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Oil Refining and Chemical Firms Predicted to Come Up with Less-than-expected Earnings
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Oil Refining and Chemical Firms Predicted to Come Up with Less-than-expected Earnings
  • By matthew
  • April 9, 2014, 08:12
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Ulsan, a city in the southeastern area of South Korea, is home to a lot of refinery infrastructure.
Ulsan, a city in the southeastern area of South Korea, is home to a lot of refinery infrastructure.

 

Major Korean oil and chemical companies are expected to record an earnings shock in the first quarter of this year. Securities companies forecast that oil refiners’ operating profits have dropped by approximately 60 percent from a year earlier. Things are not much different for the chemical companies, which have suffered from an economic recession that started in China. 

The business profits of all of the top three oil refiners in Korea – SK Innovation, GS Caltex, and S-Oil – are predicted to have been more than halved in Q1 with their refining margin standing at just 1 percent or so and their chemical business units remaining in a slump. Hyundai Oil Bank, which has focused on petroleum refinement, is expected to have posted less-than-expected earnings as well due to adverse business conditions. 

SK Innovation earned 697.5 billion won (US$669.3 million) in operating profits in Q1 2013, but the amount for Q1 2014 is likely to be limited to about 250 billion won (US$240 million). GS Caltex’s and S-Oil’s profits are forecast to have dropped by around 60 percent, too. 

“Oil refiners enjoyed sizable Q1 profits during the past couple of years, but things are likely to be different this year,” said SK Innovation, adding, “They used to make up for the oil refining losses by means of their profits from the chemical business, but the chemical divisions themselves are also struggling this year due to the decreasing demand in China.”

The chemical business above refers to paraxylene, which is used in manufacturing clothes and PET bottles. Its price has plunged recently as China, the largest export destination, cut its demand for the material. Specifically, the per-ton price was as high as US$1,400 last year, but has dropped to approximately US$1,100 until last month. 

“The downturn in refining margin in March and the decreasing paraxylene demand are likely to result in more sluggish performance,” analyst Choi Ji-hwan at NH Investment & Securities explained, continuing, “Still, the paraxylene demand is expected to increase this year for at least some improvement in profitability.”

The outlook is gloomy for the chemical industry as well, with the slump in the Chinese economy leading to less demand for chemical products, inventory pileup and decreasing prices. As an example, the price of butadiene, which is a raw material for synthetic rubber, has declined by 10.1 percent during the past three months to affect the profitability of chemical companies. 

Those with greater dependence on the petrochemical business such as LG Chem, Kumho Petrochemical, and Lotte Chemical are forecast to have been affected more. LG Chem’s operating profits are estimated at around 300 billion won (US$288 million), down by at least 100 billion won (US$95.9 million) from the previous year. The quarterly profits of Kumho Petrochemical, which relies heavily on the Chinese market, are estimated at 20 billion won (US$19 million) or so. The company posted 78 billion won (US$74 million) in business profits in Q1 2013. 

According to KDB Daewoo Securities, Lotte Chemical is predicted to have earned 97 billion won (US$93 million) last quarter, whereas the amount reached 117 billion won (US$112 million) in the same period last year. Kumho Petrochemical’s profits are estimated to have dropped 80 percent to 16 billion won (US$15 million). “The remaining inventory in the synthetic rubber market of China seems to have affected our business until Q1,” the company said. 

Nevertheless, the outlook is pretty bright for the photovoltaic sector, as business restructuring is in progress in China and the price of polysilicon is on the rise. Hanwha Chemical and OCI are likely to benefit from such trends. 

Hanwha Chemical posted operating profits of 9 billion won (US$8.64 million) in Q1 and 34 billion won (US$32.6 million) in Q4 2013. However, the profits are likely to have increased to 40 billion won (US$38.4 million) in Q1 this year. “Although the chemical sector is still struggling due to the China factor, the demand for photovoltaic products is on a consistent rise,” the company explained. 

“Hanwha Chemical succeeded in turning to a surplus in Q4 last year by excluding the one-off costs,” Shinhan Financial Investment analyst Lee Eung-joo mentioned, adding, “Now, the key is how successful its photovoltaic business has been in the first quarter of this year, and the consensus is that it has fared pretty well during the period.”