"Petrochemical Restructuring to Have Limited Impact on Stock Prices"

▲Hyundai Oilbank Refinery Plant View

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The government has taken its first step toward restructuring the petrochemical industry. While the stock market responded positively due to expectations of increased competitiveness, the long-term outlook remains bleak. Hyundai Motor Securities, in its report titled "The First Step of Restructuring. However, Risks Include Electrification and Deglobalization," stated that "expectations should not get ahead of themselves," and maintained a Neutral view on the refining and petrochemical sectors.

In the past, Korea's petrochemical industry grew significantly thanks to globalization, operating under the structure of "Korean intermediate goods → Chinese finished products → final consumption in the US." The stock market also saw the rise of the so-called "Auto-Chem-Refining" (Automobile, Chemical, Refining) rally in the 2010s. However, in recent years, China has shifted toward a domestic demand-driven economy, and the US has been pushing for the relocation of major production facilities back to its own soil, making it difficult to maintain the previous trade structure.

Domestic demand is also declining. Domestic demand for ethylene, the basic raw material for petrochemical products, began to decrease as early as 2021, and last year, it fell by another 3.4% year-on-year to 4.24 million tons. Last year, demand for synthetic resins also dropped by 7.4% year-on-year to 5.49 million tons. While Japan, with a population of 120 million, consumes 5 million tons of ethylene annually, Korea, with a population of 50 million, consumes 4.24 million tons per year.

In response, the government held a meeting on August 20 to strengthen industrial competitiveness, announcing the "three main directions for restructuring": ▲reducing excess capacity and shifting to high-value specialty products, ▲securing financial soundness, and ▲minimizing the impact on regional economies and employment. As a result, ethylene production capacity will be reduced by 2.7 to 3.7 million tons in the future. The government also plans to establish, by the end of the year, a business restructuring plan that includes measures to strengthen competitiveness through a shift to high-value-added and eco-friendly products, as well as improvements to financial structures.

Given the declining domestic population, demand for ethylene for domestic use is expected to continue decreasing in the long term. Even if domestic production facilities are restructured and output is reduced, the export dependence of major petrochemical products is expected to increase. However, the global market environment is also challenging. Self-sufficiency rates in China and Southeast Asia have risen, and the cost competitiveness of integrated refining and petrochemical facilities in oil-producing countries is difficult to match.

Kang Dongjin, an analyst at Hyundai Motor Securities, commented, "The government's restructuring plan is significant as it marks the first step in the restructuring of the petrochemical industry, but it will not be easy for domestic companies to visibly improve their competitiveness or profitability in the short term." He added, "It is also important to consider the potential accounting issues arising from the realization of asset values during the closure or integration of facilities, and not only the current reduction in production capacity but also the possibility that further reductions may be necessary."

Meanwhile, it should be noted that about 50% of global oil demand comes from transportation, such as automobiles. As the adoption of electric vehicles accelerates, it is highly likely that the expansion of petrochemical production will be prolonged as an alternative to declining oil demand. Earlier this year, Sinopec in China stated, "The Chinese government is encouraging increased production of chemical products in response to declining domestic fuel demand." Analyst Kang Dongjin also noted, "It will take time for Korea to secure competitiveness in specialty products, except in certain areas," and added, "Moreover, the sharp rise in electricity prices is also a burden, so expectations should not get ahead of themselves."

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