Lotte Chemical Corp. and HD Hyundai Co. are in talks to consolidate their naphtha cracking operations in South Korea’s Daesan petrochemical complex – marking the first significant self-initiated restructuring move among domestic players facing intense pressure from Chinese oversupply.
According to multiple investment banking sources familiar with the matter on Wednesday, the two companies began negotiations to merge their respective naphtha cracking center (NCC) assets in Daesan, South Chungcheong Province.
The companies are currently working with a major accounting firm to assess the value of the assets and determine the fair value of a prospective joint venture, sources said.
The Lotte-HD Hyundai negotiations began earlier this year, following failed attempts by Lotte Chemical to explore similar consolidation efforts with other domestic producers such as LG Chem Ltd. and DL Chemical Co.
(Courtesy of Daeun Lee) Instead, Lotte opted to deepen its existing partnership with HD Hyundai Oilbank Co., a subsidiary of HD Hyundai Group, sources said.
The two groups have been running a 40:60 joint venture, HD Hyundai Chemical, since 2014. The JV operates an ethylene facility with an annual production capacity of 850,000 tons.
Separately, Lotte Chemical runs an NCC plant in Daesan that adds 1.1 million tons of ethylene annually, representing roughly 20% of its total 4.5 million tons in ethylene output.
HIT HARD BY CHINA’S AGGRESSIVE CAPACITY BUILDOUT
Consolidating the NCC operations would allow the two companies to cut costs through shared management of facilities, reduced payroll and overhead, as well as increased bargaining power for feedstock procurement.
(Courtesy of Daeun Lee) The companies also hope to rein in redundant competition in what has become an increasingly fragmented market.
Daesan is one of Korea’s most strategically located petrochemical hubs due to its proximity to China, the world’s top petrochemical consumer.
However, Korean companies have been among the hardest hit by Beijing’s aggressive capacity buildout and efforts to achieve self-sufficiency in basic petrochemicals.
With Chinese plants producing generic products at significantly lower costs, Korean firms have been under increasing financial strain.
CONSOLIDATION METHODS UNDER CONSIDERATION
Under one proposal being considered, Lotte Chemical would transfer its Daesan NCC assets to the existing HD Hyundai Chemical joint venture, with HD Hyundai Oilbank injecting additional capital – either in cash or in kind – to balance ownership and integrate the facilities under a single entity.
HD Hyundai Chemical's plant in Daesan, Korea The merged operation is expected to gradually scale down production by retiring some facilities and redeploying the overlapping workforce as part of a broader efficiency drive, sources said.
Both companies view this year as a critical juncture.
Industry watchers said Lotte and HD Hyundai share the view that excessive competition is no longer sustainable, especially after both Lotte Chemical and HD Hyundai Chemical posted heavy losses last year, 1.83 trillion won ($1.3 billion) and 284 billion won, respectively. They are forecast to continue to remain in the red this year.
BELLWETHER FOR INDUSTRY CONSOLIDATION
The planned Lotte-HD Hyundai consolidation could serve as a bellwether for what lies ahead.
Lotte Chemical's plant in Daesan, Korea Lotte Chemical is also in ongoing talks with LG Chem over potential facility integration and has discussed collaboration with SK Energy Co. and Korea Petrochemical Ind. Co. in Ulsan, North Gyeongsang Province.
In parallel, the Korea Chemical Industry Association (KCIA), which counts most major domestic petrochemical players as members, commissioned Boston Consulting Group to study the industry's structural challenges.
A report submitted to the Ministry of Trade, Industry and Energy in late March is said to be urging a drastic reduction, up to 50%, in generic production capacity, especially in Daesan and Yeosu, where overlapping facilities are most concentrated.
“This isn’t just a cost-cutting measure. It’s the beginning of a long-overdue transformation in how Korea’s petrochemical industry needs to operate in a post-China boom era,” said an industry executive.
Write to Jun-Ho Cha, Jong-Kwan Park and Ji-Eun Ha at chacha@hankyung.com In-Soo Nam edited this article.
