LG Chem, GS Caltex to consolidate naphtha cracking centers amid petrochemical industry woes

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LG Chem, GS Caltex to consolidate naphtha cracking centers amid petrochemical industry woes

Published: 03 Sep. 2025, 15:19

Audio report: written by reporters, read by AI

LG Chem factory in Yeosu on April 17, 2019 [YONHAP]

LG Chem, Korea’s largest petrochemical company, is pursuing a “naphtha alliance” with local refiner GS Caltex in what could become the first major restructuring move in the domestic petrochemical industry.

According to industry sources on Wednesday, LG Chem is in discussions with GS Caltex to consolidate their naphtha cracking centers (NCC) in Yeosu, South Jeolla. The proposal reportedly involves LG Chem selling its Yeosu NCC plant to GS Caltex, with the facility to be cooperated under an existing joint venture.

“This is our top business restructuring priority,” an LG Chem official said.

The potential deal marks a significant attempt at vertical integration between a traditional petrochemical producer and a refiner. Vertical integration is one of the restructuring models proposed in the government’s “Petrochemical Industry Renewal Roadmap,” announced on Aug. 20.

In Korea, refiners produce naphtha during the crude oil refining process, which petrochemical companies then crack into ethylene and propylene. LG Chem is Korea’s largest ethylene producer, with an annual output of 3.38 million tons. GS Caltex, primarily a refiner, also produces 900,000 tons of ethylene annually at its own Yeosu NCC facility, which was completed in 2022.

The two companies’ plants are next to each other in Yeosu National Industrial Complex, making consolidation logistically efficient. Experts say this vertical merger could yield stronger synergies than horizontal integrations currently under review, such as that between Lotte Chemical and HD Hyundai Chemical.

“Achieving the government’s target of reducing domestic NCC capacity by 25 percent will require consolidation among the Yeosu-based firms, where most large-scale facilities are concentrated,” said Lee Jin-myung, an analyst at Shinhan Securities.

Sources say LG Group is seriously considering divesting a business that served as its corporate origin. LG Chem had previously attempted to sell its Yeosu NCC assets overseas last year.

“The competitiveness of NCCs comes down to cost,” an LG official said. “If consolidated, LG Chem would secure a stable naphtha supply from GS Caltex, while GS would gain a steady client in LG Chem.”

GS Caltex, the core affiliate of GS Group, was spun off from LG Group in 2005. Now expanding beyond refining into petrochemicals and energy, GS Caltex may see value in consolidation. However, immediate losses, restructuring costs and the need for approval from Chevron — its joint venture partner — are potential hurdles.

“We have no comment at this time,” a GS Caltex representative said.

Workers are shown at the GS Caltex factory in Yeosu in this undated photo [GS CALTEX]

The valuation of LG Chem’s NCC assets is expected to be a key point of negotiation. Given the prolonged downturn in the petrochemical industry, NCC asset values have fallen significantly, making GS Caltex more cautious about a deal.

“Unless LG lowers its valuation, GS may not be incentivized to take on the risks associated with weak ethylene demand,” said Lee Chung-jae, an analyst at Korea Investment & Securities.

As this would be Korea’s first large-scale NCC consolidation, industry experts stress the importance of getting the first step right.

“The government should provide support such as acquisition and corporate tax breaks and electricity subsidies for companies pursuing vertical integration,” said Eom Chan-wang, vice chairman of the Korea Chemical Industry Association.

A senior official at the Ministry of Trade, Industry and Energy said, “We’re open to offering financial, tax and regulatory incentives to petrochemical companies actively pursuing restructuring.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM KI-HWAN, KIM SU-MIN [[email protected]]