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[Contribution] Petrochemical business to explore Gen AI potentials

By Korea Herald

Published : May 30, 2024 - 11:01

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By Marco Moder

Partner at McKinsey & Company Korea

Once the key growth engine for the nation’s economy. Now a major roadblock in value chain realignment and market road map. This is where South Korea’s petrochemical industry stands as of now.

It is undeniable that the industry faces numerous challenges. Over the past few years, the rapid oversupply from China has intensified demand competition, causing profitability to plummet to an unprecedented level.

Also, as the business cycle is generally becoming longer, the current downcycle will likely prolong in the upcoming years. Adding further to these challenges is the heavy focus on new growth engines such as batteries, which is making it increasingly more difficult for petrochemical players to secure funds.

Most of all, it is the drastic decline of the industry that is weighing upon market observers. Those who have witnessed how the petrochemical industry heavily towed the Korean industry may be perplexed that the sector is now hampering growth and transformation.

According to McKinsey's chemical market analysis data, the compound annual growth rate (CAGR) of Korea's petrochemical industry reached a high level of 29.2 percent during the period from 2000 to 2010. The figure, however, plummeted to a mere 1.3 percent during the period from 2010 to 2020. This was a visibly steeper fall than the global average, which contracted from 17.2 percent to 4.2 percent over the same period.

And of course, the core reasons behind this particular downsizing were Korea’s heavy reliance on exports and its impact from China’s fast-expanding petrochemical production capacity.

Nevertheless, Korea continues to remain one of the key petrochemical players in the global market – one of the world’s largest manufacturers and exporters of commodity chemicals, such as paraxylene, polyethylene, and polypropylene. The country also has significant potential in high-value specialty chemicals.

Due to the impact and size of the industry, realigning the petrochemical business involves various complexities down the road -- ranging from economic growth concerns to workforce dilemmas. In fact, the Korean petrochemical sector, along with the refining sector, generated over 5 percent of the nation’s GDP and created over 170,000 jobs as of 2022, according to data from Statistics Korea.

This is why businesses should first work on cost efficiency, before jumping to radical restructuring or facility shutdown. AI, especially Gen AI, previously was noted for its use in demand forecasting and supporting maintenance. The technology now takes a step further to change operation paradigms and even proactively uncover new value-added areas.

According to McKinsey's estimates, the economic value generated by generative AI worldwide amounts to at least $2.6 trillion annually. The financial impact expected from the introduction of generative AI in the petrochemical industry alone exceeds 130 billion won annually.

For instance, a Gen AI-based facility maintenance system can improve Overall Equipment Effectiveness (OEE) by 2 percentage points and enhance wrench time by 25-35 percentage points. In terms of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), this would translate to an annual impact of more than $100 million.

Gen AI is appreciated for its unlimited potential, but it is also often neglected how it can serve to be more than a single category technology and actually help to devise valid road maps for other industries -- especially the struggling ones.

As the annual Asia Petrochemical Industry Conference (APIC2024) is to take place in Seoul this week, key petrochemical business stakeholders from Korea and across the region will be able to put their heads together and hopefully mark a watershed in the industry’s future road map.

Marco Moder is a partner for the global energy & materials practice at McKinsey & Company Korea Office. The views in this column are his own. -- Ed.