Conditions surrounding the domestic petrochemical industry are these days far from favorable. However, exports are fortunately providing a ray of hope.
The financial crises in the United States and Europe are affecting the major export sectors of Korea. In particular, petrochemical, energy and steelmaking industries have been forced to watch their business showings plunge in Q3. “With global economic uncertainties appearing, China, the world’s biggest market, is tightening its purse strings, with the global petrochemical sector seeing almost no meaningful transactions,” said Kim Jae-hong, the director of the Office of Industries at the Ministry of Kno-wledge Economy. He went on, “International merchandise and product prices are on a downward spiral and the situation is likely to last until the end of this year.”
Production in the Doldrums Yet Exports on the Rise
Korean petrochemical companies built large-scale manufacturing bases in Yeosu City, South Jeolla Province and Seosan City, South Chungcheong Province between the late 1980s and early 1990s. These industrial clusters, however, have focused heavily on universal products that are vulnerable to market changes, resulting in increased competition.
More recently, they are faced with another hurdle, that of mega-sized facilities in the Middle East enjoying high cost competitiveness. To compound the matter, the global economic contraction is severely compromising the sector’s production growth rate. The figure had amounted to an annual 14.2% on average between 1990 and 2000, but dropped to 3.6% between 2000 and 2010.
Under such circumstances, Korea’s petrochemical production for 2011, during which five out of six NCCs (naphtha cracking centers) conducted regular maintenance between March and May for the first time in four years, is estimated to grow only one-tenth of a percentage point to 15.91 million tons.
Yet, the story is totally different for exports. Unlike domestic demand which has plateaued since 2002, exports are showing explosive growth despite economic instabilities sweeping the globe and subsequent spending cutbacks in China. For example, this year alone, exports have grown in double-digits from a year earlier for three quarters in a row. All in all, exports are estimated to mark a 25.9% year-on-year increase to reach US$45 billion.
In fact, the trade surplus in the sector has expanded constantly since 1998, when the balance turned positive for the first time. It was US$2.5 billion in the black in 2000, but US$18.4 billion in 2010. It recorded the sixth-biggest surplus last year among all manufacturing industries, following shipbuilding (US$43.4 billion), automobile (US$32.1 billion), displays (US$26 billion), telecommunications devices (US$19.8 billion) and semiconductors (US$19.6 billion). According to the KIET (Korea Institute for Industrial Economics & Trade), petrochemical ex-ports 2010 ran to US$39,758.16, million with the figure jumping 13.9% on average annually since 2000.
So what is leading this year’s booming exports? Experts point to consistent large-scale investments and the industry’s flexible response to the demand decrease in China. “It can be attributed to the production of differentiated products, export market diversification to include Latin America and Africa, and the selection of tailored export items for new markets, although the rise in export unit price caused by high oil prices did also contribute,” the director analyzed.
“In addition, high added-value products like high-temperature nylons and functional films did their part, along with exclusive products such as ethylene vinyl acetate and PVC copolymer. Some manufacturers in the industry have raised their ratio of high value-added products from 19% to 32% between 2002 and 2011,” he continued, adding, “As mentioned above, the petrochemical industry is significantly contributing to the overall national economy despite adverse global conditions.”
Petrochemical Stocks Likely to Rebound in 2012
In the meantime, securities analysts are predicting that petrochemical stock prices will make a substantial recovery in 2012. “Stock prices have gone through some discount since the outbreak of the European financial crisis, but will recover to the level at which prices are commensurate with the industry’s performance soon,” said one analyst, adding, “That is owing to the pent-up demand effect that will follow the boost in domestic consumption and expansionary policy in China, after which Honam Petrochemical and SK Innovation are likely to benefit the most since they have higher levels of growth momentum than others.”
The Chinese petrochemical industry is predicted to top 3,000 trillion won in size in 2015. According to the director, China is modernizing the sector through its 12th five-year economic development plan, carrying out technological innovation, restructuring, energy preservation, quality enhancement and overseas market penetration. At the same time, it is partnering with foreign corporations to sharpen the competitive edge of its chemical enterprises, which indicates that they can become heavyweights in the global arena within a few years, and thus successfully compete with their Korean counterparts in various segments.
“To stand a chance against this, Korean companies are planning to further concentrate upon differentiated high value products, while making investments in China and jointly developing new technologies via personnel exchange programs,” said the director.