Petrochemical companies accept 25% NCC capacity cut amid oversupply crisis

Industry Minister Kim Jung-kwan, center, applauds at the Korea Chamber of Commerce and Industry in Seoul, Wednesday, during a ceremony marking Korea's 10 leading petrochemical firms' agreement to present self-rescue plans to overcome the crisis in the industry. Newsis

Korea's 10 leading petrochemical firms agreed Wednesday to reduce the combined output from their naphtha cracking centers (NCCs) nationwide by up to 25 percent, or 3.7 million tons, in an effort by the government and industry to revive the ailing sector.

For the goal, the companies will submit their own self-rescue plans to improve competitiveness by the end of the year, which are likely to contain restructuring of each company as well as merger and takeovers among them. The government made it clear that each company's efforts are a prerequisite for eased regulations, financial support and tax incentives aimed at revitalizing the petrochemical industry.

The scheme has come as the industry has been struggling with a prolonged recession fueled by oversupply from China and the Middle East.

According to the government, the 25 percent cutback goal is based on Boston Consulting Group's advice that Korean NCCs should reduce their total output by at least 2.7 million tons and up to 3.7 million tons annually. The government said domestic NCC output will reach 14.7 million tons once S-Oil completes its Shaheen project to build a mega-sized petrochemical plant in Ulsan.

In hopes of government aid, the 10 firms also pledged to accelerate their transition to high value-added, eco-friendly products and minimize the impact of restructuring efforts on local economies.

“The only way to resolve this crisis is to cut supply and strengthen fundamental competitiveness,” Deputy Prime Minister and Finance Minister Koo Yun-cheol said in a meeting of economy-related ministers. “Companies should move quickly to develop plans to overhaul their operations and boost competitiveness, as if the deadline were next month, instead of the year-end.”

Deputy Prime Minister and Finance Minister Koo Yun-cheol, right, and Industry Minister Kim Jung-kwan enter a meeting room at Government Complex Seoul to attend a ministerial meeting on industry competitiveness, Wednesday. Yonhap

Having proposed tax breaks and low-interest loans last December to enhance the industry’s competitiveness and promised follow-up actions in the first half of this year, the government was initially expected to unveil detailed measures to support the petrochemical sector during Wednesday's meeting.

President Lee Jae Myung reinforced these expectations with an order last Thursday for comprehensive plans to reorganize the domestic petrochemical industry.

However, citing the complicated situation facing the companies, the government said it will announce support measures after completing a feasibility review of each company’s self-rescue plan by the end of the year.

“Any free riders who seek only government aid or benefit from other firms’ output cuts will face strong consequences,” Industry Minister Kim Jung-kwan said during a ceremony marking the 10 petrochemical firms’ agreement to reduce output.

Still, it remains uncertain which companies will shut down which facilities.

Given the profits earned from selling naphtha to petrochemical firms, acquiring NCCs from petrochemical firms may also be difficult for oil refiners, despite some ongoing negotiations between companies in the two sectors, including those between HD Hyundai Oilbank and Lotte Chemical.

Additionally, the industry ministry said it is unclear whether the Fair Trade Act will be relaxed for the petrochemical sector, though its minister told lawmakers Tuesday that his ministry is in talks with the Fair Trade Commission to relax antitrust rules in order to facilitate mergers among struggling petrochemical facilities.

Yeochun naphtha cracking center in Yeosu, South Jeolla Province / Newsis

As these facilities are highly interconnected, such transactions usually involve large-scale deals subject to the Fair Trade Act. When the government announced financial support for the petrochemical industry last December, industry insiders emphasized the need for relaxed antitrust regulations.

"Japan lifted its antitrust regulations in the 1980s, when it reorganized its own petrochemical industry," said Lee Duck-hwan, professor emeritus at Sogang University’s Department of Chemistry. "Eliminating regulations is key to the government's role in restructuring."

The government, however, rejected criticism that Wednesday’s announcement was merely a repetition of last December's.

"This latest announcement is about setting the rules and presenting a road map for the future," an industry ministry official said.

On Thursday, the Financial Services Commission will convene a meeting with representatives from major state-run and commercial banks to discuss ways to provide financial support to petrochemical firms pursuing self-rescue plans.