A sharp surge in liquefied petroleum gas (LPG) prices driven by a surge in oil prices is threatening the profitability of South Korean petrochemical companies that heavily relay on propane to produce plastic materials.

According to industry sources on Tuesday, LPG prices soared nearly 30 percent in seven months from over $500 per ton in March to over $800 in September. The higher crude oil prices have led to a jump in LPG prices given that LPG is produced in the process of refining crude oil. The recent hike, however, is seen as excessive, sources say.

The anticipated higher demand for heating during the upcoming winter season should hike LPG prices further, industry observers concerned.

With the surge in LPG prices, Korean petrochemical companies are rapidly losing profit because they rely on import propane to make and sell plastic products.

Removing hydrogen from LPG-categorized propane creates propylene, which is a feedstock to make plastics. Petrochemical companies usually produced naphtha from crude oil before changing it to propylene but because the abundant supply of U.S. Shale gas had helped significantly lower LPG prices, producing propylene using propane began to generate more profit.

In recent years, major Korean petrochemical players such as Lotte Chemical, LG Chem, and Hanwha Total, expanded facility that produces propylene using propane. With the surge in LPG prices, however, the companies started losing price competitiveness.

Industry sources noted that in general, producing propylene using LPG creates more profit when LPG price per ton falls to below 90 percent of naphtha.

Until last year, LPG prices were kept low, leading many petrochemical companies to rush to ramp up propylene production using LPG instead of naphtha. But tith LPG prices hitting multi-year highs near naphtha prices, local petrochemical players are under mounting pressure to change their feedstock diversification strategies.

By Won Ho-sup, Choi Keun-do, and Lee Eun-joo

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