Refining and petrochemicals form a single industrial security chain, from crude oil procurement to the production of basic materials. As the risks from Hormuz and oversupply from China converge, the restructuring of South Korea's petrochemical industry is not merely a matter of reducing production but of redesigning the supply chain for essential materials. [Photo = Hamihilbo Composite]Table of Contents

 ① Why Iran's Nuclear Issue Targets Korean Factories

② If the Strait of Hormuz Closes, the Arteries of the Korean Economy Will Also Block

③ Why Refining and Petrochemicals are Security Industries

④ Crude Oil to the US and Non-Middle Eastern Regions, Flexible Processing

⑤ The Hydrogen Economy Lies Within Petrochemicals, Not Outside Them

Refining is the forefront of energy security, and petrochemicals are the rear guard of manufacturing security.

Crude Oil – Refining – Naphtha – NCC – Basic Materials: A Single Integrated Process

An essential materials security system must be overlaid onto the export-oriented petrochemical industry.

Refining and petrochemicals have long been referred to as export industries.

The process involved importing crude oil, refining it, producing naphtha or importing it to feed into Naphtha Cracking Centers (NCCs), and then producing basic fractions like ethylene and propylene, which are subsequently used to create synthetic resins, synthetic fibers, rubber, automotive materials, and electronic materials.

In times of peace, this structure was a competitive advantage. It involved stably importing low-cost raw materials, producing large quantities with massive facilities, and selling extensively in the global market.

From Export Industry to Security Industry

However, the Iranian nuclear crisis and the instability in the Strait of Hormuz have led to a different perspective on this industry.

Refining and petrochemicals are not simply private manufacturing sectors.

Refining is the forefront of energy security, and petrochemicals are the rear guard of manufacturing security. If crude oil is not imported, refining stops. If refining and naphtha are disrupted, NCCs become unstable, and if NCCs are unstable, the supply chain for basic materials in Korea's manufacturing sector is shaken. This is not a problem of gasoline prices at the pump but a problem of factory operations.

The reason refining and petrochemicals must be viewed as security industries is simple: these industries are responsible for the basic functions that keep the nation running.

Refining supplies gasoline, diesel, aviation fuel, and marine fuel. It is difficult for automobiles, trucks, aircraft, ships, military logistics, and emergency power generation to operate without refined products.

Petrochemicals underpin industries at an even deeper level. Ethylene, propylene, butadiene, benzene, toluene, and xylene are the starting points for various plastics, synthetic rubber, fibers, adhesives, packaging materials, and materials for electronics and automobiles.

If this chain breaks, it's not just a shortage of consumer goods; the very foundation of industry is shaken.

A Single Process from Crude Oil to Materials

Therefore, refining and petrochemicals cannot be viewed in isolation. They constitute a single integrated process, from crude oil import, refining, naphtha production, NCC operation, basic fraction production, to the materials industry.

When combined with by-product gases and hydrogen, reformed hydrogen, and hydrogen power generation and fuel cell vehicles, refining, petrochemicals, and hydrogen form a single industrial security chain.

The hydrogen economy should not be seen as a separate future slogan outside of petrochemicals, but rather as an expanded process that originates from within the refining and petrochemical processes and then flows back into power generation, transportation, and industrial fuels.

From this perspective, the meaning of petrochemical industry restructuring also changes.

South Korea's petrochemical industry has already entered a restructuring phase.

Ten South Korean petrochemical companies have agreed to reduce their annual naphtha cracking capacity by 2.7 million to 3.7 million tons, following a government-led plan. This is estimated to represent up to 25% of the total domestic production capacity.

The backdrop for this is oversupply from China, low margins, and sluggish demand. In 2024, South Korea's petrochemical exports amounted to $48 billion, approximately 7% of total exports. For the first half of 2025, petrochemical exports were recorded at $21.7 billion, a 11.1% decrease year-on-year.

Restructuring is Supply Chain Reorganization

The issue is that this restructuring should not be viewed merely as "closing unprofitable facilities." Petrochemical restructuring is the reorganization of the national supply chain.

Which facilities should be reduced, and which should be preserved? Should some NCCs be considered surplus export capacity and thus reduced, while others are preserved as critical domestic material supply chains? This distinction is crucial.

If all facilities are evaluated solely on market profitability, the foundation for essential materials that support domestic manufacturing during crises could be weakened.

The restructuring of the Daesan complex serves as an example of this direction. The government has approved the Daesan petrochemical restructuring plan submitted by HD Hyundai Oilbank, HD Hyundai Chemical, and Lotte Chemical.

This plan includes the division of Lotte Chemical's Daesan plant, its integration with HD Hyundai Chemical, the integrated operation of NCC and downstream facilities, and the temporary suspension of Lotte Chemical's Daesan NCC facility.

The government is also pursuing a support package worth approximately 2 trillion won, which includes financial support, tax benefits, licensing assistance, easing of electricity cost burdens, and R&D support.

What is significant in this example is not mere production cuts but integration.

Independent NCCs struggling to survive on their own find it difficult to cope simultaneously with oversupply from China, fluctuations in raw material prices, and the risks associated with Hormuz.

Integrated processes that combine refining and petrochemicals are relatively advantageous in terms of raw material procurement, naphtha utilization, by-product gas and hydrogen utilization, and product portfolio conversion.

The direction of petrochemical restructuring should not be "producing less," but rather moving towards a "structure that stably produces what is necessary for security."

Pressure from Both Sides

South Korea's petrochemical industry is currently facing pressure from two sides. Externally, oversupply from China is suppressing product prices, and internally, the Middle East conflict and the risks associated with Hormuz are driving up raw material procurement costs.

The era of producing and selling large quantities is coming to an end. Now, decisions must be made about what to reduce, what to preserve, and what to designate as domestic security supply.

Therefore, the question needs to be reframed. Instead of asking "How much will we export?", we must first ask, "What will we secure domestically during a crisis?"

What is the minimum volume of gasoline, diesel, aviation fuel, and marine fuel required? What is the essential domestic volume of basic materials like naphtha, ethylene, propylene, butadiene, and BTX? What materials are absolutely necessary to maintain supplies for automotive, electronics, shipbuilding, construction, medical, food packaging, and defense industries?

If the nation cannot answer these questions, the restructuring of the petrochemical industry will remain merely a matter of market adjustments.

A System for Essential Materials Security is Needed

An essential materials security system does not imply a closed economy. South Korea is not a nation that can achieve self-sufficiency in crude oil.

An essential materials security system means maintaining control over the core volumes and processes that prevent domestic industries from halting during a crisis.

Even if products are exported during normal times, priority must be given to domestic essential supplies during a crisis. While price competitiveness may be considered in normal times, supply stability and substitutability must take precedence during a crisis. This is industrial security.

The reorganization of crude oil supply sources must also be viewed from this perspective.

Middle Eastern crude oil remains important in terms of its suitability for refining facilities, long-term contracts, and transportation costs. However, South Korea's low energy self-sufficiency and dependence on fossil fuel imports create a structure vulnerable to supply disruptions.

The International Energy Agency (IEA) has pointed out that countries highly dependent on energy imports, like South Korea, can be vulnerable to external shocks. Ultimately, diversification of supply sources is not an option but a security cost.

Therefore, increasing imports of crude oil from the United States and non-Middle Eastern regions is not simply a matter of changing suppliers.

Changes in crude oil composition alter refining yields, the structure of naphtha production, the feedstock blend for NCCs, and the petrochemical product portfolio.

Increasing imports of US crude oil is a security choice, but it also necessitates process redesign. Without redesigning the integrated refining and petrochemical process according to security standards, diversifying supply sources may remain just a slogan.

Hydrogen is the Next Process

Hydrogen must also be incorporated into this integrated process.

Green hydrogen produced by electrolyzing water is a long-term goal, not an immediate primary solution. Realistically, the first usable sources are by-product hydrogen and reformed natural gas hydrogen generated within refining and petrochemical processes.

 By-product gases and hydrogen from NCC and refining processes should be purified and connected to industrial complex fuels, hydrogen power generation, and hydrogen fuel cell commercial vehicles. The hydrogen economy is not a substitute for refining and petrochemicals but an extension of their processes.

The transition to electric vehicles is within the same context.

Renewable energy is not a direct solution to the problems of crude oil, naphtha, and petrochemical feedstocks.

Electricity is not ethylene, and solar power is not propylene. However, reducing demand for gasoline and diesel in the transportation sector is important.

Passenger and short-distance transportation should transition to battery electric vehicles, while long-haul freight, buses, port operations, airports, and military logistics should shift to hydrogen fuel cells. This will reduce the volume of security supplies that refining must provide and decrease the pathways through which shocks from Hormuz impact prices and logistics.

It is a Security Industry Before It is a Market Industry

Ultimately, the core of the refining and petrochemical security industry thesis lies in three points:

First, refining and petrochemicals constitute a single integrated process, extending from crude oil to basic materials.

Second, this process is not just an export industry but a security infrastructure that supports domestic manufacturing, transportation, power generation, defense, and essential daily goods.

Third, restructuring should not be the closure of unprofitable facilities but the redesign of the supply chain, including domestic essential materials and the extended process of hydrogen production.

The Iranian nuclear crisis poses an uncomfortable question to South Korea.

Will South Korea continue to view refining and petrochemicals solely as a matter of business performance for exporting companies? Or will it be recognized as a security industry that keeps the nation running?

As the Strait of Hormuz faces turbulence, oversupply from China floods the market, and pressure for the transition in power and transportation mounts, refining and petrochemicals are no longer industries of the past.

They are the central axis of industrial security, extending from crude oil procurement, naphtha, NCC, basic materials, by-product hydrogen, to hydrogen power generation and hydrogen vehicles.

South Korea must now redefine refining and petrochemicals.

Refining is the forefront of energy security, and petrochemicals are the rear guard of manufacturing security. Hydrogen is the next process that connects them.

If these three are viewed separately, policies will be scattered. If viewed as one, they become strategy.

Industrial policy in the era of Middle Eastern conflicts should not be a strategy of importing cheap raw materials to produce and sell large quantities, but a strategy that ensures factories do not stop operating during a crisis. Refining and petrochemicals are national security industries before they are market industries.

Next Part Preview

④ Crude Oil to the US, Flexible Processing

The next part will discuss how increasing imports of US and non-Middle Eastern crude oil is not merely a change in suppliers but a matter of redesigning refining and petrochemical processes.

While it is impossible to immediately sever dependence on Middle Eastern crude oil, the security volume to withstand a crisis must be fixed with US and non-Middle Eastern sources. We will also analyze how changes in crude oil composition affect refining yields, naphtha production, NCC feedstock blends, and the structure of petrochemical products.