South Korea's reliance on naphtha could cause problems over the medium term

South Korea's reliance on naphtha could cause further problems over the medium term as lower cost ethane-fed crackers come online in the Middle East, the Chinese economy moderates over the forecast period and petrochemicals prices stabilise, as per a report by BMI. South Korea's petrochemical industry is mature and highly integrated, although the country lacks significant oil and gas reserves. In 2009, combined olefins capacities included 7.48mln tpa ethylene, 5.87 mln tpa propylene and 1.25 mln tpa butadiene. Intermediate and aromatics capacities include 4.06 mln tpa benzene, 330,000 tpa ethylbenzene, 1.3 mln tpa ethylene oxide/ethylene glycol, 6.63 mln tpa terephthalic acid, 3.28 mln tpa styrene monomer, 1.51 mln tpa vinyl chloride monomer and 4.83 mln tpa xylenes capacity. Polymer capacities include 1.92 mln tpa HDPE, 1.03 mln tpa LDPE, 1.22 mln tpa LLDPE, 1.09 mln tpa PET, 3.85 mln tpa PP, 1.38 mln tpa PVC and 975,000 tpa PS. It also possesses capacities of 565,000 tpa styrenebutadiene rubber and 1.48 mln tpa acrylonitrile-butadiene-styrene. The South Korean petrochemicals industry is focused on supplying the Chinese markets. Investment in coming years will be concentrated in paraxylene production to feed China's rapidly growing polyethylene terephthalate production. While the report does not anticipate any major increase in Korean olefins and polymer capacities over the next five years, the industry is set to witness a 70% increase in xylenes production capacity to 8.19 mln tpa to supply primarily Chinese polyethylene terephthalate (PET) producers. Samsung Total Petrochemicals expanded aromatics capacity at Daesan in 2009, adding capacities of 270,000 tpa paraxylene and 90,000 tpa benzene. In June 2009, Japan's Cosmo Oil signed an agreement with Hyundai Oilbank to establish a 50:50 joint venture to produce and market paraxylene and related products in Korea. When it opens in 2013, the plant will have a capacity to produce 800,000 tpa of paraxylene and will also include an existing 380,000 tpa paraxylene plant, which uses naphtha as feedstock and is to be transferred to the joint venture. Meanwhile, in 2009, S-Oil began construction on a new US$1.1bn aromatics complex at its refinery at Onsan. It will have output of 900,000 tpa paraxylene and 280,000 tpa benzene when completed in June 2011. The dependence on the Chinese market to soak up Korean production exposes the industry to significant risks. Improved trade relations between Taiwan and China through the Economic Cooperation Framework Agreement could disadvantage the Korean industry, which will be in competition with Taiwanese rivals. Another factor is the pattern of demand in the Chinese market. With the Chinese petrochemicals industry set to witness major expansion amid slower rates of demand growth, the report cautions that China will witness surpluses in some segments that could undermine prices and hit margins at Korean facilities. We estimate that in 2009 alone, China witnessed a 2.15mln tpa increase in PE capacity and a 2.25mln tpa increase in PP. With the anticipating domestic demand growth of 2%, polymer market self-sufficiency should approach 75% PE and exceed 100% PP in 2010. This could drive down international polymer prices yet further, putting more pressure on Chinese petrochemicals producers' profit margins despite the easing of naphtha feedstock prices. On the upside, some segments facing over-capacity, such as PVC, do not feature in the development of the Korean petrochemical industry, while paraxylene, which is the focus of Korean investment efforts, is likely to be a key growth area.