SK Horizontal Integration Begins: Lotte Chemical and HD Hyundai Advance Merger of Daesan Naphtha Cracking Center

Lotte Chemical and HD Hyundai are in talks to merge the assets of the Naphtha Cracking Center (NCC) in Daesan, South Chungcheong Province, South Korea, marking an important step in the self-restructuring of the Korean petrochemical industry in the face of global market changes.

The two companies have begun discussions to integrate their respective NCC businesses in Daesan and are working with a large accounting firm to evaluate the relevant assets and determine the fair value of the potential joint venture, according to several informed investment bankers. The negotiations began at the beginning of the year, and Lotte Chemical had previously tried to negotiate similar cooperation with Korean companies such as LG Chem and DL Chemical, but failed to reach an agreement. In the end, Lotte decided to deepen its existing cooperation with HD Hyundai Oilbank, a subsidiary of HD Hyundai Group.

Since 2014, Lotte Chemical and HD Hyundai Oilbank have established a 40:60 joint venture HD Hyundai Chemical to operate an ethylene cracker with an annual production capacity of 850,000 tons. At the same time, Lotte Chemical also independently operates an NCC plant in Daesan with an annual production capacity of 1.1 million tons of ethylene, accounting for 20% of the company's total ethylene production capacity (about 4.5 million tons).

The integration of NCC assets in the Daesan area is expected to bring synergies, including shared facilities, reduced management costs, streamlined labor and improved bargaining power in raw material procurement. The two companies hope to optimize resource allocation and reduce the pressure brought by homogeneous competition through this integration. As an important petrochemical hub in South Korea, Daesan has a superior geographical location and convenient transportation, and is an important base for developing joint operations.

One of the backgrounds of this reorganization is the continuous evolution of the supply and demand pattern of the global petrochemical industry. In recent years, major producers including South Korea are facing the challenge of shrinking industry profit margins. In this context, cooperation between enterprises has become a key way to enhance competitiveness and achieve sustainable development.

It is reported that according to the current proposed plan, Lotte Chemical will inject its Daesan NCC assets into the existing HD Hyundai Chemical joint venture, and HD Hyundai Oil Bank will provide additional capital in cash or in kind to achieve equity balance and integrate related facilities into one operating entity. In the future, the merged company is expected to gradually optimize its production capacity structure through measures such as facility integration and employee redeployment.

Industry observers pointed out that the cooperation between Lotte and HD Hyundai shows that both companies have realized that the continuous competition model is unsustainable. In 2024, Lotte Chemical and HD Hyundai Chemical recorded operating losses of 1.83 trillion won and 284 billion won respectively, and are expected to continue to be under pressure this year.

Analysts believe that this move may become an opportunity to promote the structural optimization of South Korea's petrochemical industry. At present, Lotte Chemical is also discussing facility integration plans with LG Chem, and is in contact with SK Energy and Korea Petrochemical Industry Corporation in Ulsan, North Gyeongsang Province to explore the possibility of further cooperation.

Meanwhile, the Korea Chemical Industry Association (KCIA) has commissioned Boston Consulting Group (BCG) to conduct research on the structural challenges facing the industry. It is reported that the association submitted a report to the Ministry of Trade, Industry and Energy of South Korea at the end of March this year, suggesting that duplicate production capacity should be moderately reduced by up to 50% in areas where facilities are concentrated (such as Daesan and Yeosu). An industry executive pointed out: "This is not just a matter of cost cutting, but also a necessary transformation for the Korean petrochemical industry to move towards sustainable development under the new market structure."

In the past year, the Korean petrochemical and chemical industry has shown significant structural adjustment activities. In response to the overcapacity of basic chemical production, LG Chem is seeking to sell its second NCC unit to focus on high value-added directions.

In addition, Hyosung originally planned to sell its high-purity nitrogen trifluoride (NF₃) business for about 1.3 trillion won, but the transaction was ultimately aborted due to valuation differences and reduced orders from customer Samsung. In order to alleviate the liquidity risk after the failure of the business sale, Hyosung TNC, a subsidiary of Hyosung Group, was listed as a potential acquirer and is expected to be diverted internally.

At the same time, the South Korean government has relaxed restrictions on mergers and acquisitions and plant closures in the petrochemical industry, and provided up to 3 trillion won in low-interest loans and tax buffers. With policy support, large-scale joint ventures, asset divestitures and the move away from traditional production models will be accelerated, which is expected to catalyze more horizontal integration models similar to Lotte-HD Hyundai.