South Korea Plans Restructuring of Petrochemical Industry Amid Competition From China

South Korea is preparing a major restructuring plan for its ailing petrochemical industry. This comes as a response to increasing competition from Chinese rivals and an oversupply in the market. The government aims to revitalize the sector by shifting the focus from basic chemicals to high-value specialty chemicals, encouraging local firms to invest in profitable products and pursue mergers and acquisitions (M&A) to strengthen competitiveness.

According to government sources as reported by The Korea Economic Daily, South Korea’s Ministry of Economy and Finance, the Ministry of Trade, Industry and Energy, the Financial Services Commission, and other key agencies are expected to unveil a series of measures next month designed to provide support to the petrochemical industry. The restructuring efforts will address the struggles faced by domestic manufacturers and help them adapt to an increasingly challenging global market environment.

In a statement, a senior official from the finance ministry emphasized that the government’s strategy involves offering various incentives, including tax benefits and low-interest loans, to encourage petrochemical companies to transition towards producing value-added specialty chemicals such as copolyesters and acrylonitrile butadiene styrene (ABS). These products offer higher profit margins compared to basic chemicals like ethylene, a key raw material in the industry.

In the third quarter of this year, South Korea’s top four petrochemical companies—LG Chem Ltd., Lotte Chemical Corp., Kumho Petrochemical Co., and Hanwha Solutions Corp.—reported a combined operating loss of 445 billion won ($317.9 million), a stark contrast to the 39 billion won operating profit they recorded in the same period last year. Among them, Lotte Chemical, one of the largest ethylene producers, posted a loss of 414 billion won. Other local firms such as Korea Petrochemical Ind. Co. and Yeochun NCC Co. (YNCC) have also faced financial difficulties.

A key part of the restructuring strategy is the promotion of mergers and acquisitions (M&A) among petrochemical companies. The government is exploring a new law to facilitate M&A and corporate restructuring that will help struggling companies consolidate or divest non-profitable assets. This law would allow companies to pursue M&A or spin-offs with just board approval, bypassing the need for shareholder meetings, which can often be time-consuming and complicated. Furthermore, the law would offer tax relief, such as deferrals on income taxes and corporate taxes related to business transfer deals.

The government believes that these measures will provide flexibility and financial incentives to the companies to pursue profitable ventures related to carbon neutrality and stable supply chains.

The government is also in talks to provide additional support for research and development (R&D) efforts aimed at developing specialty chemicals. Industry players have called for deregulation and tax incentives to make it easier to invest in R&D, as innovation will be crucial for the sector’s future growth.

The government had initially planned to announce its restructuring measures on November 27, when Minister of Economy and Finance Choi Sang-mok was scheduled to chair a special meeting with other ministers to discuss industrial competitiveness. However, the announcement was delayed allowing for further coordination between the relevant ministries. This delay is reminiscent of a similar meeting held in December 2022, when the government discussed Hanwha Group’s acquisition of Daewoo Shipbuilding & Marine Engineering Co.