It is expected that domestic petrochemical companies engaged in the oil refining business will achieve an improvement in their performance in the third quarter. After incurring significant losses in the second quarter, the oil refining sector is anticipated to generate profits due to the upward trend in international oil prices and refining margins, thus driving the improvement in their financial results. In contrast, the petrochemical industry, which had anticipated better results this year, seems unlikely to escape the ongoing challenges resulting from oversupply issues in China despite high expectations for performance improvement.
According to financial information firm FnGuide on Oct. 19, S-OIL’s third-quarter consolidated operating profit consensus, or the average brokerage forecasts, was estimated at 783.2 billion won (US$577.07 million). In its report on Oct. 17, Hana Securities projected S-OIL’s third-quarter operating profit at 869 billion won, anticipating that the company would surpass market expectations.
Using the same criteria, SK Innovation’s third-quarter operating profit consensus was reported to be 888 billion won. In a report issued on the same day, NH Investment & Securities predicted SK Innovation’s third-quarter operating profit to be 1.1 trillion won.
It has forecasted that SK Innovation will record an operating profit of 817.8 billion won (US$602.39 million) in its refining business alone in the third quarter. NH Investment & Securities believes that the profit from the refining business will increase due to the simultaneous rise in international oil prices and refining margins. The company estimated SK Innovation’s third-quarter profit related to inventory to be approximately 300 billion won (US$220.98 million).
According to industry sources in the petrochemical sector, the Singapore’s complex refining margin, which stayed around the break-even point in the second quarter of this year, has been steadily increasing in the third quarter but recently experienced a decline. After reaching US$16.8 per barrel in the second week of September, it has been on a downward trend. In the first week of October, it dropped below US$12 per barrel. Although the refining margins are not yet at a level to seriously harm the profitability of the refining business, the continuous decline is seen as a burden. The refining margin, which is considered an indicator of profitability for the refining business, is the amount obtained by subtracting crude oil prices and costs such as transportation and operating expenses from the prices of petroleum products like gasoline and diesel. Generally, a margin of about US$4 to US$5 per barrel is considered the break-even point.
While the third-quarter performance is expected to improve for the oil refining business, the petrochemical business appears likely to report lackluster results. The consensus for Lotte Chemical’s third-quarter operating profit is only 5.1 billion won. Some brokerages even predict that Lotte Chemical may incur an operating loss in the third quarter. For LG Chem, the consensus for the third-quarter operating profit stands at 765.9 billion won. Considering that LG Chem’s subsidiary, LG Energy Solution, achieved an operating profit of over 700 billion won in the third quarter, the profitability of the traditional petrochemical business is relatively modest.