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Petrochemical firms restrategize for expected market changes

Petrochemical firms
A petrochemical plant in Ulsan

South Korea’s petrochemical firms, basking in outstanding profits last year, are restrategizing to make sure they can sustain the earnings and be ready for future market changes, industry watchers said Monday.

The surprise earnings of 2015 were driven heavily by the wide profit margin — low oil prices pushing down the cost of raw materials but product prices not being marked down. Local firms, watchers say, are well aware that such ideal conditions may soon change and are setting up safety nets.

The leading petrochemical companies have been continuing their profit march this year. Lotte Chemical logged 473.6 billion won (US$409.8 million) in operating profit in the first quarter, a 166.1 percent leap from the same quarter of 2015. LG Chem’s operating profit for the first quarter was 457.7 billion won, up 26.5 percent from the same period last year.

SK Innovation, South Korea’s top refiner, made 844.8 billion won in operating profit in the first quarter, helped by its chemical unit, SK Global Chemical, which pitched in 224.3 billion won.

These companies have had the best of both worlds, industry watchers note, as low oil prices kept the prices of naphtha, a key raw material, in check, while the prices of the final products remained unchanged. Oil prices, however, have recently crept up to the $40 level a barrel, and the U.S. is resuming shale gas exploration, raising the specter of price-competitive products using ethane cracking technology hitting the market. China’s drive to convert coal into olefins could also thwart the current market conditions, as well as India putting its ethylene production facilities into operation in the latter half of this year, watchers say.

New strategies mostly aim to grow out of the conventional ethylene-based products to more value-boosted ones.

LG Chem has turned to bio business, acquiring Dongbu Farm Hannong, the country’s No. 1 crop protection and seed producer, last month. In 2014, it took over NanoH2O, a U.S. startup with technology for cleaning water.

Lotte Chemical, which has the highest proportion of products based on ethylene, has entered the market for high-value synthetic resin after buying Samsung Group’s chemical units. In obtaining raw materials, the company built a gas chemical complex in Uzbekistan last year and is constructing a shale gas-based ethane cracking center in the U.S. jointly with Axiall Corp.

SK Global Chemical last year formed a partnership with Saudi Basic Industries Corp. (SABIC), one of the world’s largest petrochemicals group, to start a global nexlene business. It already has a naphtha cracker center in China, established in a joint venture with China’s state-run refiner Sinopec Corp. in 2014. The joint venture recorded an operating profit of more than 400 billion won last year, outdoing SK Global Chemical.

Chung Chul-khil, CEO of SK Innovation, in recent remarks named three key points to surviving in the market — obtaining cheap raw material, getting into important markets and having core technologies.

“The cheap raw materials are in the Middle East, the big markets are in China and the U.S., and important technologies are in European companies,” Chung said. “If we can secure one or two of these factors, we will become competitive and become able to create growth and value.”

The Original Posted by Yonhap News