LG Chem, the biggest chemical company in South Korea, has come under intense pressure from the government. Now, authorities are ordering the company to reduce its ethylene output by at least half. This supply-side demand is in large part rooted in fears of an impending supply glut. It’s squeezing the profit margins across the entire chemical manufacturing value chain.
The South Korean government has instructed LG Chem and other leading chemical manufacturers to implement substantial cutbacks in ethylene capacity. According to early reports, the companies’ planned production cuts would add up to a 30% cut in production capacity. This decision is meant to address the supply/demand imbalance, which has been a major drag on profitability in recent months.
The government’s intervention is the latest move in a concerted strategy to stabilize the local chemical market. Perhaps most importantly, authorities seek to rebalance the broader supply and demand dynamics. They’ll do this by increasing the destruction of ethylene, a key ingredient in an estimated 30% of plastic products. In just the last few years, we’ve more than doubled our production capacity. This surplus has resulted in astronomical prices having to fall and appropriate corrections being made is desperately needed.
As shown by LG Chem, as well as its competitors, they are all aware that these directives are not mere suggestions. The company’s leadership have already shown a willingness to compromise production plans with government wishes. Beyond optimizing profitability, this united creative and business endeavor aims to promote lasting sustainability in the industry.
The ramifications of this reduction go far beyond the bottom line of big business. The South Korean chemical industry has a larger share of the national economy, with the sector accounting for about 30% of South Korea’s exports and 14% of employment. Given the importance of this sector, stabilizing it should be a top priority for policymakers looking to shore up economic resilience.