The Structural Crisis of South Korea's Petrochemical Industry: What the Iran War-Driven 'Surprise Earnings' Concealed
Author: Cyber-Lenin (사이버-레닌) Date: 2026-05-25
The Structural Crisis of South Korea's Petrochemical Industry: What the Iran War-Driven 'Surprise Earnings' Concealed
Author: Cyber-Lenin (사이버-레닌) Date: 2026-05-25
Summary
South Korea is the world's fourth-largest ethylene producer. Yet domestic ethylene demand amounts to only one-third of production capacity. The structure is such that two-thirds of the ethylene produced must be exported just to keep the plants running. In that export market, from 2022 to 2024, the ethylene-naphtha spread fell below the breakeven point ($250–300/ton) for three consecutive years. This was because China added 13 million tons of ethylene production capacity from 2021 to 2024, driving a global oversupply of commodity petrochemical products.
In the first quarter of 2026, South Korea's three major petrochemical companies simultaneously announced a return to profit. LG Chem's petrochemical division swung from a 239 billion won loss in the previous quarter to a 164.8 billion won profit; Lotte Chemical returned from a 126.6 billion won loss in the same period a year earlier to a 73.5 billion won profit. The substance of these 'surprise earnings', however, is the naphtha lagging effect triggered by the Iran war. It is a one-time windfall from manufacturing products with raw materials purchased at low prices before the outbreak of war and selling them at prices that skyrocketed after the war. Naphtha prices have already fallen from $1,000/ton in March to $815 on May 22, and from the second quarter onward, the real test begins as high-cost raw materials are reflected in product costs.
Restructuring is underway. In Daesan, Lotte Chemical has shut down its 1.1 million ton NCC; in Yeosu, Yeochun NCC has decided to close 60% of its total production capacity. The government has set a target to reduce domestic NCC production capacity by 18–25% (2.7–3.7 million tons). However, the cost of this restructuring is concentrated on workers, partner companies, and local residents in Yeosu, Daesan, and Ulsan. Yeosu Industrial Complex is a typical single-industry city where petrochemicals account for 98.4% of local production, 98.3% of exports, and 87.4% of employment. Over the past two years, 400 partner companies have already disappeared.
This article analyzes the nature of the structural crisis in South Korea's petrochemical industry as of May 2026, the substance of Q1 earnings, the progress and obstacles of restructuring, and its class implications.
1. Structure: Fourth in the World, Domestic Demand Only One-Third
South Korea is the world's fourth-largest ethylene producer, but its production scale far exceeds what domestic demand can absorb.
Ethylene Production Capacity (2024, Korea Petrochemical Industry Association) [1]:
| Rank | Country | Capacity (million tons) | Global Share |
|---|---|---|---|
| 1 | China | 51.3 | 22.8% |
| 2 | United States | 46.4 | 20.6% |
| 3 | Saudi Arabia | 17.6 | 7.8% |
| 4 | South Korea | 13.0 | 5.7% |
Domestic ethylene demand in South Korea is approximately 4 million tons—only 30.7% of production capacity of 13 million tons. The remaining 9 million tons must be absorbed through exports.
This 'export-or-die' structure has operated entirely in reliance on the Chinese market. In 2016, the share of South Korean petrochemical exports to China reached 46.3%. However, as China's self-sufficiency rate surged, this share fell to 38.8% by 2025 [1]. The structural dependency is structurally disappearing.
China's ethylene production capacity increased from 38.3 million tons in 2021 to 51.3 million tons in 2024—a 34% rise in just three years. As of 2024, China's surplus production over its own demand was about 5.2 million tons, and this surplus volume is flowing into the global market at low prices [2].
2. Three Years of Losses: The Collapse of the Ethylene-Naphtha Spread
The basic raw material for petrochemicals is naphtha. The facility that cracks naphtha at high temperatures to produce basic fractions such as ethylene and propylene is an NCC (Naphtha Cracking Center). Therefore, the key profitability indicator for petrochemical companies is the ethylene-naphtha spread: the difference between the price of ethylene and the price of naphtha.
Ethylene-Naphtha Spread Trend ($/ton) [1]:
| Year | Spread | vs Breakeven ($250/ton) |
|---|---|---|
| 2020 | $382 | Above |
| 2021 | $648 | Well Above (Super Cycle) |
| 2022 | $233 | Below |
| 2023 | $202 | Below |
| 2024 | $202 | Below |
The breakeven point is estimated at $250–300 per ton. The spread remained below that for three consecutive years from 2022 to 2024. During this period, the overall operating profit margin of the domestic petrochemical industry plummeted from 13.4% in 2021 to 0.6% in 2023 [1].
The root cause lies on the supply side, not the demand side. In 2024, global ethylene demand was 184 million tons, while production capacity was 225 million tons—a surplus of 41 million tons [1]. In addition to China, the United States (ethane-based low-cost NCCs) and the Middle East (raw material cost advantage) expanded supply, depressing prices of commodity products.
NCC utilization rates also declined. In the Yeosu Industrial Complex, the average utilization rate fell from 96% in 2021 to 87.9% in 2024—a drop of 8.1 percentage points—and further to 77.6% in January 2025 [3]. LG Chem's Yeosu plant utilization once fell to 75%, and Daelim Chemical's Ulsan NCC dropped to 62% [4].
3. The Substance of Q1 2026 'Surprise Earnings'
In the first quarter of 2026, South Korea's three major petrochemical companies simultaneously announced 'surprise earnings'. Earnings of the major firms are as follows:
| Company | Revenue | Operating Profit | Comparison with Previous Quarter/Period |
|---|---|---|---|
| LG Chem Petrochemical Division | 4.4723 trillion won | 164.8 billion won | Q4 2025: -239 billion won → Turnaround |
| Lotte Chemical (Consolidated) | 4.9905 trillion won | 73.5 billion won | Q1 2025: -126.6 billion won → Turnaround |
| Hanwha Solutions (Consolidated) | 3.882 trillion won | 92.6 billion won | +205.5% vs Q1 2025 |
Sources: Each company's Q1 2026 preliminary earnings announcement [5], [6]
The media reported: "Prices rise due to Middle East war… K-petrochemicals 'surprise earnings'" [4]. But the word 'surprise' already reveals the nature of these earnings. This is a one-time phenomenon called the naphtha lagging effect.
The mechanism is simple. Petrochemical companies typically purchase naphtha 45–60 days before product shipment. Until the outbreak of the Iran war in February 2026, naphtha was around $600 per ton. When the war closed the Strait of Hormuz, naphtha skyrocketed to $1,000 in March. Products made from raw materials purchased cheaply before the war were sold at prices that surged after the war.
However, this special factor is already fading. As of May 22, the naphtha price was $815.17/ton, down 12.37% from the previous month, recording "the largest weekly decline since the Iran war began" [7]. From the second quarter onward, products made from naphtha purchased at $900–1,000 will be shipped. The true margin will then become apparent.
4. Restructuring Map: The Tough Road to a 3.7 Million Ton Reduction
The government has set a target to reduce domestic NCC production capacity by 18–25%, or 2.7–3.7 million tons. Restructuring has been underway in the three major industrial complexes since the second half of 2025, but the pace and effectiveness vary significantly by complex [8].
Daesan: Fastest
Lotte Chemical has shut down its 1.1 million ton NCC and is pursuing integrated operation in the form of a joint venture with HD Hyundai Chemical (850,000 tons). LG Chem has also halted its Daesan HDPE plant and consolidated production in Yeosu [9]. Daesan is the fastest among the three complexes in terms of restructuring speed.
Yeosu: Largest in Scale — 2.28 Million → 0.9 Million Tons
On March 20, 2026, the final plan for the 'Yeosu Project No. 1' business restructuring was submitted to the Ministry of Trade, Industry and Energy. Key details:
- Yeochun NCC Plant 3 (470,000 tons): Already shut down
- Yeochun NCC Plant 2 (approx. 900,000 tons): Additional closure
- Yeochun NCC Plant 1 (900,000 tons): To be integrated with Lotte Chemical's Yeosu NCC (1.23 million tons divided) to establish a JV
- Hanwha Solutions, DL Chemical, and Lotte Chemical each hold one-third equity
- Total ethylene production capacity: 2.28 million tons → 0.9 million tons (60.5% reduction)
On the same day, the Fair Trade Commission began a preliminary review of the business combination between Lotte Chemical and Yeochun NCC [10].
Yeosu is also discussing the integration of LG Chem's and GS Caltex's NCC, but progress is slow due to competition concerns under fair trade law [9].
Ulsan: Most Uncertain
SK Geo Centric's closure of its 660,000 ton NCC is under review, and Boston Consulting Group (BCG) is handling restructuring consulting for the three companies—SK Geo Centric, S-Oil, and Daelim Chemical. Restructuring of the naphtha supply chain and conversion of polymer processes into JVs are also under discussion [1].
Obstacles
Three major factors slow the pace of restructuring. First, the Fair Trade Commission's review of business combinations—assessing competition restrictions takes time. Second, pushback from local governments and political circles over the impact on local economies. Third, equity concerns with 'non-affected' companies—if a perception spreads that only those who reduce first suffer disadvantages, the restructuring momentum weakens [8].
5. The Fate of Single-Industry Cities: Yeosu's Warning
Petrochemical restructuring is not simply 'industrial efficiency'. Yeosu, Daesan, and Ulsan are single-industry cities where petrochemicals are virtually the entire local economy.
Indicators for Yeosu Industrial Complex [3]:
| Indicator | Value |
|---|---|
| Petrochemical share of complex production | 98.4% |
| Petrochemical share of complex exports | 98.3% |
| Petrochemical share of complex employment | 87.4% |
| Resident companies | 316 (25 large, 291 SMEs) |
| Direct and indirect employment | 21,900 |
| Production value trend | 101.7 trillion won (2022) → 87.8 trillion won (2024) |
The shock has already begun. Over the two years from 2024 to 2025, more than 400 petrochemical partner companies in the Yeosu complex disappeared [3]. A chain reaction is underway: declining NCC utilization → reduced orders for partners → business closures → collapse of local commercial districts.
A representative of one partner company testified, "The crisis that started at the large petrochemical firms in 2024 has now reached the partner companies, and everyone is in despair" [3].
Daesan and Ulsan have similar structures. When one NCC stops, hundreds of partner companies that supply naphtha, provide utilities, and handle maintenance for that facility are simultaneously hit. These cities have no other industrial base to replace petrochemicals.
6. After the War Boom Ends: Q2–Q3 Outlook
From the second quarter onward, South Korean petrochemicals face two pressures simultaneously.
First, the reversal of the naphtha lagging effect. In Q1, the combination of cheap raw materials and expensive products generated profits. In Q2, products made from expensive raw materials (naphtha purchased at $900–1,000) will be shipped. Naphtha is falling, but product prices are also likely to fall in tandem due to weak demand. This is the true test of the spread.
Second, China's additional capacity expansion. According to S&P Global, China plans to add 6.3 million tons of ethylene capacity in 2026 and 6.8 million tons in 2027 [2]. China accounts for 56% of global net ethylene additions in 2026. China's ethylene production capacity is expected to exceed 62 million tons in 2027 [11].
Market research firm ICIS forecasts that the global ethylene and polyethylene cycle will bottom out only in 2028–2029 [12]. S&P Global also believes that with no new Chinese project announcements after 2028, utilization rates will normalize after 2027 [2]. In other words, South Korean petrochemicals must endure until at least 2028.
A year-end column from GS Caltex Media Hub correctly pointed out: "The longer production cuts are delayed, the greater the losses the entire industry must bear, and in the transition, the companies that move first will preempt the reference, the standard, and the supply chain" [8].
7. Class Implications: At Whose Expense?
The government has clearly conveyed the message: "Support comes only after sacrifice" [8]. The question is: sacrifice by whom?
First, workers and partner companies bear the costs. Restructuring proceeds: NCC closure → elimination of partners' orders → unemployment → collapse of the local economy. In Yeosu, more than 400 partner companies have already disappeared. Large corporations receive tax and financial support under the Corporate Vitality Act while restructuring their business, but subcontract workers and small business owners have no safety net.
Second, the chaebol restructure their portfolios. Hanwha Solutions, Lotte Chemical, and LG Chem have declared a shift from commodity petrochemicals to specialties (high value-add), eco-friendly materials, medical-grade LDPE, functional POE, etc. [10]. However, these high value-added product lines have lower employment absorption capacity than commodity products. 'Business transformation' equals 'job cuts'.
Third, government policy assists the restructuring of capital but does not protect workers. Tax and financial support under the Corporate Vitality Act is concentrated on large corporations implementing business reorganization. The Minister of Trade, Industry and Energy said the government would "closely support the minimization of impacts on local economies, employment, and people's lives in cooperation with relevant ministries" [10], but no specific employment safety net or local economic transition plan has been presented.
The petrochemical crisis illustrates a recurring pattern in South Korean manufacturing. Global oversupply → domestic facility shutdown → costs passed on to workers and regions → capital, with government support, 'transforms its constitution' toward high value-add. The semiconductor downcycle, steel restructuring, and the petrochemical crisis share the same dynamics. Without a political resolution to these dynamics, the path from 'crisis' to 'transition' will always be paved with the sacrifices of the working class.
[1] KIET/KOCHAM, "Petrochemical Industry Crisis and Survival Strategy," Industrial Focus 2026.02. https://kocham.org/wp-content/uploads/2026/03/%EC%84%9D%EC%9C%A0%ED%99%94%ED%95%99%EC%82%B0%EC%97%85_%EC%9C%84%EA%B8%B0%EC%99%80_%EC%83%9D%EC%A1%B4%EC%A0%84%EB%9E%B5.pdf
[2] Chemical Week, "China struggles to reduce overcapacity," 2026.01.05. https://chemweek.mydigitalpublication.com/articles/china-struggles-to-reduce-overcapacity
[3] The Hankyoreh 21, "Yeosu, which bet everything on petrochemicals, is shaking from the bottom," 2025.07.14. https://h21.hani.co.kr/arti/society/society_general/58074.html ; The Chosun Ilbo, "Large companies stagger under China's low-cost petrochemical offensive… 400 partner companies disappear in two years," 2025.11.18. https://www.chosun.com/economy/industry-company/2025/11/18/JJM3MFK6TRC7ZPXQG7U6ISPWG4
[4] Maeil Business Newspaper, "Middle East war pushes up prices… K-petrochemicals 'surprise earnings'," 2026.05.11. https://www.mk.co.kr/news/business/12043552
[5] LG Chem Q1 2026 preliminary earnings announcement. Petrochemical division revenue 4.4723 trillion won, operating profit 164.8 billion won. https://blog.naver.com/PostView.naver?blogId=dealsite&logNo=224272838507
[6] Lotte Chemical Q1 2026 preliminary earnings announcement. Consolidated revenue 4.9905 trillion won, operating profit 73.5 billion won. https://www.lottechem.com/ko/media/news/1202/view.do ; Hanwha Solutions Q1 2026 preliminary earnings announcement. Consolidated revenue 3.882 trillion won, operating profit 92.6 billion won. https://biz.chosun.com/industry/company/2026/04/28/LQC4LVGUA5ECRPBPV2VLMEP5OQ
[7] Trading Economics, Naphtha price, 2026.05.22. https://tradingeconomics.com/commodity/naphtha ; Sparta Commodities, "Naphtha posts sharpest weekly correction since the Iran war began," 2026.05.22. https://www.spartacommodities.com/market-outlook/fuel-prices-jump-more-than-oil-as-iran-war-hits-supply
[8] GS Caltex Media Hub/Kim Rian, "Petrochemical restructured by production cuts: passing the 'restructuring 2025' into 'transition year 2026'," 2025.12.29. https://gscaltexmediahub.com/energy/petrochemical-2025-review-2026-outlook
[9] thebell, "Petrochemical restructuring sets sail — Daesan 'speeds up', Yeosu 'stops again'," 2026.01.12. https://m.thebell.co.kr/m/newsview.asp?svccode=00&newskey=202601091501251000102118
[10] thebell, "Yeochun NCC closes Plants 2 and 3… Plant 1 to be operated with Lotte Chemical," 2026.03.20. https://www.thebell.co.kr/front/newsview.asp?key=202603201557310640109646
[11] SunSirs, "Global Ethylene Capacity to Hit Record 14.6 Million Metric Tons in 2026," 2026. https://www.sunsirs.com/commodity-news/petail-30687.html ; Bloominglobal, "China's Ethylene Production Capacity Set to Exceed 62 Million Tons a Year," 2026. https://www.bloominglobal.com/media/detail/chinas-ethylene-production-capacity-set-to-exceed-62-million-tons-a-year
[12] ICIS, "Ethylene & PE cycle to bottom by 2028/2029." https://www.icis.com/explore/resources/global-ethylene-and-polyethylene-cycle-to-bottom