Korean Chemical Companies Downsizing Basic Chemicals Divisions

Domestic chemical companies are downsizing their basic chemicals divisions, which are facing a crisis. By the end of this year, they plan to reduce the size of the business-related organizations and demote the positions of the responsible executives. The basic chemicals business, including ethylene, is struggling to compete with China, prompting a shift towards advanced materials, according to industry analysts.

Lotte Chemical has recently appointed Lee Young-jun, the former CEO of the advanced materials business, as the head of both the chemical division and the basic materials business. This is the first time Lotte Chemical has not appointed a separate CEO for the basic chemicals business, instead having the head of the chemical division take on both roles.

LG Chem, one of the top two petrochemical companies, also appointed Executive Director Kim Sang-min as the successor to Vice President No Guk-rae, head of the petrochemical division, effectively lowering the rank of the division head by one level. It is considered unusual for LG Chem to appoint an executive director as the head of the petrochemical division, as the company has traditionally appointed vice presidents to lead major divisions such as the petrochemical and advanced materials divisions.

The downgrading of leadership in the basic chemicals business by petrochemical companies is seen as an effort to diversify their portfolios towards advanced materials. Instead of waiting for the basic chemicals sector to recover, they are downsizing and reorganizing to shift the focus of their chemical business towards advanced materials. Lotte Chemical previously announced a goal to reduce the proportion of basic chemicals sales, which currently account for 60%, to below 30% by 2030, while expanding the proportion of advanced materials, fine chemicals, and hydrogen energy.

Until now, domestic companies such as LG Chem and Lotte Chemical have produced basic chemical products like ethylene, known as the “rice of chemistry,” for export to countries like China. However, as China rapidly increased its self-sufficiency in basic chemical facilities, domestic companies lost their largest export market. With an oversupply in China, the business conditions for the basic chemicals sector have plummeted.

Industry reports indicate that China’s self-sufficiency rates for ethylene and propylene have already exceeded 100%, and the self-sufficiency rate for synthetic resins like polypropylene (PP) has risen to around 80%. The ethylene spread, a profitability indicator (the price of ethylene minus the cost of naphtha), remained at $186.47 per ton in the third quarter of this year, failing to reach the breakeven point of $300 since 2022.

In response, domestic chemical companies are taking active measures to improve profitability and shift their portfolios, such as halting production lines at some plants. On Dec. 2, Lotte Chemical stopped production lines for ethylene glycol (EG) at its second plant in the Yeosu National Industrial Complex. LG Chem also decided to halt the alcohol production line at its Naju plant and held a briefing session for employees regarding reassignments.

An industry insider stated, “As China, the main export destination for domestic petrochemical companies, increased its self-sufficiency, export routes were blocked, and no alternative markets were found. With the added pressure of China’s low-cost competition, companies are accelerating their portfolio shifts as producing products continues to result in losses.”

While domestic petrochemical companies are devising self-rescue measures, there are growing calls for the government to actively intervene in industrial restructuring. Samil PwC released a report titled “Crisis in K-Petrochemicals: Breakthrough with Team Korea,” stating, “Although Korea is the world’s fourth-largest chemical industry powerhouse, its current technology and production are focused on general-purpose products, necessitating fundamental structural improvements.”

The report also suggested, “The operation of naphtha cracking centers (NCC) located in Yeosu and Daesan should be consolidated to one or two entities, and inefficient facilities should be closed or sold to ensure profitability. If the government only sets the basic policy for restructuring and leaves the implementation to the private sector, companies may resist, delaying the restructuring process. Therefore, drastic support measures, such as enacting special laws, are necessary.”