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[Chemicals] Status and Prospects of Korea's Petrochemical Industry

Definition and Characteristics of the Petrochemical Industry

The petrochemical industry involves the process of manufacturing basic petrochemical feedstock (ethylene, propylene, benzene, toluene, etc.) with petroleum products (naphtha, etc.) or natural gas, which are used as raw materials to produce synthetic resins (plastic), synthetic fiber (polyester and nylon), synthetic rubber, and specialty chemicals and intermediate materials of fine chemicals. The industry supplies essentials to everyday life, as 70 percent of personal belongings such as clothing, mobile phones, and bags are made of petrochemical products. It also leads environmental protection by adopting less expensive natural materials such as natural fibers and woods.

Also, the petrochemical industry is a capital-and technology-intensive equipment and plant industry, valuing economies of scale. Based on Naphtha Cracking Center (NCC) producing basic fractions, plants producing related derivatives are integrated and form a complex. It is a typical kombinat (combine)-type industry, requiring large-scale capital investment. Depending on external factors such as the global economic condition, supply and demand, and changes in oil prices, the industry goes through boom and recession. Even in the boom cycle, it should be prepared for a possible upcoming recession with capital investments and R&D.

<Picture 1> Value Chain of the Chemical Industry

Status of Korea’s Petrochemical Industry

The petrochemical industry is a key industry, playing a vital role in national production and exports, accounting for 6.1 percent of total production, 4.4 percent of added-value, and 8.2 percent of exports in Korea’s manufacturing sector, contributing immensely to achieving a trade surplus.

<Picture 2> Status of Korea’s Petrochemical Industry

By the nature of the process industry characterized by an automated production process, the industry requires only minimal workforce in factory operation and safety management when new investment is made, resulting in less job creation compared to other industries. However, it creates quality jobs, and contributes to revitalizing the economy considering the impact on forward industries in such ways as the hiring of construction workforce during the factory construction and operational phases.

The industry is called “a rice of industry,” supplying essential materials to major industries including automobiles and electronics. In the case of the automobile industry, all auto parts – except for steel, aluminum and glass – are made of petrochemical products. Considering increasing need for light-weight vehicles driven by the transition to electric vehicles, a significant portion of interior as well as exterior materials and components are adopting high-performance plastics. Also, in the electronics and electrics industry, petrochemical products are widely used, due to the excellent insulating properties of petrochemical products. First of all, electricity can be supplied thanks to the insulating properties of PE and PVC wrapping copper and aluminum. In all electronics products such as refrigerators, washing machines, televisions, air conditioners, audio, computers, laptops, and mobile phones, most parts and exteriors – except for metal parts required for electrification – are made of petrochemical products.

The development of high-tech industries including IT, BT, and NT is not possible without support from the petrochemical industry. The more high-tech industries become, the more vital the role of the petrochemical industry becomes. Moreover, the petrochemical industry has been utilized for materials of drones and 3D printers since the emergence of the Fourth Industrial Revolution, leading the transition of forward industries toward high-tech industries.

Trends and Prospects of Korea’s Petrochemical Industry

Korea’s petrochemical industry has continued to record great performance in the past four years thanks to growing global demand and low oil prices, despite heightened trade protectionism and slowing growth in China, which is Korea’s main export destination. The production capacity of Korea’s petrochemical industry has continued to rise thanks to the improvement of process efficiency and facility expansion, building on the world’s 4th largest production capability. In response to the shortage in global supply, it has operated facilities at maximum capacity, continuously increasing production of products across-the-board.

However, the industry has been slowing down due to the recent increase in oil prices, slowing global demand stemming from the prolonged U.S.-China trade dispute, and growing supply by competitors like the U.S. and China. The growth of Korea’s petrochemical industry has been led by exports due to sluggish domestic demand. However, an increased self-sufficiency rate and slowing growth in China, which is a main export market, and intensified competition due to increased supply from the Middle East and the U.S. have weighted on the industry’s growth momentum.

The U.S. has pushed for the creation and expansion of natural gas (ethane) facilities based on low-price shale gas since 2008, affecting global markets including Korea based on price competitiveness. Also, China’s government has fostered the petrochemical industry intensively since 2011 to improve global competitiveness and self-sufficiency rate. It has moved towards qualitative growth with large-scale restructuring, M&A, and the Manufacturing 2025 strategy.

When it comes to global supply and demand of the world’s petrochemical products, the growth of supply is expected to surpass that of demand up until 2023, driven by facility expansion in the U.S. and China, inevitably decreasing the operation ratio and profitability. The most important variable in the competitiveness of Korea’s petrochemical industry is likely be oil prices.

Future Plans of Korea’s Petrochemical Industry

The petrochemical industry is a large-scale process industry to which economies of scale apply. The higher the production capacity, the higher the reduction in fixed costs, including costs required for infrastructure construction, facility operation, and labor. In addition, it becomes possible to produce various products utilizing small-scale by-products, resulting in the generation of added-value. As such, the synergy effect and price competitiveness can be improved. To maintain competitiveness in the global market, Korea’s petrochemical companies have acknowledged that they need to respond through scale and connectivity by possessing the largest production capability possible. Based on such judgement, they have made a series of investment plan announcements building on positive performance in the past few years, upping the forecast of domestic ethylene productive capacity from 9.255 million tons in 2018 to 14.03 million tons by 2023.

<Picture 3> Forecast of Korea’s Ethylene Production Capacity

The petrochemical industry already announced their plans to make large-scale investments worth KRW 14.5 trillion and create more than 1,600 jobs by 2023 to build or expand large-scale petrochemical equipment and plants including NCC in December last year. At the same time, they suggested to the government that they are willing to make further investments if problems like sites for investment and lack of infrastructure are resolved. The Ministry of Trade, Industry and Energy (MOTIE), understanding the industry’s difficulties, established a “Petrochemical Investment TF”, a joint body of the government and private sector, to resolve the difficulties raised throughout the investment phase and check on the implementation status. This cooperation between the private sector and the government is expected to facilitate the resolution of problems the industry is faced with.

<Table 1> Investment Plans by Major Korean Petrochemical Companies

(Unit: KRW trillion, No.)

Investment Plans by Major Korean Petrochemical Companies
Employees Main Contents Location Period
A 5.0(5.0) 400 NCC Ulsan 2019~2023(tentatively)
B 2.7(2.7) 300 NCC Daesan 2018~2021
C 2.7(2.7) 500 NCC Yeosu 2018~2021
D 2.6(2.6) 300 NCC, Synthetic resins Yeosu July 2018-June 2021
E 0.9(0.4) 35 NCC, Synthetic resins Daesan May 2017-2019
F 0.7(0.5) 70 NCC, Butadiene Yeosu May 2018-2020
G 0.4(0.2) 40 Synthetic resin, intermediate materials Yeosu, Ulsan May 2017-2019
H 0.3(0.1) 10 Synthetic resin, others Yeosu 2017~2020
I 0.3(0.3) 30 Synthetic rubber, others Yeosu, others Jan 2018-2021
Total 15.6(14.5) 1,685
* Based on total investment amount ( ( ) refers to total investment since 2019)

Also, petrochemical companies are aggressive in expanding R&D to turn general-purpose basic materials of petrochemicals into high value-added materials. The share of R&D in revenues of LG Chem, Korea’s leading petrochemical company, is similar to that of major global companies. Other petrochemical companies are also active in making R&D investment based on good performance in the past few years. In line with the industry’s efforts, the government has been stepping up support for the development of high-performance chemical materials. It also pushes for attracting global companies possessing core technologies and securing advanced technologies in cooperation with foreign research centers. It also endeavors to improve the government’s standards on certification of products made of chemical materials, thereby facilitating commercialization and expansion of high-performance specialized products.

The attractiveness of Korea’s petrochemical industry as an investment destination is likely to increase by taking on a two-track strategy: increasing production capacity through the enlargement of facilities; and expanding R&D on high-value chemical materials.

General Manager, Choi Hong-jun (hjchoi@kpia.or.kr)
Industrial Research Division/ Korea Petrochemical Industry Association

< **The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA. >

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