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Restructuring frameworks for steel and petrochemical industries.

The government unveiled its frameworks for restructuring the steel and petrochemical industries on September 30. The two industries, along with the shipping and shipbuilding industries, are the focuses of the government's industrial restructuring.

Restructuring frameworks for steel industry

1. Current situation and outlook

Although the global steel industry depends on domestic demand due to low prices and high shipping costs, Korea and Japan have been major exporters backed by lower prices and high quality. However, there has been an issue of global oversupply in line with a slowdown in demand from China, as well as tightening import restriction measures in other countries. Furthermore, regulations on the industry are getting stricter with environmental regulations regarding greenhouse gas emissions being tough, and demands for steel products are expected to decrease as the development of steel-replacing materials, such as aluminum products and carbon fibers, is accelerating.

Competition in domestic markets is getting fierce as new manufacturers enter markets and imports from China increase. Integrated iron steel mills remain competitive, even compared with major global players, but forging manufacturers have been suffering.

2. Frameworks for restructuring

Restructure businesses

--Steel sheets: Promote the restructuring of businesses through M&As between domestic companies and encourage exporters to acquire factories located in export destinations

--Steel plates: Support the reduction of production facilities

Develop high value-added materials

--Promote R&D for the early development of value-added steel materials and lightweight materials, in particular titanium alloys, magnesium alloys and aluminum alloys

Upgrade production facilities

--Develop eco-friendly steelmaking methods: Hydrogen Reduction Iron and Steel Making, which will reduce carbon dioxide emissions by 15 percent, and technologies to recycle iron waste and use by-products

--Use IT and develop a state-of-the-art production management system

Explore new export markets

--Transform the industry from the one producing common steel products to the one making high valueadded products and providing technical and maintenance services

--Promote the sales of non-operating plants to foreign manufacturers

--Establish a tracking system for newly developed steel materials, which will provide information gathered from material suppliers, facilities builders and end users, in order to ensure that the prices and qualities are good enough to be exported

--Promote an export partnership between steel manufacturers and facilities builders, in particular power plant constructors

--Promote a partnership between steel manufacturers and parts manufacturing SMEs when steel manufacturers set up processing centers overseas

Improve trade environment

--Form a joint public-private committee to swiftly respond to import restrictions

--Utilize bilateral as well as multilateral trade negotiations

--Closely monitor markets, especially those for major export items

--Raise the national standards (KS) for structural steel to ensure the safety of buildings and avoid the import of low quality materials

--Carry out a government-wide investigation into the distribution of fraudulent products, including those with a fake KS and country of origin certificates

Restructuring frameworks for petrochemical industry

The industry

The petrochemical industry is a process industry which produces materials important to other manufacturers, such as those making plastics, textiles and cosmetics. The cost of raw materials is the most crucial factor behind the competitiveness of the industry as raw materials account for 70 percent of the total manufacturing costs, in particular naphtha, whose price fluctuates in line with oil prices. Energy efficiency is another factor that influences the industry's competitiveness as energy costs also account for a fair portion of the total costs.

1. Current situation and outlook

The industry is working to achieve economies of scale, a cost advantage backed by larger production capacity. Newly constructed naphtha cracking centers (NCCs) have much larger capacities, most of them producing more than 1 million tons a year and some of them around 3 million tons. However, petrochemical markets are expected to remain stable until 2020, given sluggish demand due to a slow global economic recovery and a limited increase in supply amid low oil prices.

Meanwhile restructuring is under way globally: China is working on developing the industry in terms of quality as well as size, the US and EU are working on business restructuring with their focuses on strengthening core competencies, the Japanese government is working in partnership with the private sector to restructure the industry and develop high value-added businesses, and the Middle East is working to change their major exports from crude oil to petrochemical products.

Korea is the fourth largest petrochemical production country following the US, China and Saudi Arabia. Most of the country's NCCs have a world class producing capacity, processing more than 1 million tons a year. Furthermore the country's NCCs are located in three industrial complexes, which makes it easy for other industries to use petrochemical materials. However, there are oversupply issues regarding purified terephthalic acid (PTA), polystyrene (PS), butadiene rubber (BR), styrene butadiene rubber (SBR) and polyvinyl chloride (PVC) as China and India are becoming more and more self-sufficient of those materials.

2. Frameworks for restructuring

--Pursue economies of scale to deal with high raw material costs

--Early start business restructuring to avoid oversupply, and accelerate the development of high valueadded products

--Promote the use of raw materials other than oil to reduce costs, as well as the establishment of a joint business with raw material exporters

--Support the development of core technologies important to produce high valueadded materials

--Promote R&D by providing tax support as well as commercialization support

--Create industrial clusters specific to precision chemical manufacturing
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Title Annotation:Policy Issue
Publication:Economic Bulletin (Korea)
Geographic Code:9SOUT
Date:Oct 1, 2016
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