South Korea faces critical decisions in petrochemical restructuring

Hanjin Shipping or Hyundai Merchant Marine?

That decision in 2016 determined the fate of South Korea’s shipping industry. Facing a severe downturn, the government and creditors concluded they could not inject public funds into both companies at the same time. They decided to support Hyundai Merchant Marine.

That company is today’s HMM. At the time, the decision had its own rationale. However, South Korea’s shipping industry ultimately failed to regain its previous market share and lost much of its global network and talent. As a result, some critics still argue that Hanjin Shipping should have been saved instead.

Industrial restructuring is always a painful choice, and whether it was the right one often only becomes clear over time. That is why industrial reorganization is so difficult. The 1999 “semiconductor big deal” was a case in point. Amid a memory chip supply glut and recession, the government and the Federation of Korean Industries at the time led Hyundai Electronics to acquire LG Semiconductor, the predecessor of SK hynix. The goal, alongside Samsung, was to create a two-power structure and boost global competitiveness. That vision only fully bore fruit more than 20 years after the so-called “big deal.”

The focus of industrial restructuring has now turned to the petrochemical sector. On Aug. 20, the government launched efforts to reorganize the industry. It announced plans to reduce the naphtha cracking capacity of 10 domestic petrochemical companies by 25%, centered on the Ulsan, Yeosu, and Daesan complexes. Authorities also emphasized a “first self-help, then government support” approach.

In fact, discussions about restructuring the petrochemical sector are not new. Proposals surfaced in the 1990s, 2000s, and 2010s but repeatedly failed. The reason is that, unlike the two- or three-player structures in semiconductors or shipbuilding, the petrochemical industry has a complex value chain, with conditions varying by region and industrial complex. It is a structure that cannot be easily altered.

The government appears to recognize this complexity, which is why it sees corporate self-help measures as a priority. It is also true that, unlike in the past, the government cannot easily demand mergers or consolidations from private companies, since it is not acting as a creditor for bankrupt firms.

However, waiting solely for companies to reorganize themselves may be too risky. A common lesson from all restructuring cases is that timing is crucial. In Hanjin Shipping’s case, government intervention came only after its bankruptcy, leaving the company beyond rescue.

Moreover, companies have learned from past government-led restructuring that “those who hold out survive.” If the market rebounds, those who endure can gain a dominant position. This has led to a continuous game of brinkmanship, and now warnings suggest that up to 50% of petrochemical firms could disappear within three years if the situation continues. If companies had been able to restructure on their own, the process likely would have begun around 2021, when China started aggressively expanding its facilities.

This petrochemical crisis is also different from past cases. While previous challenges in semiconductors, shipping, and shipbuilding were largely driven by market cycles, the current problem stems from an unprecedented structural oversupply from China. China’s ethylene self-sufficiency is approaching 100%, and in about three years, the country is expected to have more than 10 million tons of excess production even after meeting domestic demand.

A business official described this as a feature of Chinese manufacturing akin to a “platform monopoly.” In the era when the United States or Japan dominated manufacturing, they could not meet global demand alone, leaving room for second- and third-ranked companies like those in South Korea. But Chinese manufacturers aim to dominate the entire market. Already, they have swept through global steel and petrochemicals, and some analysts say they are now setting their sights on shipbuilding as well.

The petrochemical restructuring should serve as a model for how South Korea responds to future supply shocks from China. The government must take the lead by presenting detailed reduction plans for each industrial complex along with concrete incentives. It must also acknowledge the inevitability of painful layoffs and social conflicts and prepare appropriate measures to address them. Officials should not forget that the fate of South Korea’s manufacturing sector hinges on this industrial reorganization.