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South Korea petrochemicals: Challenges and opportunities

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By John Richardson on 04-Jun-2024

SOUTH KOREA, as is the case in China, is facing major demographic challenges. Demographics can amount to economic destiny without the right corporate strategy and government-policy adjustments.

Boosting South Korea’s exports will thus be the key to maintaining healthy GDP growth in South Korea, according to Professor Cho Young-tae of the Seoul National University. He wrote in a recent presentation:

  • The critical challenge for the South Korean economy is the continuing decline in the potential growth rate. The OECD estimates that South Korea’s potential growth – the rate at which the economy can grow without inflation – will decline to 1.7% this year. This is largely due to demographics. South Korea’s population has begun declining and is expected to fall from 37.4m in 2020 to 24.2m in 2050.

In 2023 around 230,000 babies were born in South Korea —less than a quarter of birth levels during the 1970s. South Korea has the world’s lowest fertility rate, which is the average number of children a woman will have in her lifetime. It recorded a rate of 0.72 in 2023 – down from 0.78 the previous year.

Petrochemicals by themselves are the country’s fourth-largest export sector. But if you add in refining, then refining-petrochemicals moves to second place behind only semi-conductors and ahead of autos.

It makes sense to combine refining and petrochemicals because crude oil could increasingly be turned into petrochemicals. This would be to compensate for the decline of growth in oil demand resulting from the rise of electric vehicles, biofuels and increasing fuel efficiency.

China has entered an era of lower GDP growth and therefore petrochemicals demand growth during a time when it is pushing hard towards much greater petrochemicals self-sufficiency.

Only minor changes to the ICIS base case assumptions compared with what would have been required just three years ago – during an earlier period of higher growth and lower capacity additions – produce scenarios of high levels of self-sufficiency in polypropylene (PP), polyethylene (PE), paraxylene (PX) and ethylene glycols (EG) by 2030.

I am not saying that China will be close to self-sufficient in these products by 2030. It could be that demand growth surprises on the upside and/or projects are delayed, leaving China as a major importer. And our base cases anyway suggest continued big volumes of imports up until 2030.

But it is essential that South Korean companies have a plan if greater-than-expected self-sufficiency were to happen. This should involve diversification to other export markets, improving cost efficiencies and the old corporate slogan of value addition through, I believe, focusing on sustainability. More on these themes later.

Firstly, though, let us narrow the lens to the “here and now” by using PP as an example. The table and chart below crystallise the challenges that South Korea faces.

In 2023, 23% of South Korea’s total PP exports of 3.1m tonnes went to China. China may by 2030 by just about balanced in homopolymer grades of PP. Some contacts suggest that by that date, China could also be significantly closer to self-sufficiency in copolymer grades.

Also note that 20% of South Korea’s PP exports went to Southeast Asia (SEA) in 2023 with 61% of this sub-total going to Vietnam. Vietnam has free-trade agreements with South Korea, China and the rest of ASEAN. Competition in Vietnam, SEA’s biggest PP import market, seems likely to remain intense.

The good news – as the chart above the table shows – is that South Korea’s PP export exposure to China as a percentage of its production has fallen since 2021. But total exports as percentages of production have risen since 2022.

Consolidation a possibility

The long ICIS history of reporting on and analysing the South Korean refining-petrochemicals business included my coverage of a series of Petrochemical Big Deals (mergers and acquisitions) promoted by the government during the late 1990s Asian Financial Crisis.

These deals included the creation of Samsung-Total Petrochemicals which later became Hanwha TotalEnergies Petrochemical.

Today’s challenges are much greater than during the 1998-1999 Asian Financial Crisis. Back then the extraordinary boom in Chinese petrochemicals demand driven by globalisation – as China became the workshop of the world – had only just begun. Now, as mentioned earlier, I believe that the China boom is over.

The BusinessKorea newspaper reported on 15 May that South Korea’s government had launched “all out efforts” to help restructure South Korean petrochemicals which is “groaning under China’s price war”.

The Ministry of Trade, Industry and Energy (MOTIE) was said to be working on a restructuring plan to be announced by the end of June.

Short-term measures reported to be under discussion included the extension of duty exemptions on imported naphtha and crude oil for naphtha production.

Japan might prove a template for the future direction of South Korea. As McKinsey wrote in a December 2023 report on South Korea’s economy and its refining-petrochemicals and other industries:

“Fuel consumption [in Japan] declined due to various reasons including an ageing population, improved automobile fuel efficiency, and the shift to EVs.

This caused a deterioration in the soundness of the refining industry and led to large-scale, industry-wide restructuring. Through mergers and acquisitions and business reorganisation, Japan’s refineries were restructured from 17 to five, and outdated refineries were closed or converted into production facilities for specialty chemical products.”

In 2000, South Korea’s refining capacity was 52% of Japan’s. But in 2024, ICIS estimates that South Korea’s capacity will have expanded to 115% of the Japanese total.

We can see similar patterns in ethylene and propylene capacities:

  • In 2000, South Korea’s ethylene capacity was 5m tonnes/year compared with 8m tonnes/year in Japan. In 2024, ICIS estimates South Korea’s capacity at 13m tonnes/year compared with 7m tonnes/year in Japan.
  • South Korea’s propylene capacity in 2000 was 4m tonnes/year over 6m tonnes/year in Japan. ICIS this year expects South Korean capacity of 11m tonnes/year versus 6m tonnes/year in Japan.

“Japan is the world’s oldest society; 30% of the population is over the age of 65. South Korea has half that share. But it is rapidly catching up,” wrote The Economist in its 2 May 2024 issue.

UN population data show that South Korea’s percentage of over-65s will overtake Japan’s in 2050.

Or South Korea might be able to avoid the levels of refining-petrochemicals consolidation that have taken place in Japan if it can at least maintain if not grow exports.

Booming circular and lower carbon markets

Dow Chemical during their Investor Day in May estimated that by 2050, circular (from recycled feedstocks) and lower-carbon PE could account for around 50% of the global market.

More immediately: “We’re starting to see the first signs of the market emerging… What we’re seeing is a market for something like 200 million tonnes of [low carbon chemicals] by 2030,” said Dan Futter, chief commercial officer during the same Investor Day.

“If you compare that with what we would estimate the supply side to be, it is much smaller,” he added.

“That is the largest dislocation in supply and demand that I’ve seen in my 36-year career. This is going to be a fascinating period for us as this rolls forward,” said Futter.

Focusing just on the carbon challenge for South Korea, InvestKorea in 2022 analysis highlighted the scale of the challenges and what is being done to address the challenges.

“The Korean government set its national greenhouse emissions target (40% reduction compared to 2018) in 2030 and 2050 carbon neutrality, with the petrochemical sector aiming to cut 20.2% compared to 2018 levels by 2030,” wrote InvestKorea.

“The petrochemical industry is inevitably a huge CO2 emitter because it uses petroleum as feedstock. It is ranked second among all industries, only after the steel industry, in terms of the amount of CO2 emissions,” added the investment promotion agency.

With an increase in demand and expansion of facility investment, the industry had continued to record increasing emissions at an average annual growth rate of 4%, the agency continued.

However, the petrochemical industry had set its own carbon-neutral target and was accelerating carbon-neutral growth “in order to create opportunities for new businesses and respond to the changing environment,” added InvestKorea.

The agency said that “bold support” from the government would be required to deal with the global expansion of greenhouse emissions trading systems, more stringent environmental, social and governance requirements and carbon border taxes.

The EU’s carbon border adjustment mechanism could apply to organic chemicals and polymers by 2030.

Conclusion: Lessons from History

South Korea was the world’s poorest country immediately after the 1950-1953 Korean War.

By nominal GDP, the South Korean economy was worth ₩2.24 quadrillion (US$1.72 trillion) in 2023. It is the fourth-largest economy in Asia and the 14th largest in the world as of 2024.

“South Korea successfully transitioned to an export-oriented economy and experienced its ‘first S-curve’ (a steep upward growth trajectory) from the 1960s to the 1980s, centred on the heavy and chemical industries,’ said McKinsey in the same report mentioned earlier.

“Since then, the country has achieved its ‘second S-curve,’ leading to what is commonly referred to as the ‘Miracle on the Han River,” a record-breaking phase of industrialisation created by expanding to high-tech and manufacturing industries,” the management consultancy added.

So why not another transition in sustainable energy, refining and petrochemicals?  South Korea’s history clearly shows that this can be done.