Home Blogs Asian Chemical Connections South Korea may have to shut 48% of its PP capacity in 2024-2030 to return to healthy operating rates

South Korea may have to shut 48% of its PP capacity in 2024-2030 to return to healthy operating rates

China, Japan, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, South Korea, Sustainability
By John Richardson on 07-Jan-2024

By John Richardson

AS THE NEW YEAR begins, I continue to feel as liverish so far in 2024 as I did in 2023 about what I see as complacency regarding the challenges faced by the petrochemicals industry.

The reason is that at the back end of last year, I had several calls with contacts who reiterated their view that there was nothing new in recent events. They insisted that the downturn was no different from anything we had seen before.

“A lot of new capacity came on-stream during 2007-2008, around the time of the Global Financial Crisis, and this was quickly absorbed. I don’t see why this period will be any different. Granted, this is a longer trough, but it will probably be over by the end of this year,” was a typical comment.

The problem with these kind of views remains the data. All the data (and I really do mean all the data) suggest something much more profound is taking place, even assuming what I see as quite robust ICIS demand growth forecasts for 2024-2030.

I believe we should stop talking about what’s happening today as a trough as this is not a trough. We are instead seeing a secular shift in markets, the biggest since the early 1990s.

As with my chart on global ethylene demand as percentages of capacity between 1990 and 2030 – which I posted on LinkedIn on 21 December – the story is the same in polypropylene (PP), as you can see from the chart below.

Between 1990 and 2023, the ICIS Supply & Demand Database assesses that global PP demand as a percentage of capacity was at an annual average of 89%. But in 2024-2030, we see this declining to 81%.

On the comment above regarding 2007-2008, ICIS does not believe that those two years were particularly bad.

In 2007, global PP demand as a percentage of capacity was at around 94% (93.6% to be exact), close to its record high of exactly 94% in 1996. And in 2008, the percentage of demand over capacity only fell to approximately 87%.

Wilkins Micawber, a character in the great Charles Dickens novel, David Copperfield, is famous for the quote, “Something will turn up”. This has become synonymous with anyone living in hopeful expectation of events beyond their control turning out alright in the end.

Lots of positive things did turn up from 1992 until late 2021, as I discussed in my 7 December blog post. But the same post, summarised in the slide below, highlighted why petrochemicals producers can no longer passively sit back and expect that events will continue to automatically turn out in their favour.

South Korea and the end of the Old Normal

South Korea’s right to play in the global petrochemicals business very heavily depends on its ability to export most of its production. Using PP as an example again, an average 69% of South Korea’s production was exported between 2000 and 2023.

Proximity to China has been one of South Korea’s advantages, along with good integration between refineries and petrochemicals. But South Korea imports all its oil and gas as it has no local hydrocarbon reserves.

The country, though, has successfully negotiated free trade deals with China, ASEAN and the US that provide tariff-free access for its PP exports.

South Korea’s PP business did extremely well under the Old Normal. This involved booming Chinese demand, big China imports and no competitive threat from crude-oil-to-chemicals (CTOC).

Sustainability pressures also used to be a great deal less than they are today. Ageing populations and the climate crisis didn’t used to be major drags on global economic growth.

But last year may have been the last year during which the Old Normal pretty much applied.

South Korea’s PP exports in January-November 2023 when annualised (divided by 11 and multiplied by 12), suggest that the country’s full-year exports will total around 3.1m tonnes.

This would compare with 2022 exports of 3.5m tonnes. Hence, we estimate that the country’s PP operating rate fell to 73% in 2023, the lowest since way back in 1982.

But a decline to 3.1m tonnes of exports could be nothing compared with the falls in overseas trade that lie ahead.

What South Korea successfully did in 2023, as the table below tells us, is diversify its PP exports away from China where self-sufficiency has of course greatly increased.

South Korea managed to reduce its reliance on China by five percentage points, which was replaced by a doubling of exports that went to Turkey and a 3% increase in shipments to Europe. In terms of actual tonnes, South Korea’s exports to Turkey look set to have increased by about 70%.

And whereas its share of the Southeast Asian market fell by four percentage points (maybe no bad thing given the region’s weak netbacks versus none-Asian destinations), it held its share of the North and South American markets at 9%. This was no mean feat given rising US capacities on advantaged propane feedstocks.

Still, though, with 2023 exports to China looking set to be down by some 200,000 tonnes versus 2022, South Korea’s year-on-year sales losses in the China market are likely to have been big.

This is the latest in a series of charts I’ve been providing since June last year.

The charts involve calculating average CFR China PP prices for the grades listed above multiplied by imports reported by China from its trading partners. I then take 2023 sales estimates away from 2022 to work out potential losses in millions of dollars.

South Korea saw an estimated $372m lower sales in January-November 2023 versus January-November 2022. This reflected reduced shipments to China, as mentioned above, and lower pricing.

South Korea under the Supermajors scenario

Under the Supermajors outcome detailed in today’s second chart – where the oil-and- gas-to-petrochemicals majors dominate the global petrochemicals business by 2030 – China is at risk of losing much of its right to play in the global PP market.

Plants on a much bigger individual scale than have been built before would be constructed, especially those employing the COTC technologies being developed by Saudi Aramco.  They would thus have excellent economies of scale.

The total volume of capacity added would also be huge. Today’s first chart may well not include many projects that have yet to be formally announced. In other words, demand as a percentage of global PP capacity in 2024-2030 could be lower than the ICIS forecast of 81%.

Further, the motive behind Aramco’s COTC investments is not just about making money from petrochemicals. Because of electrification of transport, biofuels and increasing fuel efficiency, Saudi Arabia runs the risk of being forced to leave its most-valuable asset in the ground permanently, unless it makes a lot more petrochemicals.

This raises important questions about the future value of a tonne of petrochemicals. Petrochemical markets could be partly shaped by the alternative value of leaving a barrel of oil in the ground for good. This alternative value is zero.

I believe that a battle over carbon emissions assessments is also taking place. The battle will continue regardless of whether we end up in a Supermajors or Deglobalisation world.

Under Supermajors, South Korea might lose the carbon battle to Saudi Arabia where investments in renewable energy are big. Renewable energy can, of course, be used to run petrochemicals plants.

Saudi Arabia is also said to have excellent carbon and capture and storage (CCS) economics because of favourable geology – and again because of plenty of investment dollars to make CCS viable.

The EU may extend its Carbon Border Adjustment Mechanism (CBAM) to organic chemicals and polymers by 2030 in order to create a level playing field for local producers, who have to take part in the EU’s carbon trading scheme.

Under the CBAM, a sliding scale of costs would be applied to exporters to Europe based on their carbon emissions per tonne.

As the tables on South Korea’s five biggest PP export markets tell us, Europe ranks third.

Given the financial problems facing South Korea’s PP industry, along with its lack of investment muscle relative to Saudi Arabia, South Korea may struggle to compete in Europe if the CBAM applies to PP (again assuming we see the Supermajors outcome).

China was the biggest export destination for South Korean PP in 2022 and 2023. Under either Supermajors or Deglobalisation, I believe that China will become pretty much entirely self-sufficient in PP by 2030.

Why South Korea’s PP capacity may have to fall by 3m tonnes in 2024-2030

A Supermajors outcome could therefore force substantial permanent shutdowns of South Korean PP capacity.

Or PP capacity may remain as it is because of the need to maintain other petrochemicals production in integrated complexes, to keep refineries running – and because of financial support from the chaebol. These are the industrial and financial conglomerates to which several of the country’s PP producers belong.

Under this latter result, we could see a long period of low operating rates and poor profitability.

Let’s assume that China becomes pretty much self-sufficient in both homo -and copolymer grades of PP by 2030. Any imports it does require during shutdowns and unexpectedly strong demand could be supplied by the Middle East because of cost advantages and geopolitics.

Let’s next use South Korea’s estimated full-year 2023 exports to China as the basis for what could happen to South Korea’s PP business 2024-2030.

Let’s divide the 2023 exports to China by seven (the number of years between 2024 and 2023) and assume that South Korea’s shipments to China fall to zero by 2030. Let’s then take South Korea’s estimated 2023 exports to all other countries and assume a decline by 50% between 2024 and 2030, again in seven even annual deductions.

South Korea’s PP exports would, as a result, fall to around 1.2m by 2030 from 3m tonnes in 2023.

The chart below presents two scenarios for the impact of this decline in exports on South Korea’s PP operating rates in 2024-2030.

The calculations include our estimates of domestic virgin PP demand minus small quantities of imports and consumption via recycled feedstocks, along with our assessments of local capacity.

If South Korea kept all its PP plants open, 2024-2030 operating rates would, based on the above calculations, average just 58% compared with 94% in 1990-2023. Profitability would obviously be very poor.

Or South Korea may permanently close an annual average of 430,000 tonnes/year of capacity – a total of 3m tonnes/year or 48% of capacity as of 2023. 2024-2030 operating rates would average a healthy 85%. The industry would obviously be a lot smaller and perhaps more niche, focusing on higher-value grades.

What happens in South Korea’s PP industry could also happen in polyethylene (PE) where South Korea is also heavily dependent on exports.

Conclusion: Companies need to set their own destiny

Petrochemicals are vital for South Korea as they support a lot of local downstream employment and economic value addition in industries such as autos. Petrochemical companies, the chaebol and the government may thus decide that “local for local” matters.

We may also see regional trading-blocks as part of the Deglobalisation scenario, accompanied by new tariff and non-tariff trade barriers.

It can be argued that recycling mandates will struggle to be achieved in a Supermajors world of potentially very long virgin polymer markets. This could be another reason why legislators support more local for local supply chains.

And as mentioned above, South Korea’s PP producers can reinvent themselves by focusing more on niche grades, especially if the grades are linked with sustainability.

In other words, a great deal of anti-Micawberism is required. The South Korean PP industry can shape its own destiny. As always, we are here to help South Korean companies achieve the right strategies.