(Corrects analyst title in paragraph 15)
By Heejin Kim and Trixie Yap
SEOUL/SINGAPORE (Reuters) -Small and stand-alone naphtha crackers are likely to shut while some plants could merge as part of an overhaul of South Korea’s oversupplied petrochemical sector, analysts said, which will cut naphtha demand at the world’s largest importer of the fuel.
Ten South Korean petrochemical companies agreed to reduce their naphtha-cracking capacity by between 2.7 million and 3.7 million metric tons per year, government officials said last week, to cull surplus supply and improve profit margins.
The cuts would be equivalent to about 25% of the country’s overall capacity, including the Shaheen project due to start up next year.
The companies need to submit an outline by the end of the year on steps they plan to take, South Korea’s industry ministry said.
An SK Innovation spokesperson said the company is considering various options including the possible closure of a cracker. Its subsidiary SK Geo Centric operates a 660,000-tons per year cracker at Ulsan.
Analysts say Yeochun NCC Co (YNCC), a joint venture between DL Chemical and Hanwha Solutions and the country’s third-largest ethylene producer, may have to shut one or two of its three crackers.
“We see YNCC as the least competitive due to weak financials and (a lack of) integration,” Citi analysts led by Oscar Yee said in a note.
YNCC’s debt-to-equity ratio hit 249% by the end of the first half of 2025, while it is a major net ethylene seller, they added.
Plants that may be permanently closed include YNCC’s No. 3 cracker which was shut in August and possibly a second YNCC unit, they said.
YNCC did not respond to phone calls from Reuters.
A DL Chemical spokesperson said nothing has been decided on restructuring including how to handle YNCC.
“The industry should participate in (the) restructuring, making sure there’s no free rider,” he said.
A Hanwha spokesperson said the company is considering various options and plans to submit their plan to the government as soon as possible.
HD Hyundai is looking to acquire Lotte Chemical’s naphtha cracker, or the companies may merge their cracker operations, trade sources have said. Lotte, South Korea’s second-largest ethylene producer, declined to comment, while HD Hyundai said nothing has been decided yet.
Some companies may choose to mothball smaller, inefficient units that are due for maintenance, instead of investing further, Wood Mackenzie’s head of base chemicals Catherine Tan said.
NEW PLANT LOOMS
The restructuring is likely to hit demand for naphtha, which is used to produce 82% of the country’s ethylene, harder than liquefied petroleum gas, Tan said.
Importing U.S. ethane to make ethylene would be an option but that would require investments in new infrastructure, she added.
ICIS principal analyst Salmon Lee and senior analyst Amy Yu expect South Korea’s capacity for polyolefins, aromatics and other derivatives such as monoethylene glycol to fall in line with the ethylene capacity rationalisation.
However, Woodmac’s Tan said the voluntary measures would mean “some hard bargaining and tough negotiations are to be expected as companies may want to wait and see who flinches and bows out first”.
The start-up of the Shaheen project by S-Oil and its majority owner, Saudi Aramco, to produce 1.8 million tpy ethylene next year will exacerbate oversupply and could limit the impact from capacity cuts, analysts said.
Consultancy FGE expects South Korea’s restructuring to take a year to 18 months, Armaan Ashraf, global head of natural gas liquids, said.
“This wouldn’t save the market by any means, but it would help chip away at overcapacity alongside consolidation by other players such as Europe, Japan and potentially China’s next 5-year plan,” he added.
(Reporting by Heejin Kim in Seoul, Trixie Yap and Florence Tan in Singapore; Additional reporting by Mohi Narayan in New Delhi; Editing by Sonali Paul)
