Ailing petrochemical giants consider stronger belt-tightening measures

Lotte Chemical's factory in Ulsan / Newsis

Major petrochemical companies in Korea have begun considering additional cost-cutting measures after failing once again to return to profitability last quarter, due to a lingering global oversupply driven mainly by Chinese competitors.

Lotte Chemical recently began recommending that senior blue-collar employees at its Ulsan plant leave the company. This follows a two-month suspension of operations at another factory in Seosan, South Chungcheong Province, and a series of disposals of unprofitable assets here and abroad.

Over the past three years, Lotte Chemical has not posted an annual operating profit. Securities analysts also estimate the company's first-quarter operating loss — which will be announced Tuesday — at around 140 billion won ($100 million).

Its recent decisions are therefore being interpreted as a response to mounting losses, although the company denies that its ongoing staff reductions amount to downsizing.

"The latest measure is just intended to streamline operations," a Lotte Chemical official said.

LG Chem recently informed employees at its plant in Yeosu, South Jeolla Province, of plans to sell two of the three dormitory buildings owned by the factory. The announcement follows two consecutive years of operating losses in the company's petrochemical business. Its first-quarter loss for that division amounted to 56.5 billion won.

"The company has made efforts to enhance competitiveness over the past three years by declaring an emergency and unloading unprofitable assets," LG Chem said in a notice to Yeosu workers. "However, the petrochemical division suffered an operating loss for the second straight year due to sluggish demand caused by the global economic slowdown and oversupply."

LG Chem's plant in Yeosu, South Jeolla Province / Courtesy of LG Chem

SK Innovation's management reportedly decided to return 30 percent of their annual salaries, fly economy class for overseas business trips and come to the office by 7 a.m. six days a week. During the first quarter, the company recorded an operating loss of 114.3 billion won in its petrochemical business, run by its subsidiary SK Geo Centric.

"We are standing in the center of a perfect storm, due to the petrochemical industry's structural slump and the prolonged decline in demand for electric vehicles," SK Innovation CEO Park Sang-kyu said in an email sent to employees Wednesday.

S&P Global Ratings, which recently downgraded the credit ratings of major Korean petrochemical firms, forecast another difficult year ahead, citing overcapacity, weak demand and aggressive investments in petrochemical production by China and the Middle East.

"The downturn is too deep to exit over the next two years," Kim Tae-hee, an analyst at the U.S. credit rating agency, said in a report Thursday. "Broader trade uncertainty is an additional risk that will exacerbate weak demand for chemical products, leading to lower utilization rates."

Concerns are also mounting that the government's leadership vacuum may delay the announcement of follow-up measures to last year's reform plans aimed at boosting the competitiveness of the petrochemical sector.

In December, when the government proposed tax incentives and low-interest loans to support the struggling industry, it said additional steps would be unveiled in the first half of 2025. However, the government has yet to announce any new measures, despite receiving a consulting report from Boston Consulting Group in April commissioned by the Korea Chemical Industry Association.

Moreover, the previously announced measures have been widely viewed as insufficient to address structural challenges, as the government refuses to facilitate mergers of unprofitable plants by easing antitrust regulations.

"Korean chemical companies still rely heavily on commodity chemicals with thin margins," the S&P analyst said. "Although the companies keep trying to shift to high-value specialty chemicals, this transition requires significant time and investment."