South Korea plans to restructure the struggling domestic petrochemical industry amid intensifying competition with Chinese rivals and oversupply by encouraging companies to focus on high-end products and voluntarily seek mergers and acquisitions, government sources said on Thursday.
The Ministry of Economy and Finance, the Ministry of Trade, Industry and Energy, the Financial Services Commission and other government bodies will unveil measures to boost the petrochemical sector’s competitiveness next month, according to the sources.
The country aims to spur the industry to shift its focus from basic chemicals to value-added specialty chemicals by providing incentives such as tax benefits and loans with low interest rates.
“The government is not considering forceful restructuring led by authorities,” said a senior finance ministry official. “The government will encourage companies to seek voluntary reorganization to improve the industry’s competitiveness.”
STRUGGLING
The move came as local petrochemical manufacturers have struggled due to cut-throat competition with Chinese rivals, a supply glut and weak demand.
Margins on ethylene, a core basic material needed by domestic manufacturers, have been falling since the end of the pandemic, hurting their earnings.
The country’s four largest petrochemical manufacturers – 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) on a consolidated basis in the third quarter. They logged a total operating profit of 39 billion won in the final three months of last year.
Such a shortfall in the latest quarter came as Lotte, a major ethylene producer, suffered a loss of 414 billion won in the period. Its local ethylene rivals, such as Korea Petrochemical Ind. Co. and Yeochun NCC Co. (YNCC) have also been in the red.
YNCC's petrochemical plant in Yeosu, South Korea (File photo) The country is seeking industry-wide restructuring as the sector is unlikely to recover soon.
The government had initially planned to unveil restructuring measures on Nov. 27 when Minister of Economy and Finance Choi Sang-mok chairs a special meeting with other ministers to enhance industrial competitiveness.
South Korea plans to encourage local petrochemical companies to concentrate on more profitable products such as copolyesters and acrylonitrile butadiene styrene (ABS). The industry has already been seeking such shifts.
The government aims to accelerate the transition by reorganizing the sector through mergers and acquisitions, backed by a law to revitalize local industries, sources said.
The act supports companies facing difficulties due to oversupply and industry crises while helping firms seeking new businesses, carbon neutrality and stable supply chains.
Companies can seek mergers and acquisitions, as well as spin-offs, solely with the board of director approval -- without requiring shareholders’ meetings -- under the law. Income taxes and corporate taxes on gains from business transfer deals are also deferred.
Korea Petrochemical Ind.'s petrochemical complex in Ulsan, South Korea (File photo by Korea Petrochemical Ind.) The government plans to encourage petrochemical companies to voluntarily restructure by reducing their ailing businesses and investing in new profitable businesses.
The move is expected to spur the industry to seek mergers or establish joint ventures, industry sources said.
“If the government exempts various taxes such as capital gain taxes following M&A deals or provides subsidies, that will speed up the restructuring,” said one of the sources.
The industry is also seeking tax incentives and deregulation for research and development required for specialty chemicals.
The government has yet to make any decisions although ministries are in talks on incentives for the restructuring, another senior government source said.
