Treading the untrodden path
Will Foosung become a global CDM market player?
By Park Hun-joon
In May 2003, Korea-based Foosung partnered with Japanese company INEOS Fluor to establish facilities for reducing greenhouse gas emissions and selling the resulting marketable emissions rights. By August 2007, the company had acquired and sold a staggering five million certified emissions reductions (CERs).
The clean development mechanism (CDM), defined in Article 12 of the Kyoto Protocol, is a market mechanism that allows developed countries to work with developing countries to reduce greenhouse gas emissions.
Under rules of the CDM, a project that reduced greenhouse gas emissions in a developing country was eligible to receive CERs, which could then be sold to developed countries _ also called Annex 1. The Annex 1 country could count the CERs as a reduction in greenhouse gas emissions against that country’s target reduction under the Kyoto Protocol.
First CDM project
Between November 2003 and March 2004, Firstec, which became part of Foosung Group in 2003, and INEOS Fluor installed an HFC23 decomposition equipment and completed a trial run, requesting that the Korean Ministry of Environment authorize the project.
A ceremony recognizing completion of the equipment construction was held in May 2004 with CEOs of both companies along with government officials in attendance. On July 1, the Ministry of Commerce, Industry and Energy (now the Ministry of Knowledge Economy), in association with the Ministry of Environment, through a deliberation of the CDM Committee under the Office for Government Policy Coordination, approved the Daedong River project as the nation’s first CDM project in accordance with the Kyoto Protocol.
In December 2004, the CDM Executive Board of the United Nations Framework Convention on Climate Change (UNFCCC) approved the Daedong River project and, in February 2005, registered the world’s fourth CDM project.
Based on the trading price of 20 to 30 euros per ton in the European carbon market at the time, revenues from the project amounted to 33.48 to 50.22 million euros, so Firstec’s 40 percent stake was valued at 13.392 to 20.088 million Euros _ equivalent to 17.4 to 26.0 billion won.
Considering that the total investment was 3.4 billion won and Firstec’s share accounted for 40 percent, the firm’s investment is estimated at 1.36 billion. Firstec expected to break even within three years and become profitable soon after.
Given that the demand of CERs in Europe highly exceeded supply, trading prices increased, markets expanded, and increases in profits could be reasonably expected.
With the high expectation on the CDM market, businesses and individuals started to buy CERs through prior contacts and negotiations with potential suppliers of CERs.
Due to such market conditions, Firstec, which had 1.674 million tons of verified CERs in stock, was able to sell contracts for up to 2.3 million CERs by January 2006.
Mitsubishi Corporation and Marubeni Corporation each purchased 0.1 million CERs, Japanese steel company JFE bought 0.5 million, ICE in England purchased 0.5 million and Carbon Compliance in England bought 1 million.
Foosung had already built its reputation as a leading company in the CDM business community. After experiencing the economic potential of the CDM business, Foosung started to pay attention to international CDM markets.
The company sought to expand the business to China under a partnership with EcoFrontier, of which Foosung had a 20 percent ownership. Foosung leveraged the technological and managerial know-how accumulated from the Daedong River Project. They concentrated on an HFC greenhouse gas reduction project which would be used later to acquire additional CERs. This project, which had been in development since the end of 2005, was named the Polar Project.
As of 2008, Foosung’s rapidly expanding businesses consisted of chemicals, auto parts (mostly car mats), and CDMs. As a part of its expansion and growth efforts, it acquired Ulsan Chemical’s assets, liability and goodwill for 28.148 billion won.
This contract aimed at two synergy effects: Firstly, to streamline its business model by obtaining manufacturing know-how and sales channels domestically and abroad through the acquisition of Ulsan Chemical’s production line; and secondly, to strengthen Foosung’s CDM business by acquiring Ulsan’s project investments.
Foosung recorded its first sales from the Polar Project with Sumitomo in Japan for 150,000 CERs worth 2.847 billion won. Foosung was managing this new paradigm shift by expanding its business into new clean energy projects in the global CDM market.
Participation with EcoFrontier in a bio-diesel project launched by the Malaysian government was also in line with such efforts. It was also considering investments in eco-friendly businesses that used wind and solar power.
To take advantage of the increasing demand for poly-silicon stemming from solar battery development, it would also expand its raw materials business in cooperation with one of its affiliates, Foosung Corp.
Despite Foosung’s success as an early bird in the burgeoning industry, several questions over the sustainability of its global business model remain.
Can Foosung secure a competitive advantage with only the HFC23 reduction technology and business model in the prosperous yet fierce overseas CDM market?
Which is the better way to secure competitive advantage ― to focus on the previous CDM business model and pursue differentiation or to explore new areas with a CDM business model based on other greenhouse gas reduction technologies?
If a new CDM business model is needed, how can Foosung find it?
Park Hun-joon is a professor at the School of Business, Yonsei University.