SEOUL: Ten South Korean petrochemical companies have agreed to restructure their operations, including large cuts to their naphtha-cracking capacity, government officials said on Wednesday (Aug 20).
South Korea’s government has been putting pressure on a petrochemical sector it says is in “crisis” to speed up restructuring to boost efficiency and raise flagging margins.
Executives from the companies will sign an industry-wide agreement for restructuring at a meeting attended by the trade minister, Finance Minister Koo Yun-cheol said in a statement.
The companies have agreed to reduce their annual naphtha-cracking capacity by between 2.7 million and 3.7 million metric tons, the country’s trade ministry said. That would mean shutting down as much as 25 per cent of the country’s annual capacity, according to Reuters calculations based on total capacity of 14.7 million tons.
The companies will need to submit an outline on how the cuts will be done by the end of the year, the statement said.
“The key for overcoming this crisis is clear – reducing capacity and restoring fundamental competitiveness,” Koo said.
The petrochemical industry made a mistake by allowing overcapacity and failing to shift to making higher-value products, he said, urging them to learn from Korea’s shipbuilding industry that has improved its financial position through restructuring in recent years.
The government will ease regulations and offer financial and taxation support for companies that sincerely make efforts to rescue themselves, he said.
Authorities would not tolerate any “free riders” expecting government aid without making an effort to restructure, Koo said.
South 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. If the country is forced to cut capacity, it could impact global oil markets.
RESTRUCTURING GOALS
The Korean government has set three goals for the restructuring, reducing overcapacity and facilities, improving finances at companies and minimising the impact on local economies and jobs, the trade ministry said in a statement on Wednesday.
The government will seek to restructure three industrial complexes in the country simultaneously and offer a package of comprehensive support for the industry, it said.
The government is considering designating the city of Seosan, a major petrochemical hub, as an industrial crisis zone so they can offer subsidies or loans to communities potentially affected by the restructuring, the ministry added. Yeosu was also categorised as this way in May.
Margins have plunged for petrochemical companies in South Korea and across the globe due to an oversupply of products caused by relentless capacity additions in the last decade, particularly in China, the world’s biggest petrochemical market. Demand has also been sluggish over the last four years.
Analysts do not expect global petrochemical margins to recover before 2027.
South Korean President Lee Jae Myung, who took office after a snap election in June, pledged during his campaign to pursue tax support for mergers and acquisitions in the petrochemical industry, and to exempt companies from antitrust regulations to allow more coordination of production and operations.
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