Analysis: Korea focuses on petchems amid trade pressure

South Korea is focusing on petrochemical investments to support its export-reliant economy, which has been hit by a trade war with Japan.

The South Korean government this month removed Japan from its list of preferred trade partners, intensifying a tit-for-tat trade war between the neighbouring countries.

The move came a few weeks after Japan imposed tighter curbs on exports of material used to make smartphone chips.

The dispute has not had a direct impact on petrochemical trade, but threatens to add further pressure on the economy. South Korea's GDP contracted by more than initially estimated in the first quarter because of a global economic trade slowdown, but rebounded in the second quarter thanks largely to government spending.

The country's central bank in July revised down its forecast for 2019 GDP growth from 2.5pc to 2.2pc, citing global uncertainties.

South Korea's petrochemical sector — and its promise of economic diversification — is emerging as a bright point against this challenging backdrop, with new projects and tie-ups underway.

Petrochemical expansions

South Korea produced 21.6mn t of petrochemicals in 2018, just over half of which was exported, according to the Korean Petrochemical Industry Association (KPIA).

South Korean companies are working closely with Saudi Aramco to expand the state-owned firm's already sizeable stake in the country's petrochemical sector.

Aramco signed a preliminary agreement with South Korean conglomerate GS Caltex on energy and petrochemicals in June, during a visit to Seoul by Saudi crown prince Mohammed bin Salman. GS Caltex is planning to complete a new 500,000 t/yr polyethylene (PE) plant by 2021.

South Korean refiner Hyundai Oilbank, in which Aramco bought a 17pc stake this year, is working on $222mn worth of projects to expand its aromatics production capacity.

Oilbank's Hyundai Chemical joint venture with fellow South Korean firm Lotte Chemical is expanding its capacity to produce mixed xylene from 1.2mn t/yr to 1.4mn t/yr. Work is due to be completed this month. Hyundai Chemical is also scheduled to increase its polymer capacity by 1.15mn t/yr by 2022.

Hyundai Cosmo Petrochemical, a joint venture between Oilbank and Japan's Cosmo Oil, is expanding its paraxylene (PX) output. PX capacity will be increased from 1.18mn t/yr to 1.36mn t/yr, with construction scheduled to be completed next year.

Aramco also owns a controlling interest in S-Oil, South Korea's third-largest refiner. S-Oil last year completed a residue-upgrading and olefin-downstream complex, and plans to build a steam cracker and olefins facility by 2022. The project includes a 500,000 t/yr PE plant and a 320,000 t/yr polypropylene (PP) unit.

The South Korea-Saudi partnership goes beyond Aramco. Saudi Arabia's Advanced Petrochemical, Kuwait's PIC and local firm SK Gas currently operate a 600,000 t/yr propane dehydrogenation (PDH) plant in the port city of Ulsan.

Free-trade deals

South Korea is a popular investment destination for global companies because of its advanced technology, infrastructure, workforce and integrated refinery and downstream sectors.

Korean construction and engineering companies such as Hyundai Engineering and Daelim Industrial have historically maintained strong relationships with petrochemical companies around the world, entrenching the country's brand further.

But perhaps South Korea's most important competitive advantage for prospective Mideast Gulf investors is its extensive free-trade agreements (FTAs) – something the Middle East region lacks.

South Korea has 15 FTAs covering 52 countries, including multilateral deals with the EU and the Association of Southeast Asian Nations (Asean). Key bilateral FTAs include those with Singapore, the US, Turkey and Vietnam.

The FTAs allow South Korean petrochemicals to be exported at limited or zero duties, giving producers a competitive edge in an oversupplied market.

Seoul is currently negotiating FTAs with countries in central America, Ecuador and Israel, meaning the new petrochemical output due to come on line in the next few years may be able to access hitherto untapped markets.

Overseas investments

South Korea firms are also looking to expand their petrochemical presence internationally. Textiles and chemicals producer Hyosung is investing heavily in Vietnam, where it has built PP and PDH facilities. A 300,000 t/yr PP unit is scheduled to come on stream at the end of this year.

South Korea has an existing FTA with Vietnam that began in late 2015. Hyosung could also benefit from a new FTA agreed by Vietnam and the EU in June, which will give the producer options to sell to Europe in the face of rising competition.

Elsewhere in Asia, Korean companies have operations in Uzbekistan where they operate the Uz-Kor ethylene and polymer units in co-operation with state-owned Uzbekneftegaz.

And in southeast Asia, Lotte Titan — the Malaysian unit of South Korean petrochemical producer Lotte Chemical — is an integrated producer of olefins and polyolefins.

Lotte is also planning to further expand its regional presence in Indonesia, where it broke ground in December on a naphtha cracker with the capacity to produce 1mn t/yr of ethylene and related products.

Declining margins

South Korean producers remain concerned about declining margins because of global oversupply of petrochemical products such as polymers and aromatics, despite their ambitious plans to expand capacity in domestic and overseas markets.

SK expects margins on PE and other polyolefins to remain weak because of rising supplies from the US. S-Oil's average profit margin for PX dropped to $349/t in April-June from $540/t in the first quarter.

One upside for producers has been the weakness of the South Korean currency. This is supporting petrochemical exports, which are typically priced in US dollars.

The won is one of the worst-performing currencies in Asia this year, shedding around 8pc of its value against the US dollar since last year.