South Korea petrochemicals face renewed margin squeeze

South Korea’s major petrochemical companies returned to profit in the second quarter, but the recovery is expected to prove short-lived as margins deteriorate and global oversupply intensifies.

LG Chem’s petrochemical division reported an operating profit of KRW427bn ($261mn) in the second quarter. Lotte Chemical posted an operating profit of KRW110.1bn, while Hanwha Solutions’ chemical division reported KRW87.1bn, BigGo Finance writes.

Industry sources cited on August 11 said the improvement was driven largely by temporary factors, including the lagged effect of the Middle East geopolitical crisis and government support.

Product prices rose sharply during the Middle East crisis in April. Producers benefited from processing naphtha bought at lower prices before the increase. The government also covered 50% of the import price difference for contracted naphtha volumes, helping to defend margins.

China’s temporary restraint on exports, as it sought to secure domestic supplies amid the conflict, also supported earnings.

The outlook has since weakened. Easing tensions in the Middle East are putting downward pressure on oil prices. Producers now face the reverse of the earlier lagging effect, with products made from higher-priced feedstock having to be sold into a weaker market.

The deterioration is reflected in the ethylene spread, a key measure of petrochemical profitability. The spread is calculated by subtracting the price of naphtha feedstock from the price of ethylene, often described as the industry’s key basic chemical.

The spread was about $400 a tonne in April but had fallen to minus $13 a tonne by July 24. The industry’s typical break-even level is about $250 a tonne. At current levels, operating plants and selling products can deepen losses.

The pressure is already being felt by refiners with large commodity-chemical operations. SK Geo Centric’s second-quarter results deteriorated sharply, while the petrochemical divisions of GS Caltex and S-OIL have returned to losses.

The external environment is also worsening. China, after stabilising domestic supply and demand, is again increasing exports. This is putting downward pressure on product prices. India is also building large facilities under a government-led initiative to establish Petroleum, Chemicals and Petrochemical Investment Regions, adding to the risk of global oversupply.

Calls for restructuring South Korea’s petrochemical industry are consequently growing. Progress, however, remains limited.

Some capacity reductions have already taken place. Lotte Chemical and HD Hyundai Chemical partially shut naphtha cracking centres during their integration at the Daesan Industrial Complex in South Chungcheong province.

In addition, at the sprawling Yeosu Industrial Complex in Korea’s South Jeolla province, a decision has been taken to cease operations at Yeochun NCC’s No. 2 and No. 3 plants. Further restructuring has since been limited.

Talks between LG Chem and GS Caltex on a joint venture for naphtha cracking facilities have stalled. Discussions on capacity adjustments among major companies at the Ulsan Industrial Complex are also at a standstill.

Industry experts meanwhile argue that South Korea needs to go beyond temporary operating-rate cuts to counter capacity expansion in China and elsewhere.

They are calling for the closure or divestment of unnecessary commodity facilities and for resources released by restructuring to be redirected towards higher-value businesses.

These include specialty materials for semiconductors and batteries. The aim is to reduce exposure to increasingly competitive commodity products while strengthening South Korean companies’ position in higher-value segments of the chemicals industry.