🚨 Korean Chemical Industry Crisis
Today Korean Economic News for Beginners | 2025.08.18
0️⃣ Lotte Chemical 64.4%, LG Chem Also Drops to 60% - Government's New Strategy Battle
📌 Korean chemical companies hit hard by China's overproduction and weak demand - Government to announce support measures including tax benefits and policy financing this month
💬 Major Korean petrochemical companies saw their capacity utilization rates drop significantly in the first half of the year, showing worsening industry conditions. Lotte Chemical's naphtha cracking process utilization rate fell sharply from 83.2% in the same period last year to 64.4%, an 18.8 percentage point drop. LG Chem and Kumho Petrochemical also remained in the 60% range. Korea's export-dependent chemical industry has been hit hard by China's massive petrochemical facility expansion causing oversupply, combined with weak Chinese domestic demand. The government announced it will release comprehensive measures to strengthen the petrochemical industry's competitiveness this month, including tax benefits and policy financing.
1️⃣ Easy Explanation
Korea's petrochemical industry is facing big difficulties. This industry makes basic materials for plastic containers, plastic bags, and synthetic fabrics we use every day. Recently, factory operation rates have dropped a lot, putting the whole industry in crisis.
Let me first explain what "capacity utilization rate" means. This rate shows how much a factory is actually producing compared to its maximum possible production. For example, if a factory can make 100 items per day but is only making 70 items, its utilization rate is 70%.
Usually, petrochemical factories need utilization rates of 80% or higher to make profits. This is because they have huge equipment and facilities that must run 24 hours a day, creating very high fixed costs. But currently, major Korean companies have utilization rates that have dropped to the 60% range.
The biggest reason for this problem is China. Over the past few years, China has greatly expanded its petrochemical factories, causing production to explode. However, demand within China has actually decreased due to economic slowdown. So Chinese-made products are being sold cheaply all over the world.
Korean petrochemical companies have become unable to compete with these cheap Chinese products. Even when making the same products, China can sell them much cheaper. As a result, orders have decreased and factories cannot operate properly.
An even bigger problem is that Middle Eastern countries are also entering the petrochemical industry. Countries like Saudi Arabia and UAE produce oil directly, so their raw material costs are almost zero. When they build large petrochemical plants, Korea cannot compete on raw material costs either.
In this situation, the government has stepped in. Instead of simply competing on price, they believe the business structure must change to high-value-added products. For example, instead of regular plastics, companies should switch to special materials used in cars and electronics, or eco-friendly bio-plastics.
In the end, Korea's petrochemical industry is at a turning point where it must change from "quantity to quality" and from "general products to specialized products" to survive.
2️⃣ Economic Terms
📕 Capacity Utilization Rate
Capacity utilization rate is the ratio of actual production to maximum possible production of a factory or facility.
- In the petrochemical industry, usually 80% or higher is needed to ensure profitability.
- When utilization rates are low, fixed cost burdens increase, making losses likely.
- The overall industry utilization rate is an important indicator of that industry's health.
📕 Naphtha Cracking Process (NCC)
Naphtha cracking process is a key process that breaks down naphtha extracted from oil at high temperatures to make basic chemical materials like ethylene and propylene.
- This is the most upstream process in the petrochemical industry and the starting point for all products.
- It requires large-scale investment and has the characteristics of a continuous 24-hour operation industry.
- When utilization rates drop, it affects the entire petrochemical supply chain.
📕 Oversupply
Oversupply is a situation where production is much higher than market demand, leaving excess products.
- This leads to price drops and worsening corporate profitability.
- China's massive facility expansion has caused global petrochemical market oversupply.
- When prolonged, industry-wide restructuring becomes unavoidable.
📕 High-Value-Added Products
High-value-added products are items that can be sold at higher prices by adding technology and quality to the same raw materials.
- Examples include special automotive materials instead of general plastics, and semiconductor chemicals instead of regular chemical products.
- Technology competition is more important than price competition, creating high entry barriers.
- This is considered the future direction Korean petrochemical companies should pursue.
3️⃣ Principles and Economic Outlook
✅ Structural Causes of China's Oversupply
Let's analyze the structural impact of China's petrochemical facility expansion on the global market.
First, China's production capacity expansion has disrupted the global supply-demand balance. Since 2020, China has launched massive petrochemical projects one after another, increasing ethylene production capacity to about 50 million tons annually. This is more than five times Korea's total production capacity (9 million tons). The problem is that China's domestic market alone cannot absorb this volume. China's real estate slump and consumption slowdown meant that domestic demand for plastics and synthetic fibers did not increase as much as expected.
Second, the Chinese government's export promotion policies are encouraging dumping exports. China is expanding tax benefits and financial support to increase exports by domestic petrochemical companies. This has led to increasing cases of Chinese products being sold overseas at prices lower than production costs. Particularly in Southeast Asian and European markets, Chinese products' market share has rapidly expanded, greatly reducing export opportunities for Korean companies.
Third, quality of Chinese products is improving as the technology gap narrows. In the past, Chinese petrochemical products were lower quality than Korean products, which could offset price differences. However, recently Chinese companies have introduced advanced technology and strengthened quality control, greatly reducing the gap with Korean products. This means Korean companies can no longer receive premiums based on quality advantages.
China's oversupply is not a short-term phenomenon but a structural change, making strategic responses by Korean companies urgent.
✅ Middle Eastern Entry and Raw Material Cost Competitiveness Gap
Let's analyze the impact of Middle Eastern countries entering the petrochemical industry on Korea.
First, the Middle East's raw material cost advantage is structurally difficult to overcome. Saudi Arabia, UAE, and Qatar have built integrated production systems that produce oil and natural gas while simultaneously making petrochemical products. Their raw material costs are only one-third of Korea's level. While Korean companies must purchase naphtha from the market, Middle Eastern companies can secure raw materials at almost cost level, giving them a cost advantage of $200-300 per ton.
Second, large-scale investments by Middle Eastern companies are rapidly increasing global supply capacity. Saudi Arabia's SABIC and UAE's ADNOC are building new petrochemical complexes worth tens of trillions of won. When these projects are completed, global oversupply is expected to worsen further. Particularly, they plan to use these as export bases targeting Asian markets, so competition in Southeast Asia, Korean companies' main market, is expected to become more intense.
Third, national-level support from Middle Eastern countries is making long-term competition disadvantageous. Middle Eastern countries view the petrochemical industry as a key means for transitioning away from oil-dependent economies and provide massive national-level support. They are rapidly improving global competitiveness through land provision, tax benefits, and infrastructure construction. In contrast, Korea must compete mainly through private companies, putting it in relatively disadvantageous conditions.
The raw material cost gap due to Middle Eastern entry is making business model transformation even more urgent for Korean petrochemical companies.
✅ Government Measures and Industry Outlook
Let's evaluate the specific content and effectiveness of measures the government is preparing.
First, tax support for transition to high-value-added products is key. The government plans to expand R&D tax credits for companies developing high-value-added products like eco-friendly bio-plastics, electric vehicle battery materials, and special chemicals for semiconductors, and create new investment tax credits. They are also considering allowing special depreciation for facility investments that convert existing general product lines to specialized product lines. Through this support, they aim to accelerate companies' business structure transformation.
Second, restructuring support through policy financing will also be strengthened. Through the Korea Development Bank and Industrial Bank of Korea, they plan to supply long-term, low-interest funds for facility modernization and business diversification by petrochemical companies. Particularly, they plan to boldly eliminate unprofitable general product lines and instead provide restructuring funds to focus on high-value-added products. They also announced expansion of investment funding support for overseas expansion to help develop emerging markets like Southeast Asia, India, and Africa.
Third, a comprehensive approach for innovation of the entire industry ecosystem is needed. The government is preparing measures to improve the competitiveness of the entire industry beyond simply supporting individual companies. They plan to establish specialized strategies for each petrochemical complex, with Yeosu focusing on biochemicals, Ulsan on advanced materials, and Daesan on circular economy. They also plan to strengthen cooperation with universities and research institutions to accelerate core technology development and support mutual growth of small and medium-sized partner companies. Through this, they aim to help the petrochemical industry become a new growth engine suitable for the Fourth Industrial Revolution era.
The success of government measures depends on active participation by the industry and swift execution.
4️⃣ Conclusion
The sharp drop in Korea's petrochemical industry utilization rates signals a structural crisis beyond simple economic fluctuations. Under dual pressure from China's massive oversupply and the Middle East's raw material cost advantages, Korean companies are at a fundamental turning point for survival.
The most serious problem is that current difficulties are not temporary. China's petrochemical facilities are expected to continue increasing, and Middle Eastern countries' investments are also accelerating. This means global oversupply will be prolonged. Additionally, with delayed Chinese economic recovery, demand growth is also difficult to expect.
However, not everything is hopeless. Korean petrochemical companies still have competitive advantages in technology and quality management. The important thing is to leverage these strengths to quickly transition to high-value-added products. They must move from general plastics to special automotive materials, from regular chemicals to ultra-high-purity substances for semiconductors, and from conventional plastics to eco-friendly bio-materials.
The government's planned support measures also align with this direction. They plan to help companies' structural transformation through tax benefits and policy financing, and increase technology competitiveness by expanding R&D investment. However, for these policies to be effective, active participation and bold investment decisions by companies are necessary.
The petrochemical industry is the foundation of Korea's manufacturing sector and a core pillar of exports. Whether this industry overcomes the crisis and becomes a new growth engine is directly connected to the future of Korea's entire economy. Now is the time to turn current difficulties into opportunities for change, not simply endure them.
Ultimately, the future of Korea's petrochemical industry depends on transformation from "quantity to quality," "scale to technology," and "general products to specialized products." This crisis should become a catalyst to accelerate such transformation.
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