An aerial view of the Yeosu industrial complex. [Yeosu City]
An aerial view of the Yeosu industrial complex. [Yeosu City]

The approval of the Yeosu project — the second restructuring plan in South Korea's petrochemical sector — has renewed hopes that an overhaul stalled by the fallout from the Middle East war may finally regain momentum. Analysts say restructuring at the Ulsan industrial complex, which has yet to submit a final plan, will be difficult given the variable of S-OIL's Shaheen Project nearing completion. Some in the industry argue that S-OIL must actively join the restructuring effort if the domestic petrochemical market is to survive.

Yeocheon NCC output to fall from 2.28 million to 900,000 tons — Once the Yeosu project clears a merger review by the Korea Fair Trade Commission, annual ethylene production capacity will be reduced by 1.4 million tons, industry sources said Wednesday. The project involves shutting down Yeocheon NCC's No. 2 and No. 3 plants, then merging the remaining No. 1 plant with Lotte Chemical's Yeosu factory to form an integrated entity. The government approved the Yeosu project — the second petrochemical restructuring plan — on Wednesday.

Shutting down the No. 2 and No. 3 plants, which produce 920,000 and 470,000 tons annually, respectively, will reduce Yeocheon NCC's total output from 2.28 million tons to around 900,000 tons. Under this arrangement, participating companies Lotte Chemical, Hanwha Solutions and DL Chemical will each hold a one-third stake in the integrated entity, cutting annual ethylene production capacity by roughly 1.4 million tons.

Hanwha Solutions and DL Chemical, which each hold a 50 percent stake in Yeocheon NCC, will carry out a rights offering worth 545 billion won ($368 million) — 272.5 billion won each — to repay existing Yeocheon NCC debt, and will invest an additional 253.2 billion won for infrastructure development and high-value product conversion, bringing total self-rescue efforts to 800 billion won.

The first restructuring plan — the Daesan project, approved by the government in February — centers on halting about 1.1 million tons of naphtha cracking center (NCC) capacity, as HD Hyundai Chemical absorbs Lotte Daesan Petrochemical through a merger. The merged entity is set to launch in September, and the Fair Trade Commission review is expected to wrap up by next month at the latest. Having already undergone a preliminary review, approval is considered likely.

Once both the Yeosu and Daesan projects are complete, domestic NCC production capacity will have fallen by 2.5 million tons from current levels — approaching the lower end of the government's NCC reduction target of 2.7 million to 3.7 million tons.

The Korea Chemical Industry Association welcomed the approval of the second restructuring plan Wednesday, saying it "is expected to contribute to easing the domestic petrochemical supply glut" and that "production efficiency and cost competitiveness of the domestic chemical industry will be significantly enhanced through this restructuring."

The association added that "companies will have a foundation to shift their business structure toward high-value products and focus on securing future growth engines," while stressing that "overcoming the structural crisis in the petrochemical industry requires not only companies' own self-rescue efforts but also continued, effective policy support from the government."

The government had earlier pledged to complete the restructuring within the first quarter of this year, but took a passive stance after supply disruptions in petrochemical products emerged in the immediate aftermath of the Middle East war, which broke out in late February. With supply and demand conditions in the sector having recently stabilized, the restructuring is expected to accelerate again.

Ulsan complex — the leading candidate for the third project — remains deadlocked. The industrial complexes that have yet to submit a final restructuring plan include the Ulsan complex, where SK Geocentric, S-OIL and Korea Petro Chemical IND operate NCCs, as well as LG Chem and GS Caltex at the Yeosu complex.

At the Ulsan complex, the leading candidate for the third restructuring project, the three companies are known to disagree on NCC restructuring. Their earnings have been relatively solid compared with other petrochemical firms, and the proportion of aging NCC facilities is lower. The relatively smaller scale of NCC operations at the complex compared with other industrial sites is also cited as a reason for the difficulty.

The three companies have been discussing facility restructuring plans through a consulting firm since late last year, but reaching an agreement has proven difficult due to conflicting interests. S-OIL in particular has been taking a passive stance on restructuring, citing the Shaheen Project's upcoming operation.

The Shaheen Project is a roughly 9 trillion won initiative to build a new petrochemical production line in Ulsan. It aims to complete mechanical construction this year and begin full-scale operation next year. At an earnings presentation in January, S-OIL said it had "signed multiple MOUs with customers in the Ulsan area and is in the process of concluding annual supply contracts."

The Shaheen Project will be the world's first to apply the TC2C process, which directly extracts petrochemical feedstocks such as naphtha and liquefied petroleum gas from crude oil. This gives it higher production efficiency than other petrochemical companies that procure naphtha to manufacture products. Once TC2C enters full operation, the price competitiveness of other domestic petrochemical firms is expected to weaken.

Some in the industry say it is unrealistic to expect S-OIL to cut capacity given its trillion-won-scale investment, but others argue the Shaheen Project cannot be exempt given its impact on the domestic petrochemical industry. The project's annual ethylene production capacity stands at 1.8 million tons — equivalent to half the upper end of the government's NCC reduction target. If the Shaheen Project enters full operation, the petrochemical supply glut could worsen significantly.

Moon Sin-hak, vice minister of trade, industry and energy, said Wednesday that "for the petrochemical industry restructuring to succeed, all industrial complexes must participate without free-riding," adding that the ministry "will do its utmost to swiftly advance restructuring discussions in the Ulsan area following Daesan and Yeosu, so that our petrochemical industry can recover its competitiveness and take a leap forward."

LG Chem and GS Caltex, which operate NCCs in Yeosu, are also struggling with restructuring. The decision-making process is complicated by the need to obtain consent from Chevron, the US energy company that is GS Caltex's second-largest shareholder. The restructuring scenario currently under discussion involves LG Chem shutting down its No. 1 Yeosu NCC unit and forming a joint venture with GS Caltex.


yeongdai@heraldcorp.com