By Choi Sung-jin
The domestic oil refining industry is expected to register record-high operating profits this year, industry sources said Tuesday.
Korea's four major refineries -- SK Innovation, GS-Caltex, S-Oil and Hyundai Oil Bank -- reduced their third-quarter profit target by 4.9 percent in August as refining margins plunged amid high-capacity utilization by global plants.
But contrary to expectations, refining margins recovered to previous levels in September and international oil prices maintained a stable trend, reviving an optimistic outlook for this year's performance, they said.
According to stock market analysts, the four refineries' combined operating profit is expected to top 7.5 trillion won ($6.6 billion) this year, easily surpassing the previous high of 6.9 trillion won in 2011. They registered nearly 5.4 trillion won in profit in the first half of this year alone.
The foundation for improved prospects is the stability of international oil prices.
The price of Dubai light oil, which accounts for more than 70 percent of the nation's crude imports, stood at $49.12 a barrel in the Singapore spot market Monday, rebounding from $38 in early August. Refiners capitalize on this time-lag effect because it usually takes about six weeks for them to import crude oil, refine it into petroleum products and sell them. These refineries bought crude oil at low prices in August and are selling petroleum products at higher prices now.
Oil prices are likely to move within the band of $45-$50 until year-end, further contributing to the improved bottom lines of refiners, the analysts said. Although OPEC members agreed on production cuts last month, non-member producers, such as Iran and Russia, have increased production, forcing international crude prices to fluctuate within a narrow range, they said.
Another favorable factor is the expanded refining margin -- the difference between the price of crude oil and petroleum products -- which rose for seven consecutive months in the third quarter. The Singapore gross refining margin applied to Korean companies stood at $7.40 a barrel late last month, hovering way above the $4-$5 level the industry regards as a breakeven point.
"Some of the U.S. and Chinese refineries went into regular overhauls in the third quarter, reducing supply and pushing up refining margins," an industry executive said.
A possible stumbling block to breaking the profit record is the exchange rate. Because most settlements in the refining industry are in U.S. dollars, the rise of the Korean won can weaken the export competitiveness of petroleum products refined here.
The industry's answer is to enhance the "non-refining" business, such as petrochemicals and lubricants. SK produced half its operating profit in the non-refining sector in the first half of this year.
Noteworthy in this regard is the rising profitability of paraxylene, a chemical used for synthetic fiber. The "PX spread" -- the difference between the price of paraxylene and its material naphtha -- remains above $364 this month after hitting $427 in August.
"China's demand for paraxylene is expected to exceed its supply until 2018, forcing the world's second-largest economy to increase its imports," an industry official said. "The operational suspension of the two Chinese petrochemical companies -- Dragon Aromatics and Sinopec -- due to fire accidents and other reasons will benefit their Korean competitors."
The conversion of residue oil into high value-added gasoline and diesel by using upgrading equipment is also emerging as a new revenue source. Hyundai Oil is a front-runner in this area among domestic refiners, with an upgraded refining portion of 39.1 percent. If a company can raise this above 50 percent, it can produce high value-added petroleum products from cheap Bunker-C oil without having to import expensive crude oil.
"Predicting the movement of oil prices is so uncertain as to be said to belong to God's realm," another industry executive said. "Only when the domestic refiners minimize risks through enhancing the non-refining business and residue upgrading complex can they continue to grow."
The domestic oil refining industry is expected to register record-high operating profits this year, industry sources said Tuesday.
Korea's four major refineries -- SK Innovation, GS-Caltex, S-Oil and Hyundai Oil Bank -- reduced their third-quarter profit target by 4.9 percent in August as refining margins plunged amid high-capacity utilization by global plants.
But contrary to expectations, refining margins recovered to previous levels in September and international oil prices maintained a stable trend, reviving an optimistic outlook for this year's performance, they said.
According to stock market analysts, the four refineries' combined operating profit is expected to top 7.5 trillion won ($6.6 billion) this year, easily surpassing the previous high of 6.9 trillion won in 2011. They registered nearly 5.4 trillion won in profit in the first half of this year alone.
The foundation for improved prospects is the stability of international oil prices.
The price of Dubai light oil, which accounts for more than 70 percent of the nation's crude imports, stood at $49.12 a barrel in the Singapore spot market Monday, rebounding from $38 in early August. Refiners capitalize on this time-lag effect because it usually takes about six weeks for them to import crude oil, refine it into petroleum products and sell them. These refineries bought crude oil at low prices in August and are selling petroleum products at higher prices now.
Oil prices are likely to move within the band of $45-$50 until year-end, further contributing to the improved bottom lines of refiners, the analysts said. Although OPEC members agreed on production cuts last month, non-member producers, such as Iran and Russia, have increased production, forcing international crude prices to fluctuate within a narrow range, they said.
Another favorable factor is the expanded refining margin -- the difference between the price of crude oil and petroleum products -- which rose for seven consecutive months in the third quarter. The Singapore gross refining margin applied to Korean companies stood at $7.40 a barrel late last month, hovering way above the $4-$5 level the industry regards as a breakeven point.
"Some of the U.S. and Chinese refineries went into regular overhauls in the third quarter, reducing supply and pushing up refining margins," an industry executive said.
A possible stumbling block to breaking the profit record is the exchange rate. Because most settlements in the refining industry are in U.S. dollars, the rise of the Korean won can weaken the export competitiveness of petroleum products refined here.
The industry's answer is to enhance the "non-refining" business, such as petrochemicals and lubricants. SK produced half its operating profit in the non-refining sector in the first half of this year.
Noteworthy in this regard is the rising profitability of paraxylene, a chemical used for synthetic fiber. The "PX spread" -- the difference between the price of paraxylene and its material naphtha -- remains above $364 this month after hitting $427 in August.
"China's demand for paraxylene is expected to exceed its supply until 2018, forcing the world's second-largest economy to increase its imports," an industry official said. "The operational suspension of the two Chinese petrochemical companies -- Dragon Aromatics and Sinopec -- due to fire accidents and other reasons will benefit their Korean competitors."
The conversion of residue oil into high value-added gasoline and diesel by using upgrading equipment is also emerging as a new revenue source. Hyundai Oil is a front-runner in this area among domestic refiners, with an upgraded refining portion of 39.1 percent. If a company can raise this above 50 percent, it can produce high value-added petroleum products from cheap Bunker-C oil without having to import expensive crude oil.
"Predicting the movement of oil prices is so uncertain as to be said to belong to God's realm," another industry executive said. "Only when the domestic refiners minimize risks through enhancing the non-refining business and residue upgrading complex can they continue to grow."
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