In a landmark move signaling a long-anticipated restructuring of South Korea's petrochemical industry, Lotte Chemical Corp. and HD Hyundai Co. are in advanced talks to consolidate their naphtha cracking center (NCC) operations in the Daesan petrochemical complex. This alliance is a direct response to intense market pressures, primarily stemming from aggressive oversupply by Chinese producers and subsequent financial strain on domestic players.
According to multiple media sources, negotiations between the two industrial giants commenced earlier this year, with both companies currently engaging a major accounting firm to assess the value of their respective assets. The objective is to determine the fair value for a prospective joint venture that would integrate their NCC facilities. This collaboration marks a significant shift, as Lotte Chemical had previously explored similar consolidation efforts with other domestic producers, including LG Chem Ltd. and DL Chemical Co., which did not materialize. Instead, Lotte has opted to deepen its existing partnership with HD Hyundai Oilbank Co., a subsidiary of HD Hyundai Group.
Lotte Chemical and HD Hyundai Oilbank have a history of collaboration, having operated a 40:60 joint venture, HD Hyundai Chemical, since 2014. This existing partnership oversees an ethylene facility with an annual production capacity of 850,000 tons. Separately, Lotte Chemical manages an NCC plant in Daesan, contributing 1.1 million tons of ethylene annually, representing approximately 20% of its total 4.5 million tons in ethylene output. The proposed consolidation aims to fold Lotte Chemical's Daesan NCC assets into the existing HD Hyundai Chemical joint venture. Under consideration is a plan where HD Hyundai Oilbank would inject additional capital, either in cash or in kind, to balance ownership and seamlessly integrate the facilities under a single operational entity.
The primary drivers behind this consolidation are cost reduction and enhanced efficiency. By combining their NCC operations, the companies anticipate significant savings through shared facility management, reduced payroll and overhead, and increased bargaining power for feedstock procurement. Furthermore, the merger seeks to mitigate redundant competition within what has become an increasingly fragmented market.
The Daesan petrochemical hub, located with proximity to China, has been particularly hard hit by Beijing's aggressive capacity expansion and its drive for self-sufficiency in basic petrochemicals. Korean companies, in particular, have struggled to compete with the significantly lower production costs of generic products from Chinese plants, leading to considerable financial strain. Both Lotte Chemical and HD Hyundai Chemical posted heavy losses last year, amounting to 1.83 trillion won ($1.3 billion) and 284 billion won respectively, with forecasts indicating continued losses this year. This shared financial hardship has underscored the urgency for strategic restructuring.
