13 Jun 2022 | 09:33 UTC

South Korea's trucker strike weighs on petrochemicals as output costs spike, stocks pile up

Highlights

Hike in logistics costs adds to cost pressures

Inventory builds likely to prompt run cuts

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A nearly week-long strike by truck drivers in South Korea has raised domestic petrochemical production costs and crippled supply chains, multiple industry sources said on June 13.

The logistics disruption was expected to mar downstream petrochemical shipments especially, which heavily rely on inland transportation.

The Cargo Truckers Solidarity union launched the strike on June 8, demanding the extension of a minimum wage system set to expire in 2022.

The latest talks between the South Korean Ministry of Land, Infrastructure and Transport and the union on June 13 were unsuccessful.

High logistics, cost pressures

Several petrochemical plants in Yeosu and Daesan were heard to have been suffering from the feedstock procurement due to the strikes, according to the market sources.

"We have difficulties in procuring the methanol feedstock by tank lorries, which might delay the production process significantly and end up in higher logistics and feedstock costs," an MTBE trader based in Seoul.

"If the situation continues for a long time, the spot MTBE price might be affected," the trader added.

The MTBE price has already been buoyed by higher crude oil price amid Russia-Ukraine war, with the summer driving season approaching.

A propylene producer in South Korea said that most products in the country relied on truck shipment and a prolonged strike might cripple the supply chain.

"I think if it lasts longer than expected, it will disrupt the Korean logistics system," said a propylene producer in South Korea. "It will slow delivery of products and inventory goes higher," the producer said.

In the downstream polypropylene sector, a South Korean supplier said that although the current situation remained fluid, export shipments for the week would likely be delayed for at least one week, with further delays expected.

Higher stocks may lower runs

The downstream polymers -- which are mainly solid format -- such as polypropylene and polyethylene, might be heavily affected by the piling up inventories and logistics disruptions, market sources said.

"Bulk chemicals moved by pipeline from shore to ship have not much impact [but] for small packing [participants, yes] heavy delays," another trader said.

The impact of the strike was heard less significant on South Korea's paraxylene producers as such liquid chemical is transported by pipeline rather than trucks, several sources based in South Korea said.

However, if downstream purified terephthalic acid, or PTA, and polyester inventory pile up due to the logistic disruptions, paraxylene demand and operating rates might be affected.

A South Korean propylene producer added that "with bloating inventories, some crackers will have to cut their run rates to mitigate their exceedingly high inventories.

Another South Korean propylene trader said this could have a downward pressure on the domestic petrochemical market as sellers divert their cargoes to overseas buyers.

"South Korea YNCC may cut production again because the logistics in Korea is on strike right now ... tanks and polymers can't get out," a Korean producer said.

Average daily shipments fall

The strike has affected about an estimated Won 500 billion ($388.5 million) in petrochemical shipments as of June 12, six days after the union action began, the Ministry of Trade, Industry and Energy said in a statement on June 13.

Altogether, the strike has caused production and shipment disruptions totaling Won 1.568 trillion, the ministry said.

"Considering the difficult economic conditions at home and abroad, such as supply chain crisis and rising raw material prices, there is an urgent need for an agreement and normalization of logistics," the ministry said.

Against this backdrop, the Korea Petrochemical Industry Association has urged the cargo solidarity union to stop the strike, saying that the average daily amount of shipment has been down to the 10% of the usual level of around 74,000 mt/day.