The latest round of planned cuts to South Korean cracker capacity has sparked alarm among other Asian producers who are also struggling with poor margins, although some hope that the cuts could boost margins by thinning excess supplies.
South Korea, traditionally the largest ethylene exporter in Asia, announced plans to restructure the struggling petrochemical industry, with 10 producers agreeing to reduce cracking capacity.
The move follows urgent government intervention to restructure the industry, which has been in a prolonged "down cycle", said market participants.
Naphtha cracker production margins have been negative since late 2021, following rapid expansions in China and a global economic slowdown.
South Korea has been one of the hardest hit in terms of margins because most of its exports were previously bought by China.
South Korean cracker operators began to slash operating rates in end 2021 as a result, alongside southeast Asian and Taiwanese cracker operators. Most crackers in Asia were operating at reduced rates by the end of 2022 to mitigate production losses, and crackers have continued operating under capacity ever since.
But cracker production margins have remained in the negative zone despite the lower run rates, even with slight increases across the years. Naphtha cracker production margins rose from an average of -$237/t in 2022 to -$195/t in 2023 and -$170/t in 2024, based on Argus' calculations. Year-to-date production margins stood at -$159/t, which is still far below breakeven levels. Production margins averaged at $310/t in 2020 and $96/t in 2021 by comparison.
Japan, Taiwan and southeast Asia feel the pressure
South Korea's latest moves have caused alarm among Japanese producers, who are facing similar challenges. Japan's naphtha crackers are smaller and older, and are less cost-competitive compared with the newer crackers in China and South Korea.
Rationalisation is already underway in Japan, and the latest restructuring announcements were from Mitsui Chemicals, Mitsubishi Chemical and Asahi Kasei. The three producers are in talks to reduce cracking capacity in the west of Japan.
Taiwan's Formosa is also rotating operations at its three crackers to balance olefins supplies and mitigate production losses. The producer will restart its long-idled 1.035mn t/yr No.2 cracker in Mailiao at the end of August and shut its 700,000 t/yr No.1 cracker in early September.
Meanwhile, crackers in southeast Asia are also under mounting pressure as most are stand-alone crackers that need to import naphtha for cracking, which adds to the cost of operations. Malaysia's Lotte Titan shut its 290,000 t/yr No.1 cracker in Pasir Gudang, Johor, at the end of 2024 and has no plans for a restart.
Philippines' JG Summit 480,000t/yr cracker in Batangas has been shut with unclear restart date, with the producer citing poor margins.
Some crackers are looking to feed in more profitable feedstock such as ethane in a bid to improve profits. Several producers in Asia have retrofitted their units to take in the natural gas. This includes Vietnam's Long Son Petrochemical cracker and Taiwan's Formosa No.3 cracker.
But the shift to ethane intake requires large investments in vessels and tank storages. And the uncertainty around ethane imports into Asia because of tariff concerns poses another risk to Asian crackers given that the US is the largest ethane exporter globally.
Further economic slowdown and potential changing trade flows because of US tariffs and geopolitical tensions could pose further challenges to cracker operators in Asia, prompting more shutdowns or rationalisation.
Some market participants are hopeful that the capacity cuts could help to trim excess downstream supplies and improve prices, and ultimately support margins. But some will remain on the sidelines to observe the outcome of the South Korean capacity cuts, especially since details on which crackers operators are affected and the extent of production cuts have not been released yet.
