Petrochem expansion:South Korea's strategy to ward off competition from the Middle East

Confident of their giant neighbour- China's ever growing demand for imported ethylene and propylene, major petrochemical makers in South Korea plan to boost ethylene capacity by 22% to 7.12 million tpa by 2008. With this expansion, the world's fifth-biggest ethylene producing nation will carry profits high again beyond 2010. New capacities on stream and underway in China as well as the Middle East plants, coupled with this planned expansion in South Korea are likely to end last years' boom, the biggest upturn in 17 years for the cyclical industry. Historically, the global petrochem sector has repeated ups and downs within a 7-9 year cycle, as capacity expansions take place over a very short period and almost at the same time across the markets, while demand rises steadily. Globally, ethylene output is set to rise by 35%, or about 38mln tons, between 2004 and 2010, slightly more than half of which will be from the oil-rich Middle East. South Korea's No.1 and Asia's second-largest ethylene maker Yeochon Naphtha Cracking Centre (YNCC) plans to invest US$500mln, in capacity expansions. Honam Petrochemical Corp has planned an investment of nearly US$1bln. For South Korean companies, who rely mainly on imported oil-derivative naphtha as feedstock, the growth is necessary to maintain market share in the face of rising competition from the Middle East, that has access to much cheaper, domestically produced ethane. Feedstock thus available makes the initial cost of producing ethylene by Middle Eastern producers about a third of that by Northeast Asian makers. South Korea's growth plans are based on the estimate that supply in China, the world's fastest-growing major economy, will not be able to keep pace with demand. China meets about 30% of its needs for polyethylene, polypropylene, mono ethylene glycol and styrene monomer. As demand keeps rising every year, it is perceived that the giant will have difficulty raising the ratio even up to 50% by 2008. China will has commissioned 1.8mln tpa of new ethylene capacity by the end of 2005 with 3 new major joint-venture projects, but it will be years before the giant can become self-sufficient. The hurdle being currently faced is the shortage of new infrastructure for petrochem production facilities, like power and water. But questions remain over South Korean firm's expansion strategy. Many fear that South Korea may be expanding in the wrong direction with its focus on ethylene feedstock production, leaving more value-added products to others and pushing premium profits further down the supply chain.