Oversupply from China and Middle East leaves Korean firms exposed, raising risks for banks, jobs and policymakers

South Korea’s petrochemical industry has been sliding into its deepest slump in decades as global oversupply and weakening demand erode profitability, posing risks of financial contagion and political backlash if policy execution fails to match rhetoric.

The Ministry of Trade, Industry and Energy (MOTIE) is finalizing a policy package expected to include incentives for industrial restructuring, including asset sales, facility closures and mergers and acquisitions, while easing regulatory bottlenecks such as antitrust reviews and permitting delays.

MOTIE officials are coordinating with industry groups and other ministries to present a plan at the end of this month, amid intensifying calls for intervention after Yeochun NCC, a major naphtha cracker operator, required emergency liquidity to avoid default.

A naphtha cracker operator is a company that runs large industrial plants that convert naphtha — a crude oil product — into basic petrochemicals like ethylene and propylene that are used to make plastics and other materials.

Years of overcapacity and weakening demand have eroded profitability across the sector. Boston Consulting Group — a global management consulting firm — has warned that half of South Korean petrochemical firms may be non-viable within three years without consolidation.

If that projection is realized, it would have knock-on effects on the country’s banking system and heighten social tensions in regions dependent on refinery-adjacent industrial employment. Political signaling has arrived early, but implementation will determine whether the crisis is contained or allowed to spread.

PERSISTENT GLOBAL OVERSUPPLY

The downturn reflects structural shifts in the global petrochemical industry. China tripled its production of ethylene — a basic raw material used to produce plastics and other chemical products — over the past decade to more than 52 million tons, cutting import demand and redirecting surplus volumes into export markets.

Concurrently, Middle Eastern producers, which benefit from cheaper raw materials like natural gas, have also expanded their presence in Asia’s chemical markets.

These trends have weakened South Korea’s export competitiveness. Petrochemical exports totaled $48 billion in 2024, but fell 11% year-on-year to $21.7 billion dollars in the first half of the year.

At the Yeosu National Industrial Complex — the large petrochemical and refining industrial zone located in Yeosu, South Jeolla Province — plant operating level dropped from nearly 87% in 2021 to the 60%-range this year. The resulting margin compression has hurt even the largest firms, raising doubts about long-term viability for smaller and mid-tier operators.

LG Chem’s Yeosu complex | Image: LG Chem

BALANCE SHEETS UNDER STRAIN

Second quarter earnings confirmed the severity of the downturn. LG Chem’s petrochemical division posted an operating loss of $65.3 million (90.4 billion won), citing weak demand and exchange rate volatility.

Lotte Chemical recorded a $177 million (245 billion won) operating loss, extending last year’s losses. Yeochun NCC, a fifty-fifty joint venture of Hanwha and DL Chemical, required a $108 million (150 billion won) loan commitment from DL to address liquidity shortfalls amid looming debt maturities.

Market observers estimate that total short-term liabilities across the sector are substantially higher than disclosed, given reliance on revolving credit and trade finance.

The debt risks may impact commercial lenders and policy banks that underwrote past capacity expansions. As credit risk rises, so does the possibility of bankruptcies, closures and debt workouts that spread financial and social shocks through the economy.

Without a soft landing, this in turn will lead to significant labor market volatility, which would increase the need for state-backed intervention and industrial bailouts.

RISING POLITICAL STAKES

However, industrial restructuring of the sector will likely have political ramifications. Yeosu, Ulsan and Daesan rely heavily on petrochemical jobs, along with the wider network of contractors and local businesses tied to the sector.

Any consolidation program that leads to closures or layoffs in these regions will test the Lee Jae-myung administration’s labor posture and its ability to manage regional discontent.

President Lee’s decision to appoint Kim Young-hoon, a former chairman of the Korean Confederation of Trade Unions, as his labor minister has bought goodwill from labor. But this goodwill may prove temporary if workers perceive that the administration’s efforts to restructure the petrochemical sector comes at their expense.

The government has pledged to lower regulatory hurdles for joint ventures and mergers, accelerate permitting for terminal infrastructure, and extend tariff exemptions for crude and naphtha feedstocks — basic raw materials used to supply an industrial process.

However, labor is unlikely to accept such restructuring plans if they are not accompanied by credible job reskilling initiatives or credible evidence that no corporate group is receiving preferential treatment.

South Korean workers on strike, Dec. 3, 2022 | Image: Korean Confederation of Trade Unions via Facebook

FEEDSTOCK FLEXIBILITY GAP

South Korea’s petrochemical industry is at a cost disadvantage because it relies mainly on naphtha as its basic raw material. Competitors in China and India increasingly use ethane — a cheaper alternative derived from natural gas and exported in large volumes from the U.S.

This shift has lowered ethane’s production costs while leaving South Korean firms exposed to higher input prices.

Domestic companies, including Yeochun, are reviewing how to import and use more ethane, but the infrastructure needed — storage tanks, pipelines and plant modifications — would take years to build. Until that happens, South Korea will struggle to close the cost gap, meaning any savings from switching feedstocks will come too late to ease the current downturn.

EXPORT MODEL UNDER PRESSURE

Petrochemicals feed into South Korea’s broader manufacturing ecosystem, supporting downstream sectors such as automotive, electronics and construction. Continued slack in domestic production may weaken South Korea’s exports.

Foreign buyers prioritize stable, cost-effective suppliers. If the restructuring process results in durable capacity rationalization and improved cost structures, South Korea can maintain its role in high-specification segments. If not, global buyers will increasingly turn to Middle Eastern or Chinese producers that offer scale and price advantages.

Moreover, South Korea’s petrochemical sector faces growing demand for lower-emission production. European markets increasingly require recycled content and reduced lifecycle emissions to meet Carbon Border Adjustment Mechanism requirements.

While the Lee administration has emphasized the need to pivot toward high-value, eco-friendly decarbonization goals, this will require scaled investment and rapid commercialization.

Without such investments, South Korea risks ending up with a smaller petrochemical industry as producers could find themselves shut out of premium markets even after consolidation. And those that remain may still lag behind on environmental, social and governance (ESG) benchmarks.

Concurrently, U.S. tariffs will likely distort demand signals. With the Trump administration employing erratic tariff measures, which currently face legal challenges at the federal level, South Korean firms now face the additional burden of adapting to volatile trade conditions while restructuring at home.

ROK President Lee Jae-myung leads a cabinet meeting on July 31, 2025 | Image: ROK Presidential Office

IMPLEMENTATION UNCERTAINTY

With the Lee administration facing fiscal constraints, it will likely favor market-based incentives, such as tax offsets and streamlined review procedures rather than industrial bailouts, to encourage restructuring moves.

When announcing that the restructuring plan will be unveiled at the end of the month, industry minister Kim Jung‑kwan urged companies to adopt lessons from the shipbuilding restructuring of the 2010s.

South Korea’s shipbuilding sector faced collapse in the 2010s due to intense competition from Chinese shipyards that drove down prices and led local shipyards to incur crippling debts, which led to mass layoffs and government bailouts.

In response, shipbuilders shut down unprofitable yards, reduced workforces, sold non-core assets and shifted focus toward high-value vessels like liquefied natural gas carriers.

However, the complexity of joint venture negotiations, creditor coordination and internal restructuring decisions means that outcomes will depend on petrochemical firms’ ability to execute painful reforms.

Seoul is reportedly considering temporary leniency on antitrust coordination if firms engage in pre-approved restructuring talks. While this may accelerate capacity swaps and asset sales, transparency will be essential to avoid perceptions of collusion or favoritism.

OUTLOOK FOR POLICYMAKERS

Given the losses that the sector has incurred for years, it likely cannot avoid restructuring. The core risk is that institutional design and implementation will lag behind political signaling. If that gap persists, South Korea will face deeper financial strain, public backlash and weakening industrial competitiveness.

A credible program would feature clear eligibility rules, time-bound incentives, coordination across ministries and alignment with long-term decarbonization goals. It would also provide transparency around public costs and private benefits. Anything less risks replicating past industrial bailouts that prolonged downturns and strained state resources.

The Lee administration is aware of the scale of the problem. Whether it can deliver institutional follow-through will determine the outcome for one of South Korea’s foundational industries.

Edited by Alannah Hill