South Korean chemical compounds firms are racing to faucet new markets after racking up tons of of hundreds of thousands of {dollars} in losses within the face of a deluge of capability from China, their largest market.
Reliant on exports, corporations together with LG Chem Ltd. and Lotte Chemical Corp. are feeling the pinch as new crops in Asia’s largest financial system exacerbate a worldwide glut and squeeze margins. And it appears like extra ache is about to come back for the Korean petrochemicals sector, which noticed exports drop greater than 15% in 2023 earlier than rebounding modestly final 12 months.
The fortunes of those chemical and plastics makers have turned in recent times. The place as soon as they rode the coattails of China’s explosive progress and insatiable urge for food for imports, pushing apart rivals from Japan, they now face an oversupplied market and collapsing manufacturing margins as Beijing builds out its personal trade.
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“China is quickly increasing its manufacturing of polyethylene and polypropylene, lowering its reliance on Korean imports and even exporting to different nations in Asia and South America,” mentioned Paul Joo, government director of olefins and olefin derivatives analysis at S&P International Commodity Insights. “Korea dangers being left behind except decisive restructuring happens.”
International manufacturing capability for chemical compounds comparable to ethylene and propylene — precursors in plastics manufacturing — is about to develop by near-record ranges this 12 months, with the overwhelming majority being inbuilt China, in line with BloombergNEF analyst Philip Geurts. The online progress in services will far outpace will increase in demand, he mentioned in a report launched in January.
Some firms have began to adapt, with LG Chem shutting crops in Daesan and Yeosu because it pulled out of the marketplace for one other frequent kind of chemical, styrene monomers, utilized in plastics and rubber manufacturing. Lotte Chemical, in the meantime, is within the technique of promoting its stake in its Pakistan unit and suspended operations at its artificial rubber plant in Malaysia to restrict losses.
These divestments aren’t prone to considerably pare Lotte Chemical’s report annual working lack of virtually 900 billion gained ($617 million) final 12 months. Others corporations together with LG Chem additionally posted sharp drops in profitability. That’s hit firm valuations, with chemical compounds the worst-performing sector within the Korean inventory trade over the previous 12 months after dropping a few quarter.
Each firms have mentioned they’re pivoting to extra specialised merchandise aimed on the renewable vitality sector as they search to recuperate from the onslaught of Chinese language provide, though that nation has additionally been boosting related manufacturing capabilities.
“LG Chem will proceed to foster climate-friendly enterprise, restructure its portfolio towards high-value merchandise, and concentrate on overcoming stagnant profitability by way of regional diversification,” the corporate mentioned.
Nevertheless, Chinese language producers produce other benefits aside from newer services which can be usually extra tightly built-in within the oil processing chain. They can faucet cheaper feedstocks, together with naphtha and methanol, from sources which can be much less accessible to their Korean counterparts.
As an ally of the US, Seoul doesn’t contain itself within the buying and selling of delicate oil merchandise from sanctioned nations like Russia and Iran. There have been no flows of naphtha from Russia to South Korea since April after a probe from customs authorities, in line with knowledge from Kpler.
“China additionally buys quite a lot of Iranian liquefied petroleum fuel at cheaper than market value, which Korea can’t purchase as a result of US sanctions, once more giving China a major value benefit,” mentioned Chua Sok Peng, a petrochemicals analyst on the London Inventory Alternate Group. It may additionally “renew” its services extra simply than “different locations the place tight environmental laws have halted the constructing of latest crackers,” she mentioned.
Lastly, the Chinese language authorities is urging its refiners to supply much less gas and extra petrochemical merchandise as its electric-vehicle increase alters the vitality combine. “We are going to advance petrochemical industries towards nice chemical industries,” the Nationwide Improvement and Reform Fee mentioned earlier this month in its annual report back to the Nationwide Folks’s Congress, China’s parliament.
That evolution doesn’t bode properly for the Korean chemical firms.
“New Chinese language crackers are virtually all refinery-integrated, benefiting from decrease prices and powerful authorities backing,” S&P International’s Joo mentioned. “In opposition to China, Korea is dropping floor.”
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