Donald Trump, Elon Musk, AI and EV, and Korea’s petrochemical industry

Donald Trump, Elon Musk, AI and EV, and Korea’s petrochemical industry

In the third quarter of 2024, major petrochemical companies in Korea have completed their performance announcements. As the recent stock price trend of related companies suggests, the performance has been extremely sluggish. Whenever this happens, there is something that always comes out.

“Structural recession,” one step further, “endless recession.”

These companies made billions of dollars in operating profit just two years ago, and whenever there is a deficit transition, there are talks of a “structural recession” and a “endless recession.” The same was true of the large-scale expansion in the Middle East in the early 2000s. It was the same for the ECC expansion in the U.S. after the 2008 financial crisis. Now, China’s self-sufficiency rate is said to be the main reason.

Is that really true?

Supply and demand is an important factor in determining the profitability of the petrochemical industry. Therefore, the rise in China’s self-sufficiency rate is a negative factor in the profitability of Korean petrochemical companies. Of course, it’s not good if I run a coffee shop, and there’s a back cafe next to it, and mega coffee in front of it. However, this is not absolute. Global supply and demand is important.

Even if there are three coffee shops in our city, there is no problem even if there is a back coffee shop next to my shop and a mega coffee shop in front of me. Rising self-sufficiency in China is just one of the important variables for profitability. It is not absolute.

What matters is ‘cost’.

If baseball is “pitcher play,” the petrochemical industry is “cost play.” Lotte will win the Korean Series if Choi Dong-won wins four times, or Yeom Jong-seok picks today, and finishes tomorrow. This is an expression I used every time I had basic seminars. When international oil prices plunge, Korea’s Naphtha Cracker (NCC) will also become No. 1 in the world in terms of cost competitiveness. Even if international oil prices do not plunge, if the price of ethane in the U.S. soars, it will become No. 1 in the world in terms of cost competitiveness.

Let’s think carefully. Now no one is saying that international oil prices will rise. It is said that global oil demand will decrease due to electric vehicles. In fact, China’s oil imports in 2024 are decreasing compared to last year. Everyone refers to a decrease in global oil demand and a decrease in oil prices. At the same time, it refers to the ‘endless recession’ in Korea’s petrochemical industry. I think it’s contradictory.

As many of you will forget, the ethylene cash cost of the U.S. Ethane Cracker (ECC) before the 2008 financial crisis was higher than that of Korea’s NCC. At that time, the ethylene cash cost of the U.S. was $400-500/MT. The ethylene cash cost of Korea was $300-350/MT. The ethylene cash cost of the NCC in 2004 was $100-150/MT lower than the ECC.

There is nothing absolute in the world. The cost competitiveness of NCC and ECC continues to change as oil and natural gas prices move.

Then, what will happen to the cost of having a greater impact on NCC’s profitability than supply and demand in the future?

Will U.S. oil production be able to increase under the second Trump administration? I don’t think so. What’s more important than lifting regulations is profitability, or money. No matter how much regulation is lifted, production cannot be increased if “money” does not work. The price of oil now is barely enough for U.S. shale oil companies to maintain production. Shale oil production decline rate exceeds 15% per year. If the oil price is maintained at $65-70/BBL, as shown in the Dallas Fed’s cost survey, it is difficult to increase production even if Trump comes.

U.S. oil production is currently difficult to increase at the level of international oil prices, but oil is overflowing with spare capacity around the world, including OPEC+. OPEC+ alone can increase production of millions of barrels in 1-2 months. If Trump really ends the Russia-U.S. war in one day and the tragedy of Gaza, international oil prices may really fall “hook.” Even if it doesn’t fall “hook,” it will be hard to get higher than it is now.

What will happen if this happens? U.S. shale oil companies cannot increase production. If U.S. oil production decreases, so does the accompanying gas production. Of course, ethane gas production will decrease. If Trump calls for “world peace,” U.S. ethane gas production will decrease.

What if ethane gas production decreases? The cost competitiveness of the US ECC will inevitably decrease. In other words, the so-called ‘Oil/Gas Ratio 9 times’ could happen again. If the international oil price remains at $65/BBL level in 2025 and the US Henry Hub natural gas price rises to $5.0/MMBTU level, the Oil/Gas Ratio will decrease by 13 times.

Everyone would think that would be the case with $65/BBL. One can doubt that Henry Hub natural gas prices, which are currently around $2.0-2.5/MMTU, could rise to $5.0/MMTU. When international oil prices plunged due to COVID-19 in 2020, Henry Hub natural gas prices soared due to disruptions in U.S. oil production.

What’s more, isn’t everyone saying now that the supply of electric vehicles will reduce the demand for oil? What if the increased supply of electric vehicles makes naphtha cheaper than oil because of gasoline, which should be more expensive than oil? The Oil/Gas Ratio could drop by less than 10 times.

In this case, the ethylene cash cost of the US ECC is higher than that of the Korean NCC. In other words, due to China’s rising self-sufficiency rate, the US LondonellBasell, not Korea’s Lotte Chemical, may have to restructure.

In addition, there are many prospects that the supply/proliferation of AI could significantly increase the demand for electricity in the United States. There is also talk of building nuclear power plants to stabilize the power supply and demand of so-called AI data centers and turning off nuclear power plants again. As everyone knows, this is not an immediate situation for nuclear power plants. SMR also canceled its nuclear power plant project with a construction permit. Even if it goes as planned, it is difficult within 5 years. If so, the only answer is natural gas power generation. A combination of ‘solar/wind power + ESS’ is possible, but the important thing is that natural gas power generation will also increase.

Let’s sort it out in the middle.

Right now, NCC’s