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BUSINESS
South Korean Producers Risk Investing Too Much Too Soon In Ethylene Plants
• Corporate rivalry and relaxation of government controls have set the stage for another wave of capacity expansion
Jean-François Tremblay C&EN Hong Kong
Less than five years after making huge investments in ethylene capacity expansions—oversupply-
ing Asian markets and still staggering from $4 billion in losses they collectively endured in 1993—South Korean petrochemical firms are thinking of expanding again. Because plans, even vague ones, have a history of turning into reality in South Korea, foreign chemical executives are taking notice. This time around, however, Korean firms are actively trying to organize developments and prevent another bout of excessive investment.
The producers group Korea Petrochemical Industry Association (KPIA) says four ethylene projects are planned by its members. In addition, Yukong Ltd. told C&EN it is planning a major expansion to come on-line before the end of 2001. Should they materialize, these expansions would amount to a surge in ethylene capacity of 2.1 million metric tons per year by 2001, reaching total capacity of about 6.2 million metric tons. By Korean standards, such growth is modest. Yet this would be enough to put South Korea's petrochemical industry in the same league as that of Japan, a country with three times the population and a much longer industrial history. Japan's ethylene capacity is currently about 7 million metric tons per year.
The basic business rationale for the new projects being considered is that South Korea will be needing fresh supplies of ethylene within two years to serve downstream projects that will be
Samsung's naphtha cracker in Sosan, southeast of Seoul.
coming on-line. Therefore, someone should build a facility soon. The shortage of ethylene in 1997 will reach 250,000 metric tons, estimates Jae Min Lee, Asian petrochemical analyst in the Seoul office of Peregrine, a Hong Kong brokerage firm.
But this being South Korea, things could spin out of control, and the in
dustry could actually end up with as many as six new ethylene facilities and associated downstream operations in the next five years or so. Spurred by their legendary rivalry toward each other, several firms will be vying to fill the projected gap in supply. South Korean business groups, or chaebols, tend to gauge their success in terms of mar-
Korean ethylene
Thousands of metric tons
Daelim Industrial Hanwha Chemical Honam Petrochemical Hyundai Petrochemical Korea Petrochemical LG Petrochemical Samsung General
Chemicals Yukong Ltd.
TOTAL
capacity may Capacity as of December 1996
730 520 440 420 340 600a
500
740a
4,290
increase 45% by 2001 Planned
expansion
300 350
450
400
600 2,100
Estimated completion date
1998 1999-2000
1997
na
1999-2001
Projected capacity in 2001
1,030 870 440 870 340
1,000 500
1,170b
6,220
a Includes 120,000-metric-ton process improvement scheduled to be on-line fourth quarter, b Company would shut down an older plant if this project moves forward, na = not available. Sources: Korea Petrochemical Industry Association, company data
18 JULY 8,1996 C&EN
ket share rather than profitability. Moreover, most petrochemical producers in Korea obtain ethylene from sources within their business group. The only significant exception is Hanwha Chemical, which sources as much as 50% of its ethylene needs from petrochemical producer Yukong Ltd. Whereas Yu-kong is part of the Sunkyong group and Honam Petrochemical belongs to Lotte, all other Korean petrochemical firms belong to business groups that have the same name as theirs.
When the world saw a wave of Korean expansion in the late 1980s and early 1990s, ethylene production capacity there increased from 505,000 metric tons in 1988 to more than 3.2 million metric tons in 1992, according to the Japanese petrochemical market research firm Martech Inc. Downstream facilities were also built, and the extra supply of commodity petrochemical products hit the Asian region at a time of slack demand, hurting profitability in all of Asia. Korean firms suffered most.
Today, the same potent forces that were behind the surge in capacity of the late 1980s and early 1990s are still there: the chaebols' ambitions to become worldscale players in the petrochemical field, their arch-rivalry toward each other, their financial might, and the proximity of Asian export markets. Furthermore, the past year was a good one. Strong regional demand has pushed prices up, and profits have been good. Two further elements needed to spark a reaction have also materialized—a relaxing of government controls and at least one investment announcement by a rival firm.
The South Korean government has a tradition of regulating expansion in the petrochemical industry by imposing bans on investments in naphtha cracking facilities. It was after it completely lifted controls on such investments in 1990 that the bout of overinvestment really got going. But when some firms were brought close to bankruptcy—Korea Petrochemical particularly—the government reimposed the ban on crackers in 1993, but only until the end of 1995. This year, there are no legal restrictions on investment in naphtha crackers.
The second spark required to ignite a wave of Korean petrochemical investment is one investment announcement. About one and a half years ago, long before the ban was lifted, Hyundai Petrochemical said it would build a 450,000-metric-ton-per-year ethylene facility in
Korean ethylene capacity buildup will continue Millions of metric tons 7 1 ' Ί
0 I I I I 1 I I J I I I I I I I 1986 1990 1995 2000
Sources: Martech Inc., Korea Petrochemical Industry Association
the Ulsan area. Today, although Hyundai is still the only group that has firm intentions, KPIA says four petrochemical firms are considering similar expansions.
Actually, more producers are thinking about a resumption in investments in crackers. In total, it is conceivable that up to 2.5 million metric tons of capacity could be added in the next five years, if all the rumors are to be believed, a reasonable thing to do in this country. Yukong is currently drawing up plans to add 500,000 to 600,000 metric tons of ethylene capacity by 2001 in Ulsan, with the higher capacity figure more likely, says Du Keun Chung, general manager of the chemical business planning team at Yukong. At the same time, it would scrap its 170,000-metric-ton-per-year unit built in the 1970s. "Efficiency is too low," Chung says.
Although the plans have not been finalized, the firm is intent on moving forward. "We are 70% sure to build, 30% not sure," Chung affirms. "Actually, we will build. We are just considering the timing, with 1999 the earliest and 2001 the latest." Illustrating both the ambition and the competitive outlook of Korean firms, he says: "Yukong is a big Korean player, but small internationally. Growth is most important, profit is second."
The Samsung group has been the focus of many rumors. Some find it hard to believe that it would stand idle while rival Hyundai is adding capacity. The two groups vie for the position of largest business group in Korea. But the rumor is completely denied by a spokesman for Samsung General Chemicals. Woon Ahm Oh, manager of
public affairs, says, "We are concentrating on fibers, ethylene glycol, and aromatics at present. We are not planning a naphtha cracking facility presently, but maybe later. . . . Generally, there is too much emphasis on naphtha cracking facilities." Currently, Oh says, the group is building facilities to produce 400,000 metric tons of p-xylene, 200,000 metric tons of benzene, and 250,000 metric tons of purified tere-phthalic acid. And it is planning to boost its output of styrene to 1 million metric tons by the end of the decade.
When they think about their industry as a whole, South Korean petrochemical firms do not want a repeat of the overinvestment that occurred less than five years ago. At meetings of KPIA, member producers are trying to come up with a mechanism to organize the growth of the Korean petrochemical industry. Other than their own self-interest, they are being prodded in this endeavor by the Korean Ministry of Trade & Industry, which has asked KPIA to form a coordination council for future investments.
One problem with having KPIA discipline developments in the industry is that it does not have the wherewithal to reign in the natural aggressiveness of its impetuous members. A KPIA coordination council would not be sufficient to prevent companies from investing in whatever they so please, says Peregrine's Lee. Owing to this problem, it was resolved at a meeting of KPIA's members in late May to ask the government to adopt a law requiring anyone planning an investment in a naphtha cracker to first obtain the approval of at least two-thirds of the existing operators of ethylene production facilities.
Should the government comply with the request, even Hyundai's planned expansion would be subjected to peer approval before it could proceed any further, says Lee. But it is far from certain that this will happen. The Ministry of Trade & Industry and the government's Fair Trade Commission disagree on the wisdom of having the producers decide who should and who should not build. The commission reportedly has misgivings about institutionalizing something that would resemble a producers' cartel.
Much of the excess commodity chemicals produced in South Korea are exported. South Korean demand for petrochemicals is growing at about 5 to 7% per year, Lee says. "It's not as strong as
JULY 8,1996 C&EN 19
BUSINESS
in China, where it's growing at double-digit figures for some of the products," she adds. South Korea exports about 30 to 40% of its total output of petrochemicals and, of that amount, over 50% goes to China. In the case of polyethylene and polypropylene, about 60% of the country's total production is exported to China.
The main advantages that Korea has in supplying China, compared with other countries, are its geographic location and its ability to supply large orders. "If China wants, it can draw up huge contracts to order supplies from Korea," Lee says. "If Korea wasn't there, maybe it would have to use a little bit of Japanese products, and little bit of Taiwanese, and some from the U.S. But if they can import a lot of Korean material all at once, then the transportation cost will, of course, be cheaper than bringing it in by small bulks."
Some analysts at the Houston-based consulting company DeWitt & Co. harbor doubts about South Korea's strategy of dependence on export markets. Speaking at the 1996 DeWitt Far East
Conference in Singapore in May, DeWitt Group Vice President Earl H. Armstrong highlighted several Asian countries that were in the process of building up their petrochemical industry. For example, Thailand's ethylene production capacity is expected to grow to 3.2 million metric tons by 2000 from 700,000 metric tons now. "Korea may be a worry spot if the final decisions [to invest] rely on today's export markets remaining in existence for them ad infinitum," he said.
In the same talk, however, Armstrong delivered an encouraging thought for Korean producers: "Expansion moves rapidly in this part of the world, limited by money and government approval rather than demand. Even in heavy expansion periods, high growth rates prove very forgiving of overexpansion as long as projects enjoy fundamentally sound construction."
The possibility of closer business relations between the north and the south of Korea is generally overlooked in discussions of South Korean "excessive" production capacity. A reunification of the
Korean peninsula could cause an abrupt shift in South Korean export and investment patterns. Too far-fetched to consider? In June, after three months of study, a team of 20 planners at Yukong completed an internal report on North Korea. Its focus was broad, including politics, industry, and "scenario planning."
Are they expecting reunification soon? Not really, says planning manager Chung. "I don't think North Korea will collapse soon. I heard that people in North Korea do not have discomfort about their leaders. When people are hungry, they pray to their leader, Kim Jong II. This could change, but it will probably take two to three years for all people to change their mind."
And it will also take two to three years for new Korean crackers to come on-line. How many will be built and how much capacity will be added is not yet clear. But in the view of DeWitfs Armstrong, the only question mark is Samsung. And, he adds, "when an expansion gets talked about in Korea, it usually happens." Π
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