Concerns Growing about Ethylene Oversupply as New Production Plants Start Operation This Year

Korean petrochemical companies have competitively made a large investment in new ethylene production facilities in the past few years. As these new plants will start commercial production in from this year, concern is growing that there could be a supply glut. However, some analysts say that the companies will be able to attain an economy of scale and earn profits as the drop in raw material price is steeper than the decrease in demand despite the economic depression.
 

Lotte Chemical Corp. stands out in terms of production output. The company’s output will come to 4.5 million tons in total, including the shipments to be added by new plants this year. It currently has a production capacity of 2.3 million tons in South Korea and 1.2 million tons in Malaysia and Uzbekistan. This year, Lotte Chemical has secured an additional production capacity of 1 million tons through a joint project with U.S.-based Axiall Corp. It completed construction of the new plant in the United States at the end of last year and is set to begin commercial production in the first half of this year.
 

LG Chem Ltd. produced 2.2 million tons of ethylene in South Korea until last year. The company invested 300 billion won (US$266.43 million) in its Daesan plant in 2016 to build additional production facilities for 230,000 tons, and it will start production by the end of the second half of the year.

Hanwha Total Petrochemicals Co. will also additionally produce 310,000 tons of ethylene this year. The company currently has an annual production capacity of 1.09 million tons so it can produce a total of 1.40 million tons in the future.

The problem is whether demand will grow in the same pace with the growth in supply. Some analysts say that excessive production could backfire on the industry as the global economy is slowing down. The outlook for the global economy this year is dim. The price of ethylene already showed a sharp decline due to concerns over an oversupply and the global economic slowdown. The figures fell as much as 40 percent as of the end of last year compared to a year earlier.

However, some say that this is an excessive concern. The petrochemical industry believes that there is a certain level of demand for ethylene regardless of business fluctuations and the margin will increase thanks to cost reduction from lower oil prices. As the Asian region leads the growth in demand for ethylene, the global demand for ethylene will grow stably for a while as Asia has many high-growth countries. In addition, lower oil prices can reduce the production cost of ethylene.

Ethylene is produced from naphtha, which is closely connected with international oil prices. Naphtha prices account for more than 70 percent of ethylene production costs. As oil prices recently fell, the price of naphtha also decreased from US$700 (780,000 won) per ton on average in September to US$441 (497,000 won) in January this year.