Fair Trade Commission conditionally approves Lotte-HD Hyundai merger for 'Daesan No. 1' petrochemical restructuring

South Korea's Fair Trade Commission has conditionally approved a merger tied to the "Daesan No. 1" petrochemical industry restructuring.

The antitrust regulator determined that the deal could substantially restrict competition in the domestic markets for low-density polyethylene (LDPE) and ethylene vinyl acetate (EVA), and attached conditions including a five-year cap on price increases and decreases, a supply maintenance obligation and a ban on exchanging competitively sensitive information.

The Fair Trade Commission announced Thursday that it had reviewed and approved — with conditions — the merger involving Lotte Chemical, Lotte Daesan Petrochemical, HD Hyundai Oilbank and HD Hyundai Chemical as part of the petrochemical sector restructuring.

Under the deal, HD Hyundai Chemical will absorb Lotte Daesan Petrochemical through a merger, with Lotte Chemical receiving additional shares in HD Hyundai Chemical as consideration. Lotte Daesan Petrochemical was established June 2 when Lotte Chemical spun off its Daesan factory as a separate entity.

Once the merger is complete, Lotte Chemical and HD Hyundai Oilbank will each hold a 50 percent stake in HD Hyundai Chemical and exercise joint control. The two companies' naphtha cracking centers and petrochemical production facilities at the Daesan industrial complex will also be integrated and operated together.

The commission began its review after receiving a voluntary pre-screening application in November last year, analyzing production, sales and trade data for 20 petrochemical products and gathering broad input from stakeholders. The companies formally filed the merger notification on June 15 after signing the merger agreement.

Of the 12 product markets examined, the commission found that competition could be substantially restricted in the LDPE and EVA markets. The number of competitors in those markets will fall from four — Hanwha, LG Group, Lotte Chemical and HD Hyundai — to three: Hanwha, LG Group and HD Hyundai. After the merger, the three companies will divide production capacity in roughly a 50:25:25 ratio, and their combined sales share will exceed 75 percent — reaching 82 percent for LDPE and 95 percent for EVA.

The commission noted that LDPE and EVA are commodity products with high homogeneity, and that the market structure makes it easy for suppliers to monitor competitors' pricing, raising the risk of coordination among producers.

In practice, the domestic LDPE market saw a cartel persist for more than a decade during the supply glut of the 1990s. The commission in 2007 uncovered a price-fixing scheme involving Honam Petrochemical — now Lotte Chemical — and six other companies, imposing a combined penalty of 54.17 billion won ($38.4 million).

The commission also found that if the separate "Yeosu No. 1" restructuring currently under review proceeds as planned, cross-shareholding links between multiple joint ventures could emerge, further increasing incentives for coordination.

The fact that the merger involves HD Hyundai Chemical — a relatively new market entrant — and established player Lotte Chemical was also flagged as a concern. HD Hyundai Chemical began full-scale production and sales of ethylene, propylene and polyethylene in late 2021 and has been the lowest-price supplier in the market.

The commission warned that if the merged entity discontinues low-margin, low-priced product grades, product variety would shrink and prices could rise. It also took into account that most domestic buyers of LDPE and EVA are small and medium-sized plastic processors, that the reduction to three suppliers would make it difficult to find alternative sources, and that competitors' facilities are already running at 95 to 100 percent capacity, leaving little room for substitute supply.

In response, the commission imposed behavioral remedies valid for five years. On pricing, if the merged entity's LDPE or EVA export prices rise or hold steady compared with the previous three months, any domestic price increase must not exceed the rate of the export price increase; if export prices fall, any domestic price reduction must be at least as large as the export price decrease.

On supply, the merged entity must fulfill all domestic buyers' requested volumes for every product grade it was producing at the time of the merger, on fair, reasonable and non-discriminatory terms.

Under the information-exchange prohibition, HD Hyundai Chemical, Lotte Chemical and HD Hyundai Oilbank are barred from sharing or providing competitively sensitive information — including pricing, volumes, costs and inventory levels — among themselves or with designated information-barrier subjects.

A ban on concurrent executive appointments prohibits HD Hyundai Chemical and Lotte Chemical from sharing executives or directors with each other, or with any affiliate of the other party that operates an LDPE or EVA business.

A personnel restriction bars any Lotte Chemical employee who transferred to HD Hyundai Chemical during the restructuring from being assigned to LDPE- or EVA-related departments, or seconded to related affiliates, for one year after returning to Lotte Chemical. The commission also made mandatory the education of relevant employees on the remedies and the collection of pledges not to leak competitively sensitive information.

The remedies take effect from the date the corrective order is issued and remain valid for five years, with the possibility of extension depending on changes in market conditions. They were developed based on a remedies proposal submitted by the companies, with input from stakeholders and experts.

Meanwhile, HD Hyundai Chemical said it plans to pursue cooperative initiatives with its business partners separately from the merger review process. Specific measures are to be announced after further consultations with the Fair Trade Commission.

The commission said the decision "supported the smooth progress of industrial restructuring by swiftly reviewing the first merger in the petrochemical restructuring initiative, while also preventing harm to domestic buyers — most of them small and medium-sized enterprises — by imposing effective remedies in the LDPE and EVA markets, where competition concerns were significant."

The commission added that it will closely monitor compliance with the remedies and carefully assess the competitive impact of subsequent petrochemical mergers, including the Yeosu No. 1 case, to protect competition in the domestic petrochemical market.