Because of Loss from Inventory Valuation
South Korea’s four oil refiners all recorded an “earnings shock” in the fourth quarter of last year. They took a direct hit from a loss from valuation of inventories due to lower oil prices and a lower refining margin from a supply excess and decrease in demand.
SK Innovation Co. announced on Jan. 31 that it recorded an operating loss of 278.90 billion won (US$250.58 million) in the fourth quarter of 2018. GS Caltex Corp., which released its Q4 results on Jan. 31, posted 267 billion won (US$239.89 million) in operating loss and Hyundai Oilbank Co. 175.30 billion won (US$157.50 million). S-Oil Corp. which announced its results on Jan. 28 also had an operating loss of 292.40 billion won (US$262.71 million) over the same period. In short, the country’s four oil refining companies all had the “earnings shock.”
It was largely due to the oil refining sector. U.S. oil refiners raised the operation rate and the supply of gasoline significantly increased. However, the supply dropped in the aftermath of a trade dispute between the United States and China, leading to lower refining margins. The chemical sector also somewhat shrunk because of a weaker demand caused by the trade war.
As the four firms’ annual operating profit plunged as well compared to a year earlier, some market experts even said that a “super cycle” in the refining and petrochemical industry ended. The domestic refining and petrochemical industry enjoyed a boom thanks to an increasing demand in the Chinese market and short supply of major companies, including the United States, over the past three years. In fact, SK Innovation saw its consolidated annual sales grow 20 percent from a year ago to 54.51 trillion won (US$48.98 billion) last year but its operating profit drop by a third to 2.12 trillion won (US$1.90 billion). The sales of GS Caltex also grew by 19.9 percent to 36.36 trillion won (US$32.67 billion) compared to the previous year but the operating profit decreased by 38.3 percent to 1.23 trillion won (US$1.11 billion). In addition, Hyundai Oilbank had an operating profit of 661 billion won (US$593.89 million), down 42 percent from a year earlier, while S-Oil showed a 50.4 percent drop in operating profit to 680.60 billion won (US$611.50 million).
However, the four companies are confident about a rebound in performance this year. SK Innovation is planning to boost its performance by diversifying its business portfolios to electric vehicle battery, which is considered a next-generation growth engine. GS Caltex will complete the olefins plant, or mixed feed cracker (MFC), project with a large-scale investment and boost exports in order to seek an outlet. Hyundai Oilbank and S-Oil expect to increase refining margins as the International Maritime Organisation (IMO) will implement a new regulation for a 0.50% global sulphur cap for marine fuels in 2020 and the supply is forecast to be stable in the second half of the year.