Analysis: Hyundai crosses 1st milestone on a long journey

04 February 2003 01:30  [Source: ICIS news]

SINGAPORE (CNI)--The signing of an agreement by an LG Chem and Honam Petrochemical consortium to buy the debt-distressed Hyundai Petrochemical late last week brought to an end only the first episode of a saga that is likely to drag on.

The point is that even though the South Korean industry now looks likely to achieve an important consolidation, the issues that still have to be resolved are how the Hyundai assets would be run by LG and Honam, whether the Daesan complex can be truly globally competitive, what would be the effect on the workers at the site, and feedstock supply.

The deal is subject to formal approval from the Hyundai creditor committee, and from regulatory authorities. Completion is expected by the end of H1 this year.

At least for the short term, the always tricky issue of management control appeared to have been resolved as sources indicated that it would be LG who would assume control of a joint venture that it plans to establish with Honam.

However, the joint-venture company may exist only for a short while.

In the longer term, the company could be dissolved and the Hyundai assets divided up between LG and Honam on the lines of their core competencies.

CNI's sister publication ACN understands that LG could in the long run take charge of one of the two crackers at the site and the 390 000 tonne/year styrene plant, with Honam operating the other cracker, the 375 000 tonne/year monoethylene glycol (MEG) facility, 500 000 tonne/year of polypropylene (PP) and 655 000 tonne/year of polyethylene (PE).

On the surface, this makes sense as LG's core activities include acrylonitrile butadiene styrene (ABS) and polyvinyl chloride (PVC). In 2000, LG acquired Hyundai's PVC and vinyl chloride monomer (VCM) assets, both of which are 200 000 tonne/year.

For Honam, it would be left with a total MEG capacity of 775 000 tonne/year, with Samsung General Chemicals - its only domestic competitor - that has a capacity of only 110 000 tonne/year.

Honam's PP capacity would rise to 778 000 tonne/year from 500 000 tonne/year.

It currently has 337 000 tonne/year of hdPE, added to which would be a further 220 000 tonne/year of hdPE, 275 000 tonne/year of ldPE and 160 000 tonne/year of lldPE.

But beneath the surface, carving up the assets in this way is fraught with disadvantages and complications.

Economies of scale of the two crackers would be less than if the crackers were run together.

Also, each of the crackers is linked to polyolefins and styrene units. Honam could finish up paying LG for ethylene and vice versa.

One analyst suggested last week that the companies could be facing investor pressure to stick to their self-avowed core competencies at the expense of economic logic.

'A way round the problem would be to keep the joint venture together and divide the earnings up based on who takes charge of which assets,' the analyst added.

A source familiar with the Daesan site added that a study needs to be conducted into shifting Hyundai's PE and PP production to more speciality grades.

'Because it has been on a debt treadmill and has therefore had no capital available for investing in technology, Hyundai has been competing toe-to-toe with the Middle East on commodity grades and has been losing out.

'If the complex is to be genuinely globally competitive, investment in higher-end grades is needed,' he said.

Around 50% of polymer production is currently exported by Hyundai, most of which goes to the China market.

Honam is to carry out a study into what grades need to be produced at Hyundai.

Job losses at Daesan are not expected to be substantial because manning levels are already fairly low.

However, some marketing staff may have to go, with the opportunity for the transfer of some of the Hyundai team to an expanded technical services. Technical services would need to be expanded if more speciality grades are produced.

Sister company Hyundai Oil Bank used to supply 50% of Hyundai Petrochemical's naphtha. However, supply was cut off in 2002 due to non-payment of bills.

A verbal agreement has been reached for resumption of supply. However, a formal agreement, which has been under discussion since late last year has yet to be signed, ACN understands.

The extra freight costs being incurred are undermining Hyundai's economics.

Another complication is that LG and Honam have acquired synthetic rubber assets - 40 000 tonne/year of butadiene rubber and 16 000 tonne/year of nitrile butadiene rubber - that the companies have no long-term interest in retaining.

The signing of the Won1.74trn (($1.45bn/Euro1.33bn) deal, though, is a relief for the creditors.

Of the total amount, Won1.4trn comprises Won600bn of cash upfront with a further Won800bn that LG and Honam would need to borrow from banks. This amount would then be paid to the creditors.

In addition, the consortium have agreed to meet Won340bn of liabilities which are due over the next five years.

The companies had asked for Won600bn of Hyundai's debt to be written off when negotiations began last year.

The creditors have agreed to write off this amount.

As of last year, Hyundai's outstanding debt was placed at Won2.3trn.

If you subtract the Won600bn write-off plus the Won340bn which LG and Honam have agreed to pay, this would still leave liabilities of Won1.36trn.

It was unclear last week as to what happened to this debt.

What was crystal clear, though, was that LG/Honam is to acquire the assets at a much lower price than an independent valuation, which had placed their worth at Won3.3trn.

LG and Honam also need to pay a further Won200bn in fees to Goldman Sachs, finanical adviser to Hyundai and JPMorgan, LG and Honam's financial adviser.

(With additional reporting by Iqbal Anand)


By: John Richardson
+65 6780 4359



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