Petrochemical overhaul faces renewed urgency as margins slide again

The Yeosu Petrochemical Industrial Complex in South Jeolla Province / Yonhap

The petrochemical sector is coming under renewed strain as naphtha and ethylene margins have slipped back below break-even levels following a brief wartime rebound, reinforcing calls for the government to accelerate its long-delayed industry restructuring.

Margins briefly recovered during the U.S.-Iran conflict as feedstock shortage fears lifted petrochemical prices. The ethylene-naphtha spread, a key profitability gauge for naphtha cracking centers (NCCs), jumped to about $370 per metric ton in April from $90 in February, but fell back below $200 in June as supply concerns eased and buyers delayed purchases.

The fading war premium comes as the industry's fundamental challenge remains unchanged, with aggressive capacity expansions in China, India and the Middle East continuing to drive a global oversupply.

Ethylene demand is expected to grow by about 6 million tons this year, while new capacity additions, led by China and India, are projected to reach roughly 9 million tons, leaving supply growth outpacing demand.

In light of this, Seoul has begun pushing industry restructuring, with a target of cutting up to 3.7 million tons of domestic NCC capacity. It has approved a restructuring plan for the Daesan Petrochemical Industrial Complex in Seosan, South Chungcheong Province, including the shutdown of Lotte Chemical’s 1.1 million-ton NCC facility.

Another restructuring project in Yeosu, South Jeolla Province, is now undergoing government review.

The success of the overhaul now hinges on whether authorities and companies can push the more complex Yeosu and Ulsan projects from negotiation into execution.

In Yeosu, which accounts for nearly half of domestic ethylene capacity, a first-phase consolidation centered on Yeochun NCC and Lotte Chemical remains under negotiation, while a separate tie-up between LG Chem and GS Caltex faces additional hurdles over partner agreements, asset valuation and regulatory constraints.

In Ulsan, the startup of the Shaheen project is set to almost double local ethylene capacity to 3.56 million tons annually, forcing operators and policymakers to redefine the roles of new and legacy plants and decide which facilities should be integrated, cut or upgraded to higher-value production.

Industry Minister Kim Jung-kwan, left, visits SK Energy's plant in Ulsan, May 13. Courtesy of the Ministry of Trade, Industry and Resources

Beyond the immediate supply-demand imbalance, the industry is increasingly concerned that prolonged delays carry a growing financial cost.

An NCC with an annual capacity of 1 million tons operating in an environment where margins are $100 per ton below break-even could incur about $100 million in losses over a year, tying up capital that might otherwise be redeployed into higher-margin businesses such as semiconductor packaging materials, electric vehicle materials, engineering plastics and specialty resins.

“Companies also recognize the need for capacity cuts and integration and are adjusting voluntarily, but asset values, equity stakes, employment and regulatory issues are intertwined, and the situation is nearing its limits,” an industry official said.

“If delays continue, investment capacity and industrial competitiveness could be damaged together, bringing a situation that may become difficult to reverse.”

The focus is now on the government to move beyond setting reduction targets and act as a coordinator by easing regulatory hurdles, expanding transition financing and investing in shared industrial infrastructure, so companies can execute complex consolidation plans before the current policy window closes.