South Korean chemicals companies are racing to tap new markets after racking up hundreds of millions of dollars in losses in the face of a deluge of capacity from China, their biggest market.
Reliant on exports, firms including LG Chem Ltd. and Lotte Chemical Corp. are feeling the pinch as new plants in Asia’s biggest economy exacerbate a global glut and squeeze margins. And it looks like more pain is set to come for the Korean petrochemicals sector, which saw exports drop more than 15% in 2023 before rebounding modestly last year.
The fortunes of these chemical and plastics makers have turned in recent years. Where once they rode the coattails of China’s explosive growth and insatiable appetite for imports, pushing aside rivals from Japan, they now face an oversupplied market and collapsing production margins as Beijing builds out its own industry.
“China is rapidly expanding its production of polyethylene and polypropylene, reducing its reliance on Korean imports and even exporting to other countries in Asia and South America,” said Paul Joo, executive director of olefins and olefin derivatives research at S&P Global Commodity Insights. “Korea risks being left behind unless decisive restructuring occurs.”
Global production capacity for chemicals such as ethylene and propylene — precursors in plastics production — is set to grow by near-record levels this year, with the vast majority being built in China, according to BloombergNEF analyst Philip Geurts. The net growth in facilities will far outpace increases in demand, he said in a report released in January.
Some companies have started to adapt, with LG Chem shutting plants in Daesan and Yeosu as it pulled out of the market for another common type of chemical, styrene monomers, used in plastics and rubber production. Lotte Chemical, meanwhile, is in the process of selling its stake in its Pakistan unit and suspended operations at its synthetic rubber plant in Malaysia to limit losses.
Those divestments aren’t likely to significantly pare Lotte Chemical’s record annual operating loss of almost 900 billion won ($617 million) last year. Others firms including LG Chem also posted sharp drops in profitability. That’s hit company valuations, with chemicals the worst-performing sector in the Korean stock exchange over the past 12 months after dropping about a quarter.
Both companies have said they are pivoting to more specialized products aimed at the renewable energy sector as they seek to recover from the onslaught of Chinese supply, although that nation has also been boosting similar production capabilities.
“LG Chem will continue to foster climate-friendly business, restructure its portfolio toward high-value products, and focus on overcoming stagnant profitability through regional diversification,” the company said.
However, Chinese producers have other advantages apart from newer facilities that are often more tightly integrated in the oil processing chain. They are able to tap cheaper feedstocks, including naphtha and methanol, from sources that are less accessible to their Korean counterparts.
As an ally of the US, Seoul doesn’t involve itself in the trading of sensitive oil products from sanctioned countries like Russia and Iran. There have been no flows of naphtha from Russia to South Korea since April after a probe from customs authorities, according to data from Kpler.
“China also buys a lot of Iranian liquefied petroleum gas at cheaper than market price, which Korea cannot buy due to US sanctions, again giving China a significant cost advantage,” said Chua Sok Peng, a petrochemicals analyst at the London Stock Exchange Group. It can also “renew” its facilities more easily than “other places where tight environmental regulations have halted the building of new crackers,” she said.
Finally, the Chinese government is urging its refiners to produce less fuel and more petrochemical products as its electric-vehicle boom alters the energy mix. “We will advance petrochemical industries toward fine chemical industries,” the National Development and Reform Commission said earlier this month in its annual report to the National People’s Congress, China’s parliament.
That evolution doesn’t bode well for the Korean chemical companies.
“New Chinese crackers are almost all refinery-integrated, benefiting from lower costs and strong government backing,” S&P Global’s Joo said. “Against China, Korea is losing ground.”
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