Petrochemical firms face bumpy road

An LG Chem petrochemical plant in the nation’s southern industrial city of Yeosu. / Korea Times file

Samsung, Lotte, Hanwha suffer snowballing losses

By Kim Yoo-chul

Korea’s leading petrochemical companies, including Samsung, Lotte and Hanwha, are facing a bumpy road ahead as a consequence of snowballing losses due to declining demand from China coupled with the rise of competition from the Middle East.

Chinese firms have expanded their production capacity to reduce their dependence on products manufactured by Korean firms. Middle Eastern firms are rapidly making forays into the Chinese market with cheaper products.

The problem is that the worst is yet to come. Beijing has vowed to boost its nationwide annual capacity of polyethylene products ― the raw material for the production of synthetic rubbers ― to 27 million tons by 2015 from the current 19 million tons, according to data from the China Petroleum & Chemical Industry Association.

``We are in trouble. Samsung’s proven manufacturing technology has managed to help us grow overseas. But the external growth strategy won’t work anymore. Now we must focus on qualified growth selling our patented products,’’ said an official at Samsung Petrochemical.

The Samsung Group’s petrochemical affiliate, which runs two local factories in the provincial cities of Ulsan and Seosan, posted a 73.8 billion won operating loss last year.

Samsung and industry officials said an oversupply of purified terephthalic acid (PTA) products in China has caused the price of PTA to fall, deteriorating the company’s bottom line. PTA is the major cash cow for the company.

The worsening performance is not isolated to Samsung.

The operating profit of LG Chem’s petrochemical division nearly halved last year, while that of Lotte Chemical and Hanwha Chemical dropped by 76 percent and 70 percent during the same period, respectively.

Kumho Petrochemical, another leading local petrochemical firm, saw an operating profit of 223 billion won last year, down 73.3 percent from the previous year.

``The uncertain economy and less demand for petrochemical products market hit us,’’ said a Kumho official.

SK Chemical, the SK Group’s chemical affiliate, reaped 190 billion won in operating profit in 2012, a drop of 17.4 percent from 2011.

``We only saw negative factors such as the stronger local currency against the greenback last year,’’ said an SK Chemical official.

``LG Chem is seeing another tough year in 2013. We will try hard to sell our in-house and patented premium products in order to report better profit from the previous year,’’ said LG Chem Chief Executive Park Jin-soo.

The chief executive was confident about surmounting the various challenges yet recognizes the sense of urgency to maintain its lead over overseas rivals, including Chinese players.

``LG Chem will probably lose our leadership in one or two product areas,’’ the CEO Park said.

The Chinese market has become a threat to Korean petrochemical firms rather than an opportunity due to the rapid growth of Chinese competitors.

After three decades of stellar growth, China has left its economic growth target for this year unchanged at 7.5 percent.

Like semiconductors and displays, the petrochemical industry is cyclical and volatile often depending on macroeconomic conditions.

Thanks to its superior technological capacity, Korea was able to supply cheap and essential materials used in the manufacture of petrochemical products through a timely delivery scheme. Industry observers now believe all that is now history.

``I can say the boom is completely over. China is sourcing key materials from domestic companies lowering its previous reliance on Korea and companies in the Middle East are offering more of a discount than those from Korea,’’ said Lee Eung-joo, an analyst at Shinhan Financial.

Lee said the petrochemical products’ self-sufficiency rate in China rose to 70 percent as of last year from 50 percent in 2003.

``The crisis has yet to come and we think this will come from next year at the earliest after Chinese companies finish their plant expansions. Korean firms need to realign their business strategies to respond to the challenging market situation,’’ said Lim Ji-soo, an economist at LG Economic Research Institute.

Lim says Korean firms will need more plants in strategic markets to save delivery costs and boost management efficiency.

The petrochemical industry is critical for Korea Inc. along with steel, automobile, consumer electronics and shipbuilding industries. China has so far been regarded as the ``dollar box’’ because it accounted for 50 percent of the market for these industries.

The world’s petrochemical industry has changed drastically in the last thirty years as large-scale construction of facilities in emerging markets has been rising, which has changed an industry structure led by the United States, Western Europe and Japan, said IHS, a market research firm.