Korean petrochem industry hit by galloping naphtha price

2022.04.19 09:01:00 | 2022.04.19 09:01:26

LG Chem이미지 확대

LG Chem"s naphtha cracking center. [Photo by LG Chem Ltd.]

South Korea’s petrochemical industry is grappling with a thinning operating margin already below the break-even point as the price of imported naphtha is zooming, whereas the export price of their mainstay ethylene products remains unchanged.

With the ongoing global trade and economic sanctions against Russia over its attack on Ukraine, the price of crude oil has surged, elevating the price of other oil-related chemicals including naphtha. The international naphtha price hit $877.96 in the January-March quarter, the highest level in seven and a half years, according to Korea Petrochemical Industry Association on Monday. Most naphtha is produced from crude oil in the first step of the refining process. Russia is the world’s third largest oil producer.

On the other hand, the price of ethylene produced via naphtha steam cracking has stayed almost unchanged between $1,000 and $1,100 in the past five quarters, leading an ethylene-naphtha spread to drop to $275.54 in the quarter, the thinnest since the fourth quarter of 2019. This suggests Korean petrochem companies are losing money by producing ethylene in the quarter, given the break-even point is in the about $300 range in most ethylene makers in Asia.

Korea imports naphtha, a basic raw material for petrochemicals, from Russia, the United Arab Emirates, and the United States, and a small portion is produced domestically. LG Chem, Lotte Chemical, and Yeocheon NCC run naphtha cracking centers to manufacture major basic oil products for chemicals such as ethylene and propylene. Korea, the world’s fourth-largest ethylene producer, exports 55 percent of their total production.

Uncertainty in the ethylene business is expected to continue for some time as the U.S. and China are set to expand their ethylene production facility, while it is difficult to predict the direction of international oil prices, according to a market forecast. According to IHS Markit, global ethylene facilities are expected to grow by 919 tons this year, following an expansion of 10.54 million tons last year.

Coronavirus lockdowns in China’s major cities including Shanghai could be another headwind for Korean petrochem makers as most of their products go to China. The ongoing lockdown may interrupt the operation of many Chinese plastic plants that rely on Korean ethylene.

By Park Yun-gu and Minu Kim

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