S. Korea’s Oil Refining Industry in Trouble Due to Falling Refining Margin

South Korean oil refiners, which saw their operating profits surpass 1 trillion won in the first half of this year, are now in trouble due to the fall in refining margins. This is because the benchmark Singapore complex gross refining margin (GRM), which controls the performance of oil refiners, has been below the break-even point this month.

According to industry sources on August 24, the complex GRM hovered at US$9.90 (11,113 won) in January, which was higher than US$8.60 (9,654 won) of the average GRM in December and US$7.70 (8,643 won) of the average last year. However, the figure plunged to the US$3 (3,368 won) per barrel range this month from US$6.60 (7,409 won) in February, US$4.90 (5,500 won) in June and US$4.80 (5,388 won) in July.

The refining margin is the difference between the total value of petroleum products coming out of an oil refinery and the cost of crude and related services, including transportation. Usually, a South Korean refiner can generate a profit with a refining margin of US$5 (5,613 won). The GRM stood at US$3.50 (3,929 won) per barrel in the first week of August before dropping to US$3.10 (3,480 won) in the second week and inching up to US$3.40 (3,817 won) in the third week.

Industry watchers attributed the recent tumble in refining margins to rising oil prices. Although the price of crude oil increases, the price of petroleum products doesn’t rise immediately. So, oil refiners' profits will plunge in the meantime.

An official from the industry said, "The current GRM is below the break-even point. Should the refining margin maintain its current level, oil refiners will likely see their earnings drop sharply in the third quarter.”

Oil refiners have expectations for the chemical sector. The non-refining sector, including chemicals, helped domestic oil refiners have good results in the second quarter.

Preemptive investments in the non-refining sector so far are kicking in. SK Innovation saw its non-refining business, such as chemicals and lube base oil, account for more than 40 percent in profits of the second quarter.