South Korea plans to restructure the struggling domestic petrochemical industry amid the intensifying competition with Chinese rivals and oversupply by encouraging companies to focus on high-end products and voluntarily seek mergers and acquisitions, government sources said on Thursday.
The Ministry of Economy and Finance, the Ministry of Trade, Industry and Energy, the Financial Services Commission and other government bodies will unveil measures to boost the petrochemical sector’s competitiveness next month, according to the sources.
The country aims to spur the industry to shift its focus to value-added specialty chemicals from basic chemicals by providing incentives such as tax benefits and loans with low interest rates.
“The government is not considering forceful restructuring led by authorities,” said a senior finance ministry official. “The government will encourage companies to seek voluntary reorganization to improve the industry’s competitiveness.”
STRUGGLING
The move came as local petrochemical manufacturers have been struggling amid the cut-throat competition with Chinese rivals, a supply glut and weak demand.
Margins on ethylene, domestic manufacturers’ core basic chemical materials, have been falling since post-pandemic, hurting their earnings.
The country’s four largest petrochemical manufacturers – LG Chem Ltd., Lotte Chemical Corp., Kumho Petrochemical Co. and Hanwha Solutions Corp. — reported a combined operating loss of 445 billion won ($317.9 million) on a consolidated basis in the third quarter. They logged a total operating profit of 39 billion won in the final three months of last year.
Such a shortfall in the latest quarter came as Lotte, a major ethylene producer, suffered a loss of 414 billion won in the period. Its local ethylene rivals such as Korea Petrochemical Ind. Co. and Yeochun NCC Co. (YNCC) have also been in the red.
The country is seeking an industry-wide restructuring as the industry is unlikely to recover in the near term.
The government had initially planned to unveil restructuring measures on Nov. 27 when Minister of Economy and Finance Choi Sang-mok chairs a special meeting to enhance industrial competitiveness with other ministers.
The authorities delayed the announcement as they needed more time for agreements among ministries. The country last had such a meeting on Dec. 16, 2022, to discuss Hanwha Group’s acquisition of Daewoo Shipbuilding & Marine Engineering Co., which became Hanwha Ocean Co.
M&A
South Korea plans to encourage local petrochemical companies to concentrate on more profitable products such as copolyesters and acrylonitrile butadiene styrene (ABS). The industry has already been seeking such shifts.
The government aims to accelerate the move by reorganizing the sector through mergers and acquisitions, backed by a law to revitalize local industries, sources said.
The act supports companies facing difficulties due to oversupply and industry crises while helping firms seeking new businesses, carbon neutrality and stable supply chains.
Companies are allowed to seek mergers and acquisitions, as well as spin-offs only with decisions by boards of directors without shareholders’ meetings under the law. Income taxes and corporate taxes on gains from business transfer deals are also deferred.
The government plans to encourage petrochemical companies to voluntarily restructure their businesses by reducing their ailing businesses and investing in new profitable businesses.
The move is expected to spur the industry to seek mergers or establish joint ventures, industry sources said.
“If the government exempts various taxes such as capital gain taxes after M&A deals or provides subsidies, that will speed up the restructuring,” said one of the sources.
The industry is also seeking tax incentives and deregulations for research and development required for specialty chemicals.
The government has yet to make any decision although ministries are in talks on incentives for the restructuring, another senior government source said.
By Kyung-Min Kang, Sang-Yong Park and Woo-Sub Kim
kkm1026@hankyung.com
Jongwoo Cheon edited this article.
