South Korea’s Lotte Chemical, HD Hyundai Group plan to merge NCCs amid challenges

Lotte Chemical and HD Hyundai Group plan to integrate their naphtha cracking facilities in the Daesan petrochemical complex, a strategic move to navigate the challenging landscape of the South Korean petrochemical sector amid poor margins, according to a report and sources with close knowledge of the matter.

The two companies are currently in negotiations to consolidate their respective petrochemical assets in the Daesan area, with the valuation process being conducted by a major accounting firm, according to a local media report June 11 from Korea Economic Daily.

Hyundai Oilbank and Lotte Chemical sources said regarding the negotiations that "nothing has been finalized" and "everything is under review."

The two major South Korean petrochemical makers' collaboration marks a critical step toward voluntary restructuring in response to the oversupply issues driven by Chinese competition, which has put immense pressure on local producers, according to industry analysts at local securities houses based in Seoul with close knowledge of the merger plan.

Additionally, their joint venture HD Hyundai Chemical, in which HD Hyundai Group's refining arm Hyundai Oilbank holds a 60% stake and Lotte Chemical holds 40%, is set to produce 850,000 mt of ethylene annually, an operation manager at Lotte Chemical said.

Lotte Chemical operates an additional facility in Daesan, producing 1.1 million mt/year of ethylene, which constitutes roughly 25% of its total production capacity of 4.5 million mt/year.

As part of the integration, Lotte Chemical is expected to transfer its Daesan facilities to HD Hyundai Chemical, which may receive additional cash or in-kind contributions from HD Hyundai Oilbank to streamline operations.

Following the merger, the companies plan to gradually close overlapping facilities, reduce production levels and realign workforce roles to enhance efficiency.

South Korea's demand for petrochemical feedstock naphtha in the first four months fell 3.3% year over year to 145.8 million barrels, latest data from state-run Korea National Oil Corp. showed. Asia's biggest importer of the light distillate product purchased 19.67 million barrels in April.

Among recent spot purchases, traders based in Singapore said LG Chem bought at least one 25,000-mt cargo for July delivery at a premium of around $5.50-$6.25/mt to the Mean of Platts Japan naphtha assessments, CFR, with pricing over 30 days prior to delivery to Yeosu/Daesan. Platts is part of S&P Global Commodity Insights.

Industry consolidation

Lotte Chemical's decision to consolidate its operations with Hyundai Oilbank reflects a strategic shift toward addressing the immediate challenges posed by Chinese market dynamics.

On May 13, Lotte Chemical announced its preliminary results for the first quarter of 2025, reporting sales of Won 4.9018 trillion ($3.6 billion) and an operating loss of Won 126.6 billion.

Asian cracker operators have suffered from a prolonged period of poor production margins, with the majority of the Asian naphtha-fed crackers running below capacity to manage inventory levels amid sluggish demand.

Prices of ethylene on a CFR Northeast Asia basis averaged $807/mt in April and fell to $782/mt in May, Platts data showed.

"Crackers have been suffering for the past few years, and with geopolitical tensions and all the uncertainties that come with that, the derivative markets are unlikely to see any potential upticks in the near term, which will further exacerbate the situation for cracker operators," said a Northeast Asian trader.

The Korea Chemical Industry Association indicated that restructuring is necessary to respond to changes in the global industrial environment, such as the increase in China's industrial self-sufficiency and the expansion of supply from the Middle East.

In particular, it is anticipated that if oversupply issues are resolved and voluntary restructuring takes place, companies will be able to restore their competitiveness and establish a foundation for generating stable profits, KCIA said.

With the consolidation, both companies could see significant cost savings, including reductions in facility management, labor and indirect expenses. Enhanced bargaining power when purchasing raw materials and decreased competition are additional benefits expected from this merger.

Industry analysts and regional traders said the merger is anticipated to catalyze further consolidation within the stagnant South Korean petrochemical industry.

"[There] will be more integration in each [South Korean] complex -- Daesan, Yeosu, Ulsan," another Northeast Asia-based trader said.

The government, led by newly elected President Lee Jae-myung, has committed to supporting timely restructuring efforts within the petrochemical sector, promising specific assistance as progress unfolds.

Government support is crucial for successful restructuring, according to a representative at KCIA.