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The government has approved the petrochemical industry's second restructuring project as the sector seeks to address an industrywide crisis caused by global oversupply, green-lighting the "Yeosu Project No. 1" plan.
The proposal calls for reducing annual naphtha cracking capacity by 1.4 million tons through the consolidation of production facilities in the South Jeolla city of Yeosu. In return, the government will provide 700 billion won ($473 million) in financial, tax and research and development (R&D) support to participating companies.
The Ministry of Trade, Industry and Resources said Wednesday it had approved the final business restructuring plans of the Yeosu petrochemical complex submitted by Yeochun NCC, Lotte Chemical, Hanwha Solutions and DL Chemical. The approval follows the go-ahead given to another restructuring project, the "Daesan Project No. 1," announced in February.
The plan centers on establishing a new joint venture by combining Yeochun NCC, jointly operated by Hanwha Solutions and DL Chemical, with Lotte Chemical's Yeosu plant. Lotte Chemical, Hanwha Solutions and DL Chemical will each hold a one-third stake in the new entity.
Hanwha Solutions and DL Chemical will each inject 272.5 billion won through paid-in capital increases, totaling 545 billion won, to pay off Yeochun NCC's existing debt. The companies also plan to invest 253.2 billion won in supply chain infrastructure and other facilities, bringing their total self-help efforts to 800 billion won.
As part of the restructuring, Yeochun NCC's No. 2 and No. 3 plants will be shut down, effectively cutting naphtha cracking capacity by 1.39 million tons annually.
Naphtha Cracking Centers (NCC), which produce basic petrochemical feedstocks such as ethylene and propylene, have come under mounting pressure to reduce capacity amid oversupply from China.
The companies plan to shift toward higher-value and environmentally friendly products instead, including medical-grade low-density polyethylene and polyolefin elastomer, which is used in adhesives for medical, food and hygiene applications.
In return for the voluntary restructuring, the government will provide a support package comprised of financing, tax incentives and regulatory easing.
The largest component is 650 billion won in financial support. Creditor banks led by the Korea Development Bank will provide 450 billion won in new financing for facility integration and the transition to higher-value products while offering deferrals on existing debt. The Korea Trade Insurance Corporation will expand import insurance support worth 200 billion won through preferential guarantee limits.
The government will also ease corporate and local tax burdens arising from corporate mergers and spinoffs and provide 34 billion won for R&D projects related to advanced chemical materials.
With the scale-down from the Yeosu project, the government moves significantly closer to its target of cutting 3.7 million tons of petrochemical capacity.
The Daesan Project No. 1 reduced capacity by 1.1 million tons earlier this year, through a joint venture between Lotte Chemical and HD Hyundai Oilbank. The two projects approved thus far will eliminate 2.49 million tons of capacity, about 68 percent of the government's reduction target.
“Approval of the Yeosu project, following the Daesan restructuring, is expected to help ease domestic oversupply and restore the competitiveness of Korea's petrochemical industry,” said the Korea Chemical Industry Association.
Attention is now turning to the Ulsan petrochemical complex, where restructuring discussions have progressed more slowly.
Companies in Ulsan — SK geo centric, Korea Petrochemical Ind. and S-Oil — have had fewer incentives to restructure following recent earnings improvements, while differences remain over how much production capacity should be reduced.
S-Oil is preparing to begin full-scale operations next year with its 9 trillion won Shaheen Project, which is expected to produce 1.8 million tons of ethylene annually — nearly half of the government's nationwide reduction target.
LG Chem and GS Caltex, which also operate in the Yeosu petrochemical complex, have yet to submit their final restructuring plans.
The Ministry of Trade, Industry and Resources urged all petrochem companies to join in the restructuring effort.
"For the restructuring of the petrochemical industry to succeed, all industrial complexes must participate without free-riding," Moon Shin-hak, the vice industry minister, said. "Following Daesan and Yeosu, we will move quickly to advance restructuring discussions in Ulsan so that Korea's petrochemical industry can regain its competitiveness and resume growth."
BY AHN HYO-SEONG [[email protected]]
