China’s Shutdown of Teapot Refineries to Benefit Korean Refiners
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
2Q21 OP beats market consensus by large margin
— S-Oil turned in 2Q21 revenue of KRW6.71tn (+94.4% YoY, +25.6% QoQ) and OP of KRW571.0bn (turn to profit YoY, -9.3% QoQ); OP beat the market consensus (KRW488.5bn; FnGuide, Jul 5) by a large margin.
— Earnings growth was attributable to: (1) inventory gains coming from rising oil prices, (2) improvement in PX/benzene spreads and (3) strong lube base oil prices (decrease in supply).
2Q21 review: Refining and Lube Base Oil outperform
— Refining turned in revenue of KRW4.85tn (+27.7% QoQ) and OP of KRW152.5bn (-55.4% QoQ). Margins remained solid, though OP suffered a QoQ drop. The top line was boosted by increases in ASP and sales volume. High oil prices at end-2Q21 added KRW120.0bn in inventory-related gains.
— Petrochemical posted revenue of KRW1.2tn (+17.8% QoQ) and OP of KRW134.0bn (+36.4% QoQ). The considerable QOQ improvement seems to have been fueled by widened PX and benzene spreads and a large jump in OP for the olefin unit (triggered by rising PP/PO spreads).
— Lube Base Oil OP came in at KRW284.5bn (+50.6% QoQ; 43.1% OPM). Profit margins soared thanks to a drop in supply (falling utilization rates at Asian refineries) and low feedstock prices.
2H21 outlook: Earnings run to continue
— We expect the earnings run to continue in 2H21, though the spread of COVID variants may hurt oil demand for the time being. However, economic activity should pick up in 4Q21 as vaccination rates go up and COVID-19 treatments are developed.
— In June, the Chinese government strengthened regulations on teapot refineries amid its bid to downsize the industry; oil imports for teapot refining facilities were cut back and tax rates on intermediate materials (e.g., LCO, MX) were raised. To achieve carbon neutrality by 2050, China must shut down teapot refineries, a major source of pollutants.
— Exports of petroleum products from China’s teapot refineries should plunge in 2H21. Coupled with rebounding regional oil demand, this should boost refining margins and benefit Korean refineries.