S.Korean refiners may see lube oil lifeline slip away

GS Holdings

23/09/2014 06:41

* Profits from lube business plug gaping hole from refining 
    * Capacity increase may bite lube margins in late 2014 
 
    By Meeyoung Cho and Chris Lee 
    SEOUL, Sept 23 (Reuters) - Profits from robust lubricant oil 
sales helped offset steep refining losses at South Korea's top 
three oil refiners in the first half, but planned production 
hikes later this year threaten to erode margins and sever their 
earnings lifeline. 
    Korean refiners have focused on specialty lubricants, using 
heavy oil upgrading systems to feed residual oil from the 
refinery process into lube base oil, and have enjoyed robust 
sales this year to Europe and the United States. 
    Profits in lube base oil, the feedstock for engine oils and 
greases, covered nearly two-thirds of refining losses at South 
Korea's top three refiners despite making up only six percent of 
sales, helping them weather a refining industry downturn. 
    "Refineries are experiencing many losses when it comes to 
refining ... they're passably making a profit in lubricants and 
chemicals. The lubricant market isn't doing well like it was 
back in 2011 but it's still basically an oligopoly market," said 
Yeon-ju Park, an analyst at KDB Daewoo Securities. 
    SK Lubricants Co Ltd, owned by SK Innovation Co Ltd 
 096770.KS , GS Caltex Corp and S-Oil Corp  010950.KS  reported 
combined profits from their lube oil and lubricant businesses of 
389 billion Korean won ($374 million) over the first six months 
of this year, doubling year on year, according to an analysis of 
company filings.  
    Over the same period, SK Energy, also owned by SK 
Innovation, GS Caltex and S-Oil accrued a combined 623 billion 
won operating loss in their refining businesses, which were hit 
by weak oil prices and soft regional energy demand, swinging 
from 509 billion won profit a year earlier. 
    But a planned 30 percent increase in four South Korean 
refiners' lube oil production capacity - to 144,300 barrels per 
day (bpd) - before the end of the year poses a major risk to 
lubricant revenues, and could expose the country's energy giants 
to harsher operating conditions, analysts said. 
    South Korea has the fourth-largest refining capacity in Asia 
Pacific at 2.9 million bpd, but run rates and refinery sales 
have eased this year, although lube oil and lubricant sales 
jumped 17 percent in the first half to 3.4 trillion won. 
 
    ADDING CAPACITY 
    Lube oil has five major markets depending on quality and 
usages, the largest of which are 'Grade II' for industries and 
automobiles, and 'Group III' for premium market vehicles. 
    European and U.S. demand for high-end automobiles is 
projected to remain brisk, but premium lube production capacity 
is rising. 
    "They're all flocking at the same time because they have no 
other choice. This is part of the reason why lubricating oil 
product prices are unable to rise," said Kyu-won Hwang, an 
analyst at Tong Yang Securities. 
    South Korea's combined lube production capacity will jump 30 
percent to 144,300 bpd later this year as SK Lubricants jointly 
with Spain's Repsol  REP.MC  will open a 13,300 bpd plant and 
Hyundai Oilbank with Shell Petroleum Co, a refining unit of 
Royal Dutch Shell  RDSa.L , will start 20,000 bpd plant. 
    Shell is also betting on lubricants along with its chemicals 
and retail fuel sales to help it boost the performance of its 
downstream division, where oil refining will remain a drag on 
earnings in many regions.  ID:nL5N0RA3S2  
    "The supply is out there, and lubricating oil margins are 
also easing, so profits will be diminished," said Young-joo Son, 
a senior analyst at Kyobo Investment Trust. 
    (1 US dollar = 1,042.5 Korean won) 
 
 (Reporting by Meeyoung Cho and Chris Lee; Editing by Richard 
Pullin) 
 ((meeyoung.cho@thomsonreuters.com; +82 2 3704 5653; Reuters 
Messaging: meeyoung.cho.reuters.com@reuters.net)) 
 
Keywords: OIL SOUTHKOREA/REFINERIES