Petrochemical firms brace for fines as price-fixing probe deepens

South Korea's petrochemical industry, already struggling under a global supply glut and weak demand, now faces the added threat of heavy fines from a large-scale price-fixing investigation — raising fears of a further hit to earnings and financial stability.

Industry sources said Thursday that major domestic petrochemical companies are closely watching the scale of potential fines and how they would be accounted for, as prosecutors have stepped up their price-fixing probe. The accounting treatment of such fines can vary depending on their nature and connection to business operations. If classified as operating expenses, the fines could deepen operating losses in the petrochemical segment, which is already expected to swing to a deficit.

Prosecutors last month raided seven domestic chemical companies and subsequently summoned key suspects for questioning. The firms are suspected of colluding to fix prices for eight petrochemical products, including polyvinyl chloride (PVC), plasticizers, caustic soda and hydrochloric acid.

Prosecutors are examining whether the companies exploited instability in naphtha supply caused by the Middle East war to reap illicit gains worth trillions of won. The investigation is also understood to have been extended back to 2021, raising the possibility that the final tally of relevant sales and the scale of sanctions could exceed initial estimates.

Industry observers warn that a large one-time charge at this point would significantly worsen an already strained financial picture. Petrochemical companies have seen profitability erode sharply due to oversupply from China and a slowdown in the global economy. With the industry's recovery remaining limited this year, major firms have been pursuing business restructuring, cutting investment and liquidating assets to shore up cash reserves.

The outlook for the second half is also far from optimistic. The sector enjoyed a brief return to profit in the second quarter, benefiting from a lagging effect on raw material costs and higher product prices tied to the Middle East conflict, but the prevailing view is that those tailwinds will fade in the third quarter and margins will come under renewed pressure. Customers are said to have already built up inventories in anticipation of supply disruptions from the Middle East conflict, leaving little immediate appetite for additional purchases.

According to financial data provider FnGuide, the analyst consensus for LG Chem's third-quarter operating profit stands at about 186.5 billion won ($137 million), a sharp drop from 599.6 billion won in the second quarter. Lotte Chemical is expected to swing to an operating loss of about 142.5 billion won in the third quarter, compared with operating profit of 110.1 billion won in the second quarter.

Fines, if they materialize, could deal a significant blow to earnings. Because fines are recognized as an expense when payment is confirmed, the larger the amount, the greater the impact on the bottom line for that period. The paper industry, which faced cartel sanctions earlier this year, saw similar concerns arise when a weak business environment collided with large fines.

"The business environment is already so bad that there are serious concerns about second-half earnings — if fines become a reality on top of that, the burden will be considerable," a company official said. "Ultimately, the key question is how large the fines turn out to be."

Meanwhile, companies may seek to reduce their exposure by applying for leniency — a system that allows firms to receive reduced fines in exchange for voluntarily reporting collusion and cooperating with investigators. Whether and how many companies choose to come forward could significantly affect the final scale of sanctions.