LG Chem Shuts Down No. 2 Ethylene Plant at Yeosu Complex Amid Naphtha Supply Crisis

South Korea's largest chemical company, LG Chem, halted operations at its No. 2 naphtha cracking center (NCC) at the Yeosu National Industrial Complex on March 23, 2026. The shutdown was triggered by a severe naphtha supply shortage caused by the prolonged blockade of the Strait of Hormuz, which has disrupted global energy flows since late February 2026.

The No. 2 plant has an annual ethylene production capacity of 800,000 tons. LG Chem decided to keep only its larger No. 1 plant operational, which produces 1.2 million tons of ethylene per year, in an effort to sustain output as long as possible while waiting for naphtha supplies to normalize. Before the shutdown, LG Chem had already reduced its operating rate at Yeosu to approximately 60 percent and lowered capacity utilization at its Daesan facility to 54 percent.

LG Chem sources roughly half of its naphtha feedstock from domestic supplier GS Caltex and imports the remaining half from overseas markets. With the Strait of Hormuz blockade cutting off a major share of Middle Eastern naphtha exports, overseas procurement became increasingly difficult. South Korea imports about two-thirds of its total naphtha consumption, and 60 percent of those imports come from the Persian Gulf region. The blockade has effectively severed this critical supply route.

Naphtha prices surged dramatically in the weeks following the outbreak of the U.S.-Iran conflict on February 28, 2026. According to the Korea National Oil Corporation, naphtha stood at $124.53 per barrel on March 17, nearly double the $68.87 per barrel recorded on February 27. S&P Global Energy reported that naphtha prices reached $875 per ton, representing a 50 percent increase in just one month.

Ethylene is one of the most widely used petrochemical building blocks in the world. It is produced by thermally cracking naphtha in specialized facilities known as naphtha cracking centers. Ethylene serves as the primary feedstock for manufacturing polyethylene, one of the most common plastics found in packaging, bottles, films, and containers. It is also essential for producing polyvinyl chloride (PVC), used in construction pipes, window frames, and flooring. Ethylene derivatives include ethylene glycol, a key ingredient in antifreeze and polyester fiber production, and styrene, which is used to make polystyrene foam and ABS resins for automotive and electronics applications. Propylene, another major output of naphtha crackers alongside ethylene, feeds into the production of polypropylene for automotive parts, textiles, and medical devices.

The shutdown of the LG Chem No. 2 plant removes 800,000 tons of annual ethylene capacity from South Korea's supply chain. This is significant because the Yeosu National Industrial Complex alone accounts for roughly 46 to 49 percent of the country's total ethylene production capacity. Industry experts warn that if the naphtha shortage persists, downstream sectors including plastics manufacturing, textiles, construction materials, shipbuilding, automotive parts, and consumer packaging will face serious supply disruptions.

LG Chem is not the only company affected by the crisis. Yeochun NCC, the largest standalone ethylene producer in South Korea, declared force majeure on March 4 and reduced its operating rate to 66 percent. It also halted its Olefin Conversion Unit on March 23. Lotte Chemical lowered the operating rate at its Daesan plant by 10 percent and was considering advancing scheduled maintenance at its Yeosu facility. Hanwha Solutions, which depends on Yeochun NCC for ethylene supply, notified its clients of a potential force majeure situation. Multiple petrochemical producers across South Korea have sent force majeure notices to their customers warning of possible contract non-fulfillment.

The Yeosu Chamber of Commerce and Industry identified the period between March 24 and March 31 as a critical window to prevent a full-scale cascade of plant closures across the complex. Industry sources estimate that crude oil inventories available for naphtha production could be depleted by the end of March 2026. If all NCCs at the Yeosu complex were to shut down simultaneously, the consequences would ripple through the entire South Korean manufacturing sector.

The South Korean government has pushed back against what it calls the 'April crisis theory.' A senior official at the Ministry of Trade, Industry and Energy stated that naphtha supply could be maintained through late April to early May by releasing strategic reserves around mid-April and implementing emergency supply-demand adjustment orders. The government is also reviewing the activation of special measures that would allow it to establish or modify production plans for designated items such as naphtha, adjust supply priorities, and issue directives on transportation, storage, and stockpiling.

Small and medium-sized enterprises downstream of the petrochemical value chain are facing particularly severe consequences. While major manufacturers report having at least two months of raw material inventories through long-term supply contracts, smaller companies are struggling with raw material shortages. Some firms are reportedly considering dismantling their production facilities altogether due to the inability to secure feedstock at viable prices.

The crisis at Yeosu comes on top of a longer-term restructuring trend in the South Korean petrochemical industry. Chinese competitors have rapidly expanded their ethylene production capacity in recent years, creating a global oversupply that has pushed operating rates at Korean plants below the 70 percent breakeven threshold. In December 2025, LG Chem and GS Caltex submitted a restructuring plan to the South Korean government to consolidate and jointly operate their respective crackers at Yeosu. The broader industry-wide restructuring aimed to cut 3.66 million tons or more of annual ethylene capacity across the Yeosu, Daesan, and Ulsan industrial complexes.

However, the Strait of Hormuz crisis has accelerated these capacity reductions in an unplanned and disruptive manner. Rather than orderly restructuring over several years, companies are now being forced into emergency shutdowns driven by feedstock unavailability. The immediate economic damage extends well beyond the petrochemical sector itself, threatening supply chains in automotive manufacturing, electronics, construction, agriculture, healthcare, and consumer goods.

The situation at Yeosu reflects a broader regional pattern. Japanese petrochemical companies including Mitsubishi Chemical and Mitsui Chemicals have also begun cutting production. Analysts at Citigroup Japan warned that unless the situation improves by mid-April, multiple ethylene plants across Asia could be forced to shut down entirely.