South Korea's financial authorities have issued an emergency directive to banks to expand the opening and limits of letters of credit (LC) for petrochemical companies' naphtha imports. The preemptive move came as the won-dollar exchange rate fluctuated around 1,500 won per dollar and profits at petrochemical firms were expected to plunge due to the fallout from the U.S.-Iran conflict.
The Financial Services Commission (FSC) held a meeting with officials from commercial banks on the previous day and made the request, according to financial industry sources on the 26th. "The message was that any disruption in the supply of naphtha, the raw material for ethylene, would have a significant ripple effect across the national economy," an industry official said.
The financial health of domestic petrochemical companies is deteriorating. LG Chem (051910.KS), the country's largest petrochemical company, shut down its naphtha cracking center (NCC) at its Yeosu No. 2 plant on the 23rd, and concerns are growing over the possibility of cascading shutdowns at other firms.
To make matters worse, the soaring exchange rate is squeezing LC limits for petrochemical companies. When limits shrink, companies have no choice but to reduce their import volumes. An LC is a type of payment guarantee in which a bank pledges to pay overseas exporters on behalf of the importing company based on the bank's credit. "When the exchange rate rises, companies face a situation where their LC limits need to be reset," an official at a commercial bank said.
