Gov't rejects petrochemical sector's request to ease antitrust regulations

The world's largest petrochemical industrial complex in Yeosu, South Jeolla Province, is seen in this Oct. 23 photo. Newsis

On Monday, the government announced long-awaited measures aimed at boosting the competitiveness of Korea's petrochemical industry, which has seen declining profitability due to strong price competition from Chinese rivals as well as the global economic downturn.

However, despite years of requests from the industry, the measures did not include a relaxation of antitrust regulations, which could have facilitated the merger of unprofitable factories by removing rules that some argue restrict market-leading companies. Because the equipment in these factories is interconnected, mergers and acquisitions between petrochemical firms often involve large-scale deals, which then makes them subject to antitrust regulations.

According to the Ministry of Trade, Industry and Energy, petrochemical firms will be allowed to defer the payment of transfer income taxes if they sell assets in regions designated as vulnerable to industrial decline, in order to repay debts or make investments.

Subcontractors and small business owners in these regions will also receive financial support from the government.

Additionally, state-financed funds worth up to 3 trillion won ($2 billion) will be injected into the petrochemical sector, so that companies can secure liquidity and reorganize their businesses with low-interest loans.

Regarding joint ventures and merger and acquisition deals in the sector, the government said it will help companies consult with authorities, namely the Fair Trade Commission, in advance, to shorten the reviewing process for such transactions.

“It was uncertain which specific company or which specific merger case needed the easing of antitrust regulations,” Lee Dong-cheol, head of the ministry’s chemicals industry team, said.

In a press release, the ministry stated that the government will encourage companies to develop restructuring plans through an independent consulting agency, acknowledging the challenges of government-led reforms.

It added that the government will announce follow-up measures during the first half of next year after listening to suggestions from the industry.

Trade, Industry and Energy Minister Ahn Duk-geun, left, speaks during a meeting with the CEOs of petrochemical firms at a restaurant in Seoul, July 19. Courtesy of the Ministry of Trade, Industry and Energy

The Korea Chemical Industry Association (KCIA) welcomed the government's plans in its official statement, but officials in the industry remain lukewarm about the measure, saying they do not expect the announced measures to become fundamental solutions to the current situation.

"KCIA Chairman Shin Hak-cheol appreciated the government announcing the measures without delay," the association said. "He vowed to communicate with the government and industry officials so that the announced measures can help the industry overcome crises and achieve continuous growth."

A major petrochemical company official also noted that tax incentives for research and development could be helpful for the industry, but the government’s plans do not seem to be a breakthrough, considering the current market environment.

Throughout this year, petrochemical firms had expected that the government may employ drastic measures similar to Japan’s lifting of antitrust regulations on struggling industries in the 1970s, which is considered to have facilitated the Japanese petrochemical sector’s restructuring in the 2010s.

“By delaying the application of the Fair Trade Act and providing tax reduction and other incentives for mergers, the government should support autonomous restructuring of the private sector,” Korea Industry Alliance Forum Chairman Jeong Marn-ki said in April, during a conference on the petrochemical industry crisis.

Accounting firm Samil PwC recommended that the government waive antitrust regulations on mergers within the petrochemical industry and proposed that operators of naphtha cracking centers in the Ulsan, Yeosu and Daesan industrial complexes form an integrated company to close or sell inefficient facilities.

“For the restructuring to gain momentum, the government should legislate a special law and provide unprecedented financial support,” the accounting firm said in a report published this month.