Gov't seeks restructuring of steelmaking, petrochemical industries

By Nam Hyun-woo

The government is seeking corporate restructuring of the steelmaking and petrochemical industries, urging local companies to “voluntarily reorganize” their businesses.

However, the move has been drawing corporate opposition since Thursday that the demand is based on foreign research irrelevant to local market circumstances and will only deteriorate the companies’ competitiveness.

Trade, Industry and Energy Minister Joo Hyung-hwan held a meeting with the heads of petrochemical firms. “The firms should preemptively streamline their businesses to cope with tough competition,” he said at the meeting.

The remark came after local steelmaking and petrochemical associations commissioned consulting firms to come up with industry-wide restructuring plans. The firms, Bain & Company and Boston Consulting Group (BCG), pointed out the supply glut of petrochemical products, the decrease in steelmaking facilities and the crowded steel pipe sector.

Bain & Company, which conducted a study on the petrochemical industry, pointed out that companies should downsize production of terephthalic acid (TPA) and polystyrene, while additional increases in facilities making butadiene rubber and polyvinyl chloride (PVC) should be stopped.

Domestic firms’ TPA exports reached $4.4 billion in 2011, but plunged to $1.4 billion last year, as China increased supply to meet its own demand. Polystyrene’s profitability will likely decrease amid severe price competition, according to the consulting firm. The report also suggested companies upgrade their butadiene rubber and PVC facilities to ones making high value-added products.

However, industry insiders cast doubts on the report, saying cutting down the supply of specific products will aggravate the entire petrochemical industry because one product can be an ingredient to others.

“The move can affect short-term sentiment, but it seems to be difficult to bring a structural turnaround, because China is already experiencing an oversupply,” said an analyst at Hana Financial Investment.

BCG, which researched the steelmaking industry, expressed its concern with the oversupply of thick steel plates because of the nosedive in shipbuilding orders. Also, the consulting firm recommended Korea decrease its number of steel pipe companies through mergers.

In an interim report, BCG recommended that Korea decrease the number of thick steel plate factories from seven to three, citing thick steel plate consumption will decline from 9.2 million tons last year to 7 million tons by 2020.

There are seven thick steel plate factories in Korea. POSCO has four, Hyundai Steel has two and Dongkuk Steel has one. The three companies can produce 7 million, 3.5 million and 1.5 million tons of thick steel plates, respectively.

On the heels of a global decrease in demand, POSCO and Hyundai Steel’s operation rates of their thick steel plate manufacturing line reportedly dropped to 80 percent, down 15 percentage points from a year earlier.

However, criticism also stirred that the report does not reflect the business that takes places in the thick steel plate sector. According to industry sources, they produce the plates only after they receive orders, thus the concept of oversupply does not exist in their business. Also, given the massive costs for building the factories, maintaining them will cost them less than tearing them down for now and rebuilding them again when the industry faces an upturn.

“When we get rid of the factories and the thick steel plate sector faces an upturn, Chinese steelmakers will only benefit,” said a steelmaking firm official asking not to be named.

The government will announce its schemes for restructuring the steelmaking and petrochemical industries on Friday and the consulting firms’ opinions are anticipated to affect the government’s plan heavily. Minister Joo mostly echoed the consulting firms’ reports, saying “the thick steel plate sector needs to adjust its facilities.”