Projects: Mood is positive for South Korea petrochemicals

03 January 2011 00:00  [Source: ICB]

South Korea gets the "supercycle" bug and announces significant new projects

One just has to hope it doesn't all end in tears as it has done so often before following periods of overinvestment.

But for the time being at least, confidence could not be higher in the South Korean petrochemical industry. This has led to a trickle of project announcements to take advantage of the growing consensus that a petrochemical supercycle of profitability is on the way.

Take a November report from South Korea-based Shinhan Investment as an example of this widespread confidence. It talked about local companies being poised to ride strong worldwide growth catalysts that would enable them to "leapfrog into the global league."

Thus, South Korea is set to raise its ethylene and propylene capacities by 700,000 tonnes/year and 740,000 tonnes/year respectively by 2013, said Seo Kyung Sun. She is executive director of the consulting business of Seoul-based consulting and data analysis service Chemical Market Research.

South Korea's current ethylene nameplate capacity stands at 7.6m tonnes/year, with Yeochun Naphtha Cracker Center (YNCC) the country's biggest cracker player, added Kyung Sun.

"YNCC, a joint venture between Daelim and Hanwha Chemicals, has expanded ethylene capacity by 50,000 tonnes/year in 2010 and will add a further 300,000 tonnes/year in 2012. All the additional ethylene will be for export," she said.

Honam Petrochemical is scheduled to raise its ethylene capacity by 250,000 tonnes/year in 2012 while also increasing high density polyethylene (HDPE) capacity by 250,000 tonnes/year, she continued. And LG Chem is due to expand ethylene by 100,000 tonnes/year in 2011.

The country's current propylene capacity is 5.7m tonnes/year, with expansions set to come via steam cracking (410,000 tonne/year) and fluid catalytic cracking (330,000 tonne/year), said Kyung Sun.

Honam will use its additional propylene output to add to 200,000 tonnes/year of polypropylene (PP), she added.

Other expansions include a 300,000 tonne/year ethylene-based polyvinyl chloride (PVC) project in China by Hanwha. This was due to be brought on stream in the fourth quarter (Q4) of 2010.

Just a couple of years ago, when China was a net exporter of carbide-based PVC, expansions by the ethylene players would have been much harder to justify. But structural changes in the chlor-alklali-to-carbide-based industry in China demonstrate how radically and rapidly petrochemicals markets can shift - opening up major new opportunities.

Global PVC capacity totals 40m tonnes/year, with China accounting for around 20m tonnes/year of this, according to Maggie Zhu, markets analyst for chlor-alkali and PVC at research and analysis company CBI China. Shanghai-based CBI is part-owned by ICIS.

"Capacity is a great deal more than demand, and so operating rates are, as a result, at only 60-70%," she added.

Coal and electricity prices have increased, which has put pressure on the less competitive producers, forcing their operating rates down. This has resulted in greater volumes of ethylene-based vinyls imports.

A lot of local-industry consolidation has already taken place. In 2007, the average size of PVC plants was 100,000-120,000 tonnes/year, and now it is 200,000-300,000 tonnes/year, Zhu added.

There are plenty of smaller plants still around, though, with capacities of as little as 15,000-20,000 tonnes/year.

Those most vulnerable to further restructuring appear to be the eastern coastal producers, which still lack sufficient scale in chlor-alkali-to-carbide-based PVC.

Coastal chlor-alkali-to-carbide players are also a long distance from coal supplies and lack common ownership with coal mining and power-generation companies.

Honam completed its acquisition of Malaysia-based Titan Chemicals in December, and has confirmed it is examining expansion of Titan's upstream and downstream capacities in Pasir Gudang, Malaysia.

There are also unconfirmed reports that Honam is considering building a grassroots cracker in Indonesia. This would help provide ethylene to PT Titan, the Indonesia-based polyethylene (PE) producer that Honam also acquired as part of the Titan deal.

Honam has indicated that it might expand further overseas as it attempts to take full advantage of this new-found confidence in petrochemicals.

South Korea, quite brilliantly at times through its sales and marketing excellence, knows how to make money from this business. Financial results from this year provide ample evidence of this.

So perhaps its producers will emerge as winners if all the ­supercycle hype turns out to be justified.

By: John Richardson
+65 6780 4359

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