South Korean petrochemical companies failed to recover credit ratings in the first half of this year, with zero upgrades among 14 major firms reviewed by the country's three credit rating agencies. LG Chem was downgraded from AA+ to AA, Yeocheon NCC dropped from A- to BBB+, and SK Advanced fell from BBB+ to BBB, while Lotte Chemical's outlook shifted from stable to negative despite maintaining its AA- rating. The downgrades stem from ongoing industry weakness driven by cost disadvantages against competitors in China, the United States, and the Middle East, which utilize cheaper raw material processing methods. The government responded on the 22nd by approving the Yeosu No.1 restructuring project involving Yeocheon NCC, Lotte Chemical, Hanwha Solutions, and DL Chemical, with plans for 545 billion won in equity injections and up to 450 billion won in government support.
Petrochemical Companies Record Zero Rating Downgrades in H1
According to credit rating industry sources and Hana Securities analysis, none of the 14 major petrochemical companies received effective rating upgrades during regular assessments in the first half of this year. An effective rating refers to the lowest rating assigned by Korea's three major credit rating agencies—Korea Ratings, Korea Investors Service, and NICE Investors Service—which serves as the basis for interest rate calculations when issuing and trading corporate bonds.
Rating downgrades occurred across multiple firms. LG Chem's rating fell from AA+ at the end of last year to AA in the first half of this year. Yeocheon NCC dropped from A- to BBB+, while SK Advanced declined from BBB+ to BBB. Lotte Chemical maintained its AA- rating but saw its outlook downgraded from stable to negative.
The remaining companies maintained both their ratings and outlooks. Hanwha TotalEnergies, SK Geocentric, and Hanwha Solutions continued at AA- with negative outlooks, while Kumho Petrochemical, SK Chemicals, and Gukdo Chemical maintained A+ ratings with stable outlooks. SKC and Kumho P&B Chemical held A ratings with stable outlooks, HD Hyundai Chemical maintained A with a negative outlook, and SK PICC Global kept its A- rating with a negative outlook. Among companies that maintained their ratings, five carry negative outlooks, bringing the total number of firms either downgraded or facing potential downgrades to nine when including the three actually downgraded and one with a downgraded outlook.
Naphtha Crackers Create Cost Disadvantage Against US and China
The concentration of rating downgrades stems from unfavorable raw material supply structures compared to China and other competitors launching low-cost petrochemical product offensives. South Korea's petrochemical industry has been assessed as relatively disadvantaged compared to manufacturers in the United States, China, and the Middle East, which possess cost advantages. Domestic companies use naphtha cracking facilities (NCC) that decompose naphtha—an intermediate product from crude oil refining—at high temperatures to produce ethylene, the basic raw material for plastics, vinyl, and synthetic resins.
In contrast, the United States produces ethylene through ethane cracker facilities (ECC) that decompose inexpensive ethane gas separated from shale gas-derived natural gas. The Middle East benefits from being oil-producing nations while also operating low-cost ethane facilities. China has expanded coal-to-olefins crackers (CTO) that use the country's abundant coal as feedstock to produce ethylene. China stands out as a key competitor pressuring Korean companies through large-scale capacity expansions and low-cost exports.
Government Approves Yeosu Restructuring Project with 545 Billion Won Investment
Amid this crisis, the government took action. The Ministry of Trade, Industry and Energy announced on the 22nd that it approved the Yeosu No.1 business restructuring project involving Yeocheon NCC, Lotte Chemical, Hanwha Solutions, and DL Chemical. This marks the second petrochemical business restructuring following the Daesan No.1 project announced in February. Under the approved plan, Hanwha Solutions and DL Chemical will contribute downstream businesses including polyethylene (PE) through in-kind investments, while Lotte Chemical will physically split its Yeosu plant NCC and basic materials business to establish an integrated corporation with Yeocheon NCC.
Hanwha Solutions and DL Chemical plan to invest a total of 545 billion won to secure funds for repaying Yeocheon NCC's marketable debt. The government will also pursue up to 450 billion won in new financial support, deferral of covenant debt repayment, and tax support. With the Bank of Korea raising its base rate this month and signaling additional increases within the year, debt-laden companies face growing financing cost burdens. However, this restructuring includes marketable debt repayment through paid-in capital increases and repayment deferrals, which analysts say will limit additional financing cost burdens even amid rising interest rates.
Analysts Question Long-Term Competitiveness of Restructuring Plan
Some observers note that fundamental competitiveness recovery remains uncertain given continued unfavorable conditions in raw material supply. Kim Sang-man, a researcher at Hana Securities, stated, "While this structural reorganization is meaningful in reducing the scale of losses, it has limitations in that it cannot fundamentally change the cost structure itself or resolve structural competitive disadvantages."
FAQ
What happened to South Korean petrochemical companies' credit ratings in the first half of this year?
None of the 14 major South Korean petrochemical companies received credit rating upgrades in the first half of this year during regular assessments by the country's three credit rating agencies. LG Chem was downgraded from AA+ to AA, Yeocheon NCC dropped from A- to BBB+, SK Advanced fell from BBB+ to BBB, and Lotte Chemical's outlook shifted from stable to negative while maintaining its AA- rating.
Why are South Korean petrochemical companies facing cost disadvantages?
South Korean petrochemical companies face cost disadvantages because they use naphtha cracking facilities (NCC) that process naphtha, an intermediate product from crude oil refining. In contrast, US competitors use cheaper ethane gas from shale gas, Middle Eastern firms benefit from oil-producing status and low-cost ethane facilities, and Chinese companies utilize abundant domestic coal through coal-to-olefins crackers (CTO), all providing lower production costs.
What did the government approve on the 22nd to support the petrochemical industry?
The Ministry of Trade, Industry and Energy approved the Yeosu No.1 business restructuring project on the 22nd, involving Yeocheon NCC, Lotte Chemical, Hanwha Solutions, and DL Chemical. The plan includes 545 billion won in equity injections from Hanwha Solutions and DL Chemical, up to 450 billion won in government support, physical division of Lotte Chemical's Yeosu plant NCC and basic materials business to create an integrated corporation with Yeocheon NCC, and deferral of covenant debt repayment.
