Refiners cope as lubricant business slips

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Refiners cope as lubricant business slips

Local oil refiners are boosting production of paraxylene (PX) products as earnings from their lucrative high-end lubricant business plunge due to the worldwide economic slump.

According to SK Innovation, a holding company?of oil refining businesses within SK Group, its affiliate SK Lubricants saw its operating profit drop 92.8 percent compared to a year ago in the first quarter taking in revenues of only 7.6 billion won ($6.7 million). The nation’s largest oil refiner’s sales also went down 13.5 percent year-on-year to 681.1 billion won.

GS Caltex, the second-largest oil refiner, saw first quarter year-on-year operating profit from its lubricant business drop to 31 billion won from 69 billion won. Sales shrunk from 490.4 billion to 350.7 billion won.

S-Oil’s first-quarter lubricant business generated 14.2 billion won in operating profit, down 86 percent from 105.9 billion won a year ago. Sales decreased 31 percent year-on-year to 432.8 billion won.

In recent years, the lubricant business has been an important source of profits for refiners. For GS Caltex, lubricant products accounted for only 3.7 percent of sales in 2012, but nearly half of the company’s operating profits came from lubricants. Likewise, the lubricant business generated 42 percent of S-Oil operating profits last year.

Experts said these companies have benefited from producing top quality Group III lubricants which have the highest margin. But as the global economic slump continues, demand has fallen as customers try to cut costs.

“Our inventory started to increase following low demand from China and other countries,” said an oil company official. “As our stocks piled up, it led to decline in lubricant prices and profit margins, which has created a vicious cycle.”

As the oil refining business and lubricant sector start to lose energy, the companies have recently focused on petrochemical products like paraxylene to fill the void.

Paraxylene is primarily used as a feedstock for the manufacture of purified terephthalic acid (PTA), an important chemical in the production of fiber and plastic bottles.?PTA costs about $1,500 per metric ton and has a higher margin than other petrochemicals. Demand has soared in recent years and China is now the world’s top producer of PTAs. Last year, total PTA capacity reached 26 million metric tons per year with the addition of 10.2 million metric tons of capacity in 2012 alone, according to China’s General Administration of Customs. Korean oil refiners can produce 5 million metric tons of PX lubricants, but SK Innovation is building a plant that will be able to produce 1.3 million metric tons.

By Joo Kyung-don [kjoo@joongang.co.kr]

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