The Korea Fair Trade Commission (KFTC) has conditionally approved the merger of Daesan 1, the first case of restructuring in the petrochemical industry. While there are concerns about potential market competition limitations, the merger was not blocked.
However, the KFTC imposed corrective measures, including restrictions on the prices and supply of low-density polyethylene (LDPE) and ethylene-vinyl acetate (EVA) for the next five years.
On August 20, the KFTC announced its conditional approval of the merger involving Lotte Chemical, Lotte Daesan Petrochemical, HD Hyundai Oilbank, and HD Hyundai Chemical as part of a restructuring of the petrochemical business.
The Daesan 1 project involves the absorption of Lotte Daesan Petrochemical, which was established by HD Hyundai Chemical through the physical division of Lotte Chemical's Daesan plant. After the merger, Lotte Chemical and HD Hyundai Oilbank will each hold a 50% stake in HD Hyundai Chemical, jointly controlling the entity.
As a result, the naphtha cracking facilities (NCC) and other petrochemical production facilities of both companies located in the Daesan Industrial Complex will be operated jointly. The companies plan to increase operational efficiency, achieve economies of scale, and reduce costs through shared utilities and streamlined organizational structures.
The KFTC expressed concerns about potential competition restrictions in the LDPE and EVA markets, as the number of domestic players will decrease from four—Hanwha, LG, Lotte, and HD Hyundai—to three. In terms of production capacity, Hanwha is expected to capture about 50% of the market, while LG and HD Hyundai will hold approximately 25%.
Notably, the KFTC found that HD Hyundai Chemical has been supplying products at about 10% lower prices than its competitors. There are fears that the price competition pressure created by the new entrant, HD Hyundai Chemical, could dissipate due to the merger.
Additionally, the reduction in the number of competitors could facilitate price coordination among remaining players, raising the risk of price increases and production halts due to collusion. In fact, there was a precedent in the 1990s when collusion persisted in the domestic LDPE market for over a decade due to supply excess.
To address these concerns, the KFTC has linked the domestic sales price fluctuations of LDPE and EVA to export price changes for the next five years. If export prices rise or remain stable, the domestic price increase must be kept below the export price increase rate. Conversely, if export prices fall, the domestic price decrease must exceed the export price decrease rate.
The KFTC chose to use export prices as a benchmark, believing that prices in the more competitive overseas markets are closest to competitive pricing. Currently, Lotte Chemical's Daesan plant and HD Hyundai Chemical export over 70% of their production.
For all LDPE and EVA products being produced at the time of the merger, the companies are required to supply the quantities requested by domestic buyers. Many domestic purchasers are small plastic processing firms, and this measure aims to prevent disruptions in supply due to the discontinuation of less profitable products or avoidance of small orders during the restructuring process.
Lotte Chemical, HD Hyundai Chemical, and HD Hyundai Oilbank are also prohibited from sharing sensitive competitive information regarding LDPE and EVA prices, quantities, costs, and inventory levels. However, in cases of unavoidable circumstances such as actual product purchases or intermediary sales, they may exchange information with internal controls and KFTC approval.
The corrective measures will remain in effect for five years. Jeon Seong-bok, head of the KFTC's Merger Review Division, stated, "Although the restructuring period for the petrochemical business is three years, the market impact will be felt more significantly after the restructuring is completed. We determined that five years is appropriate, considering the competitive landscape in China and abroad. If competition concerns remain after five years, we will extend the corrective measures."
Separately, the newly formed HD Hyundai Chemical plans to promote cooperative partnerships with its suppliers in consultation with the KFTC.
This decision is expected to influence the review of the subsequent restructuring project, Yeosu 1. Yeosu 1 aims to integrate Lotte Chemical's Yeosu basic materials business, Hanwha Solutions' Yeosu polyethylene and petrochemical resin business, DL Chemical's polyethylene business, and Yeocheon NCC. If the plan proceeds as intended, Lotte Chemical, Hanwha Solutions, and DL Chemical will jointly control Yeocheon NCC.
The KFTC also considered that if both Daesan 1 and Yeosu 1 are completed, there will be a share linkage between the two joint ventures through Lotte Chemical. Jeon noted, "Since the market situation for Daesan 1 is confirmed, it will naturally be taken into account when assessing Yeosu 1. Although the companies participating in Yeosu 1 differ, the number and types of product markets to be analyzed may change, but we will aim to conclude the review as quickly as possible."
Industry voices welcomed the approval of Daesan 1. The Korea Chemical Industry Association expressed hope that it will serve as a successful restructuring model in line with the roadmap for the restructuring of the petrochemical industry, emphasizing the need for swift reviews of subsequent mergers to ensure the restructuring's goal of enhancing industrial competitiveness is realized without delay.
* This article has been translated by AI.
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