated that authorities would not tolerate “free riders” who expected government assistance without making efforts to restructure.As a major global importer of naphtha, South Korea plays a significant role in the oil markets. Naphtha, an oil product, is crucial for producing chemicals used in plastics across various industries such as automotive, electronics, clothing, and construction. Therefore, any reduction in South Korea’s naphtha processing capacity could have repercussions on global oil markets.RestructuringAccording to Hwang Kyu-won, an analyst at Yuanta Securities Korea, companies will be unable to avoid pressure to act due to the government’s leadership in the plan and its connection of financial support to restructuring.Hwang was quoted in the report:The targets should be debt-ridden companies or those running very old facilities. The...

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