SK to Unify Its Oil Refining and Chemicals Value Chains in China

Sinopec-SK Wuhan Petrochemical, a joint venture between SK Global Chemical and China's Sinopec, has decided to acquire Wuhan Refinery and this acquisition has necessitated the unification of its value chain to connect oil refining to chemicals. A streamlined value chain will allow the company to raise profitability by mass producing chemical products, including ethylene, using the naphtha extracted in the oil refining process.

SK Global Chemical announced on April 29 that it is planning to invest 189.80 billion won (US$163.55 million) in cash in taking over a stake in Wuhan Refinery from Sinopec. Sinopec will also make an in-kind investment worth 352.60 billion won (US$303.83 million). SK Global Chemical has a 35 percent stake in the joint venture, with Sinopec owning the rest. The two firms’ ownership ratio will remain the same after the acquisition of Wuhan Refinery. The total acquisition cost amounts to 2.21 trillion won (US$1.90 billion). SK Global Chemical said that the rest of the funds will come from loans. The acquisition is planned to be completed by the end of the second half of the year.

The deal is in line with the Chinese government’s strategy to integrate its oil refining and chemical industries. SK Global Chemical now indirectly owns oil refining facilities in China through Sinopec-SK Wuhan Petrochemical.

Wuhan Refinery is located in Qingshan District, Wuhan, and is capable of refining 170,000 barrels of oil a day. The company logged around 350 billion won (US$301.59 million) in operating profit in 2017 and 2018, and it is planning to finish facility expansion and upgrading by the end of next year. Wuhan Refinery’s profitability is expected to improve further since oil products are in short supply in Hubei Province where Wuhan Refinery is located and three other neighboring provinces.

Sinopec-SK Wuhan Petrochemical recorded 2 trillion won (US$1.72 billion) in aggregated operating profit in five years since it has begun commercial operation, becoming one of the successful cases of SK Group’s business abroad. The joint venture has been expanding its facilities and output through investments since 2017 and it is highly likely to become the second largest naphtha cracking firm in China by securing the production capacity of 1.1 million tons of ethylene a year by 2020.