Lubricant business weighing South Korean refiners down

South Korean oil refineries are struggling with their lubricant businesses. Until last year, lubricant units had accounted for more than 50% of operating profits. As lubricant demand falls along with prices, however, the lubricant units have become the weakest link in their business.
According to oil refining industry sources, SK Lubricants, the lubricant unit of SK Innovation, has decided to cut its spending in expanding its Ulsan plant operations to 70.9 billion won (US$60.6 million) from the originally planned 290 billion won (US$247.7 million). The company’s first-quarter operating profit was almost 7.6 billion won (US$6.5 million), an operating profit ratio of 1.1%, down from 105.9 billion won (US$90.5 million), or 13.4% in the same quarter last year.
The lubricant unit of GS Caltex saw its operating profit shrink to 31.0 billion won (US$26.5 million) from 68.5 billion won (US$58.5 million) during the same period. In the same way, the lubricant division of S-Oil Corp. expects to earn only 14.2 billion won (US$12.1 million) in operating profit in the first quarter, down from 105.9 billion won (US$90.5 million) a year ago.
Lubricant production, though it is sensitive to business conditions, is a typically high-margin business. For this reason, most refiners have invested aggressively in this area. Lee Eung-joo, an analyst with Shinhan Investment Corp., said, “Even though the lubricant business has been lackluster for the first half, things are looking up in the second half, contributing more to the refiners’ bottom line.”
(May 24, 2013)