Government Approves Petrochemical Restructuring 'Daesan Project No. 1'... Rolls Out 2.1 Trillion Won Support Package (Comprehensive)

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The petrochemical industry, which is facing a structural crisis due to worsening oversupply, weakened cost competitiveness, and a lack of high value-added products, has entered a full-fledged restructuring phase. The government has approved the "First Petrochemical Industry Business Restructuring Project," centered on suspending operations of Lotte Chemical's 1.1 million-ton naphtha cracking center (NCC) in Daesan, and decided to implement a comprehensive package worth more than 2.1 trillion won, combining improvements in finance, taxation, costs, and licensing. This is the first case of implementation since the restructuring roadmap was announced last year.

The Ministry of Trade, Industry and Energy announced on the 25th that it has finally approved the business restructuring plan submitted by HD Hyundai Oilbank, HD Hyundai Chemical, and Lotte Chemical at the Meeting of Ministers for Economic Affairs and the Ministers' Meeting on Strengthening Industrial Competitiveness, presided over by Koo Yooncheol, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance. The government defined this measure as "the first case of preemptive and voluntary restructuring to respond to a structural crisis across the industry, rather than ex post restructuring of individual companies."

The core of this first project is not simple production cuts. Lotte Chemical's Daesan plant will be split and merged with Hyundai Chemical to establish an integrated entity, and one 1.1 million-ton NCC facility will be shut down for three years. Ethylene production capacity within the Daesan industrial complex will be reduced from 1.95 million tons to 850,000 tons. However, the strategy is to raise the operating rate of the remaining facilities from the current 80% level to 100% to lower the fixed-cost burden and restore unit cost competitiveness.

The government is placing more emphasis on "which facilities are reduced" than on "how much is reduced." An official from the Ministry of Trade, Industry and Energy explained, "The criterion for restructuring is not volume but competitiveness," and added, "The principle is to reduce low-efficiency facilities, switch to high-efficiency facilities, and thereby improve profitability." Regarding why the facility to be shut down is Lotte's NCC, the official said, "As a result of evaluating overlapping facilities and efficiency on a project basis, the facility with relatively lower competitiveness was suspended."

Downstream facility reductions are expected to be carried out step by step, focusing on commodity and loss-making products. However, as product supply and demand conditions are fluid, specific volumes and facilities will be finalized during the implementation process. On the relationship with the industry's voluntarily proposed reduction target of 2.7 million to 3.7 million tons, the government drew a clear line, saying, "Those figures are not government targets, and a simple additive approach is not appropriate."

The integrated entity is focusing not on simple restructuring but on transforming its business portfolio. It plans to increase the share of high value-added products such as high-elasticity lightweight materials for power cables and wires and organic solvents for secondary battery electrolytes, while simultaneously pursuing an eco-friendly transition by introducing bio naphtha and ethane to reduce carbon emissions by up to 50%. It also plans to enhance operational efficiency by vertically integrating refining and petrochemicals to manage feedstock procurement, production, and sales in an integrated manner.

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Another feature of this restructuring model is that policy finance is matched to companies' self-help efforts. HD Hyundai Oilbank and Lotte Chemical will each inject 600 billion won in new capital, for a total capital increase of 1.2 trillion won. In response, the creditor group has prepared a plan to provide up to 1 trillion won in new funds and to convert up to 1 trillion won of existing loans into perpetual bonds. Including a grace period on repayment and the maintenance of financial terms for approximately 7.9 trillion won in existing agreement-based debt, the financial stabilization mechanism is described as being worth up to 9.9 trillion won.

The government described this as "a structure in which companies and creditors are betting together." The size of support is determined by assessing the scale of self-help efforts and the sustainability of the business plan, and the model is explained as one that secures time for structural transformation rather than merely providing temporary liquidity support. It was also made clear that if self-help efforts are large, support can be expanded, and conversely, if they are small, support can be reduced.

Tax and cost support are also included. Acquisition tax and registration license tax will be reduced by 75% to 100%, corporate tax deferrals will be expanded, and the limit on the deduction of loss carryforwards will be raised. By designating Daesan as a distributed energy special zone, electricity rates will be cut by 4% to 5% compared with Korea Electric Power Corporation, and regulations on overlapping supply of heat (steam) will be eased. The scope for direct imports of liquefied natural gas (LNG) for fuel use will be expanded, and the extension of zero tariffs on naphtha and crude oil will be implemented in parallel. The cost reduction effect is estimated at between 69 billion and 115 billion won over three years.

However, discussions are continuing over the extent of the electricity rate cuts. In response to criticism that there is a gap between the level requested by companies and the special-zone rate reduction, the government said it is consulting with relevant ministries on the possible introduction of additional systems such as time-of-use tariffs and regionally differentiated tariffs. Issues of fairness with other industries such as steel are also being discussed.

Kim Jeonggwan, Minister of Trade, Industry and Energy, is attending and speaking at the Economic Ministers' Meeting and the Ministers' Meeting on Strengthening Industrial Competitiveness held at the Government Complex Seoul in Jongno-gu, Seoul on February 25, 2026. Photo by Cho Yongjun

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With the approval of the first project, follow-up restructuring plans are also expected to accelerate. A total of five business restructuring plans were submitted to the Ministry of Trade, Industry and Energy at the end of last year, and excluding the first Daesan project approved this time, four plans are about to submit their detailed proposals. In the Yeosu industrial complex, Yeochun NCC is preparing a detailed plan, and a potential joint venture between LG Chem and GS Caltex is also being discussed. In Ulsan, SK Geocentric, Daelim Industrial, and S-Oil are engaged in related discussions.

The industry believes that a significant portion of uncertainty has been resolved as the structure of government support has become more concrete. The support structure, which combines repayment deferrals and maintenance of financial terms with capital enhancement, is being evaluated as having served as a "buffer" for companies with heavy financial burdens. As a result, there are expectations that detailed restructuring plans are likely to be submitted one after another.

However, the fundamental causes of the crisis in the petrochemical industry have not been resolved. Concerns are being raised that if global demand remains sluggish and oversupply caused by large-scale capacity additions in China continues, the effect of improving financial structures could be limited. Critics also point out that if fundamental structural reforms and a shift toward high value-added products do not lead to tangible results, this could end up as a one-off measure.

Eom Chanwang, Vice Chairman of the Korea Chemical Industry Association, said, "Only when private-sector self-help efforts and effective government support go hand in hand can we overcome the structural crisis," and added, "We hope that this approval will serve as a catalyst for the spread of restructuring."

Minister of Trade, Industry and Energy Kim Jeonggwan said, "The first Daesan project is the first execution outcome derived through cooperation between the government and the industry," and added, "We will swiftly push ahead with follow-up business restructuring to restore the competitiveness of the petrochemical industry."

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