South Korea's SK Innovation Anticipates Recovery in Refining Margins and Battery Demand in Second Half of the Year

South Korean refiner SK Innovation forecasts an improvement in refining margins and a rebound in battery demand during the second half of the year. This anticipated recovery is expected to enhance the utilization rates at its battery factories. The company attributes the projected strong refining margins to OPEC+ production cuts, which are likely to elevate oil prices, along with increased demand for transportation, cooling, and industrial purposes. These factors are expected to outweigh the delayed demand recovery from China and other emerging markets, as well as the ongoing challenge of high interest rates.

In the second quarter, SK Innovation's revenue fell slightly to 18.8 trillion won ($13.8 billion) from 18.9 trillion won in the previous quarter, but it was slightly higher than the 18.7 trillion won reported a year earlier. Energy and chemical sales constituted 92% of the total revenue, with battery and material sales making up the remaining 8%.

The company reported operating losses of 45.8 billion won in the second quarter, a significant reversal from an operating profit of 625 billion won in the first quarter, but an improvement from an operating loss of 107 billion won a year ago. The quarter-on-quarter loss was primarily due to weak oil refining margins and the burden of fixed costs from lower utilization rates in the battery business.

Operating profit from refining dropped sharply from 591.1 billion won in the first quarter to 144.2 billion won in the second quarter, driven by lower refining margins amidst concerns over prolonged high interest rates and China's sluggish economic recovery.

In the second quarter, oil product crack spreads decreased, with gasoline falling by $4.80 per barrel to $8.50 per barrel, diesel by $8.30 per barrel to $14.80 per barrel, and kerosene by $7.90 per barrel to $13.20 per barrel.

SK Innovation's Ulsan refinery, with a capacity of 840,000 barrels per day (b/d), operated at 78% of its capacity in the second quarter, down from 85% in the previous quarter. In contrast, the Incheon refinery, with a capacity of 275,000 b/d, saw an increase in its operating rate to 89% from 84% in the previous quarter. There are currently no planned turnarounds for the third quarter.

Battery Business Struggles

The battery business faced significant challenges, with operating losses widening to 460.1 billion won from 331.5 billion won in the previous quarter. Revenue dropped by 7.7% quarter-on-quarter and by 58% year-on-year to 1.55 trillion won. Utilization rates at battery factories declined in the first half of 2024 due to sluggish demand from automakers, though a gradual recovery is expected in the second half, according to subsidiary SK On. The company's battery production capacity is projected to reach 132 GWh this year, with plans to expand to at least 199 GWh by 2025.

Summary

SK Innovation expects a recovery in refining margins and battery demand in the second half of 2024. The company's revenue fell slightly in Q2, with significant operating losses due to weak refining margins and fixed costs in the battery business. Despite current challenges, SK Innovation anticipates improved utilization rates and expansion in battery production capacity.

Hashtags

#SKInnovation #RefiningMargins #BatteryDemand #OPEC #OilPrices #EnergySector #SouthKorea #BatteryProduction #EconomicRecovery #MarketTrends