Oil margins firm, but players still hedge bets

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Oil margins firm, but players still hedge bets

The country’s major petrochemical companies are set to benefit from an expected recovery in refining margins next year, according to oil market analysts and industry sources.

Refining margins recorded in Singapore - the benchmark for profitability among oil processors in Asia - fell to as low as $4 a barrel in the fourth week of November due to ample gasoline supplies from Europe.

Lower margins hit Asian refiner profitability since the break-even point for them is around $4.5.

But with many Asian refineries set to reduce capacity, margins are expected to rebound as early as later this month, according to analysts.

“As we draw near January, the gasoline refining margin will likely improve,” said Hwang Kyu-won, an analyst from Yuanta Securities.

“Smaller refiners in China and Japan, in particular, will be active in adjusting their capacity.”

Several Chinese independent oil refiners, commonly known as ‘teapots,’ are taking the lead in cutting capacity, reducing it from 63 percent in September and October to 59 percent as of the fourth of November.

Smaller players typically react most quickly when margins decline.

At home, major petrochemical units have braced for lower margins and fluctuating oil prices.

SK Innovation, for instance, has sought to diversify its business portfolio and expand non-petrochemical lines, such as the making of electric vehicle batteries.

Other alternative segments include the manufacturing of paraxylene, a chemical essential to making plastic bottles and polyester fibers.

After committing significant capital, SK Innovation has become the sixth largest producer of paraxylene globally.

Another major source of new growth is the electric vehicle battery business, as the petrochemical market could face headwinds with the introduction of a worldwide regulation on high-sulfur fuel oil (HSFO), essentially the leftovers of an oil refiner’s output.

Dubbed IMO 2020, the regulation from the International Maritime Organization will impose a tighter fuel sulfur cap starting 2020.

Cho Hyung-ryul, an analyst at Samsung Securities, sees SK Innovation possibly gaining momentum around 2020 thanks to prospects in the battery sector.

“By 2020, SK Innovation will have the capacity of more than 25 gigawatt hours, and then it could reach the break-even point,” the analyst said.

SK Innovation announced this year’s plans to build production lines for electric vehicle batteries in Europe, the United States and China with an aim of increasing capacity 11 fold.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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