S.Korea’s petrochemical firms to cut capacity on state call for rigorous restructuring

South Korea’s 10 largest petrochemical companies have agreed to restructure their operations, including up to 25% cuts to their naphtha-cracking capacity, as the government called for rigorous restructuring to save the bleeding sector from total collapse.

Executives from the companies on Wednesday signed an industry-wide agreement for restructuring at a meeting attended by Industry Minister Kim Jung-kwan.

The petrochemical makers agreed to reduce their annual naphtha-cracking capacity by between 2.7 million and 3.7 million metric tons, the ministry said in a statement.

That would mean shutting down as much as 25% of the country's annual capacity of 14.7 million tons.

The companies are required to submit their detailed plans on how the cuts will be done by the end of the year, the statement said.

"The key to overcoming the current crisis is clear. Reduce capacity to tackle chronic oversupply and shore up the sector’s competitiveness,” Finance Minister Koo Yoon-cheol said in a separate statement after presiding over a meeting of economy-related ministers on strengthening the sector’s competitiveness.

Koo warned companies against delay. “Firms and their shareholders must present binding restructuring and competitiveness plans swiftly,” he said. “They should aim to file proposals as early as next month, not by year-end.”

The finance minister urged petrochemical executives to learn from the country’s shipbuilding industry, which has improved its financial position through restructuring in recent years.

FINANCIAL, TAX, REGULATORY SUPPORT BUT NO ‘FREE RIDERS’ ALLOWED

Koo said the government will ease regulations and offer financial and taxation support for companies that sincerely make efforts to “rescue themselves.”

But he warned that authorities will not tolerate any "free riders" expecting government aid without making an effort to restructure.

Korea is one of the world's largest importers of naphtha, an oil product that is broken down into chemicals used in plastics for automobiles, electronics, clothing and construction.

However, Korean companies have been among the hardest hit by Beijing’s aggressive capacity buildout. With Chinese plants producing generic products at significantly lower costs, Korean firms have been under increasing financial strain.

THREE RESTRUCTURING GOALS

A recent Boston Consulting Group study, commissioned by the Korea Chemical Industry Association (KCIA), warned that if the current downturn persists, nearly half of Korean petrochemical firms may not survive the next three years, given their weak financial health.

The Korean government has set three goals for the petrochemical industry restructuring: reducing overcapacity and facilities; transitioning to the production of high-value specialty products; improving finances at companies and minimizing the impact on local economies and jobs.

The government said it will seek to restructure the country’s three major petrochemical complexes in Yeosu, Daesan and Ulsan simultaneously and offer a package of comprehensive support for the industry.

The industry ministry said it is considering designating the city of Seosan, a major petrochemical hub, as an industrial crisis zone so the government can offer subsidies or loans to communities affected by the restructuring.

LARGE-SCALE TIE-UPS OR MERGERS LIKELY

Analysts said the much-anticipated restructuring will likely lead to discussions of large-scale tie-ups across the country’s industrial belts.

In Daesan, Lotte Chemical Corp. and HD Hyundai Co. are exploring a merger of their naphtha-cracking center (NCC) operations, with HD Hyundai’s affiliate HD Hyundai Oilbank Co. expected to contribute cash or in-kind assets in return for capacity consolidation.

Similar “big deal” scenarios are weighed in Ulsan, where SK Innovation Co. and Korea Petrochemical Ind. Co. are discussing cutting their production and merging their facilities.

Analysts said capacity cuts will be inevitable as S-Oil Corp. is pushing ahead with its multibillion-dollar Shaheen project, which is set to exacerbate oversupply after 2027.

Yeosu, Korea’s largest petrochemical hub, is also seen as a focal point for consolidation.

With seven crackers concentrated in the area but only one refinery, industry executives expect GS Caltex Corp., LG Chem Ltd. and Lotte Chemical to explore joint operations.

Pressure on industry restructuring has mounted since Yeochun NCC Co. (YNCC), another major local petrochemical producer, suspended its third plant this month amid liquidity strains.

Closure of that unit remains possible to cut capacity, but disputes between YNCC’s two largest shareholders, DL Chemical Co. and Hanwha Solutions Corp., complicate negotiations, according to industry watchers.

“Even if YNCC shuts its No. 3 plant, hitting the industry’s reduction target will require broader consolidation among Yeosu’s big players,” said an industry executive. “Now that concrete figures are on the table, restructuring talks are set to accelerate.”

Write to In-Soo Nam at isnam@hankyung.com

Jennifer Nicholson-Breen edited this article.