Beyond South Korea’s Rationalization: How the US–Iran Conflict is Reshaping Restructuring Priorities

In August 2025, the South Korean government called on domestic petrochemical producers to formulate measures to ensure the survival and long-term competitiveness of the industry, amid persistent global oversupply—particularly within Asia—and intensifying competition. Under government coordination, major producers were asked to submit plans by year-end targeting a reduction of 20-30% of domestic ethylene capacity and 15-20% of propylene capacity as part of broader rationalization efforts. Both ethylene and propylene are key chemical products widely used in plastics production, and therefore major supply chain pillars. However, the outbreak of the US–Iran conflict in late February ultimately slowed the process down.

While no official public statement has been released by the authorities, industry sources indicate that the South Korean government has pivoted from its previous rationalization drive to an approach that respects market autonomy and supports flexible adaptation, at least for the time being. Ensuring supply security has emerged as a critical national priority, prompting policymakers to take a step back from forcing immediate, mandate-based capacity shutdowns.

In fact, to support stable operations for domestic companies, South Korean Government provided approximately half a billion dollars in import subsidies during the second quarter for petrochemical raw material imports, like naphtha. Consequently, despite skyrocketing raw material prices, when incorporating these subsidies, first-half profitability for petrochemical producers this year reflects an improvement compared to the second half of last year.

The post-conflict reality has vividly exposed the structural vulnerability of South Korea’s heavy reliance on Middle Eastern crude oil and naphtha supply chains. While government subsidies and favorable lagging effects provided temporary margin relief in the first half of this year, this buffer will erode in the second half as the subsidies expire and negative lagging impacts take hold. Consequently, this shift highlights that diversifying away from Middle Eastern feedstocks is no longer a cost-saving option, but a critical priority for the domestic industry.

Among the various potential alternatives to traditional naphtha feedstock, US ethane stands out as the most economically attractive option. Backed by abundant shale gas reserves and stable pricing, ethane cracking offers a significant cost advantage that can fundamentally improve the structural margin profiles of domestic producers. Driven by the need to hedge geopolitical risks and overhaul uncompetitive cost structures, major South Korean chemical players have long been conducting feasibility studies for US ethane imports and minor cracker modifications. However, the high upfront capital expenditure required for infrastructure and supply chain logistics remains a primary deterrent, causing producers to hesitate despite the long-term benefits. While US ethane is poised to remain a structural cost-advantage leader over traditional naphtha, its relative advantage is highly likely to moderate over time.

-William Chen, Executive Director, Olefins & Derivatives (William.Chen@chemicalmarketanalytics.com) and Mike Park, Director, Olefins & Derivatives (Mike.Park@chemicalmarketanalytics.com)