No signs of Recovery in Oil Refining Sector
Until recently, the chemical and oil refining industries moved in close connection to the international oil price, that is, product prices and corporate profits rose or fell along with the oil price. However, COVID-19 has completely changed this. The chemical industry is recovering fast whereas the oil refining sector is showing no signs of recovery after massive losses in the first half of this year.
Major South Korean oil refining companies are barely meeting their break-even points this quarter after having imported oil at very low prices in the second quarter. Specifically, the import and current prices are US$30 or so and US$40 or so, respectively. The oil will constitute their inventory valuation profits for this quarter. In other words, the companies are resorting to accounting profits while failing in their business.
The prices of their products are falling, too. For example, in the latest week, the gasoline and diesel prices fell approximately 2 percent and 3.6 percent, respectively. For the past one month, kerosene fell more than 3 percent, diesel fell more than 3 percent, and only gasoline edged up slightly.
This has to do with COVID-19. Diesel, aviation fuel and gasoline constitute the three largest parts of the sales of South Korean oil refining companies. In other words, their sales increase or decrease in proportion to how many people travel. At present, travel restrictions, social distancing and the like are still going on worldwide and the companies’ conditions are likely to continue to deteriorate for a while.
Things are totally different in the chemical sector. This quarter, the prices of chemical products are rising without exception and much more than expected. The examples include acrylonitrile butadiene styrene (ABS). Its price jumped 16.4 percent in one month and more than 20 percent in one year. ABS, which is a plastic raw material, is mainly used in consumer electronics. Global home appliances sales increased a lot after the outbreak of COVID-19, leading to the higher ABS price. The same applies to polyvinyl chloride (PVC), which is mainly used for interior design. The PVC price rose 8.5 percent in the latest month.
In addition, the demands for acetone, polypropylene, and so on have skyrocketed since the outbreak of the pandemic. The price of acetone, which is used in hand soaps, has soared 68 percent from a year ago. Polypropylene is a material used in mask filters.
Under the circumstances, securities companies are becoming increasingly optimistic about local chemical companies while refraining from mentioning oil refining companies. For instance, they adjusted their average Q3 operating profit estimate for LG Chem from 500 billion won or so to more than 600 billion won in August.