PLATTS ANALYSIS: South Korean refiners hit by strong currency, weak margins
Seoul (Platts)--7Feb2013/519 am EST/1019 GMT
South Korean refiners suffered a drop in earnings for the fourth quarter
of last year due to lower refining margins, which were further worsened by the
local currency's sharp appreciation against the dollar, analysts said
"That's true, refiners suffered poor refining margins in the fourth
quarter," said Yoo Young-Kook, analyst at Seoul-based KTB Securities.
"European refiners hiked operating rates in the fourth quarter to meet
winter heating demand, which led to increased supplies," he said, adding that
South Korean refiners were hit hard by this as they are dependent on exports,
unlike their rivals in India and other domestic market-focused refiners, Yoo
South Korea's domestic oil demand rose a marginal 1.2% year on year to
212.99 million barrels in the fourth quarter of 2012.
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The country's top refiner SK Innovation's operating profit for the
refining segment fell 55% year on year to Won 78.5 billion ($72.2 million) in
the fourth quarter of 2012; No. 2 refiner GS Caltex's refining segment swung
to an operating loss of Won 143.1 billion from an operating profit of Won
144.6 billion a year ago; and No. 3 refiner S-Oil posted an operating loss of
Won 207.2 billion compared with an operating profit of Won 70.1 billion a
"Operating profit decreased owing to weak refining margin and inventory
related losses," SK said in its earnings release February 1.
"In particular, the fourth-quarter fuel oil crack hit a record low for
the year," the refiner said, adding that the fuel oil crack widened to minus
$11.3/barrel in the fourth quarter of 2012 compared with minus $2.8/barrel in
the same period the previous year.
S-Oil in its statement also attributed the declining refining margin to
a deteriorating fuel oil spread despite a healthy spread for other products.
"Inventory-related losses were also significant because of lower oil
prices late last year," Yoo said, noting that the three refiners suffered
around Won 100-200 billion inventory and foreign exchange loss each.
Kwak Jin-Hee, an economist at Eugene Investment & Securities, said
Wednesday that the sharp appreciation of the local currency against the
dollar worsened refining margins, noting that average operating profit of the
three refiners ended up 57% below the market forecast.
"Dollar-based refining margin was $6.8/barrel in the fourth quarter,
down 37.5% from $10.9/b in the third quarter, but in won terms, the margin
was down 40.0% due to the currency's appreciation against the dollar," the
In won terms, the refining margin was Won 7,404/b in the fourth quarter,
down 40% from Won 12,339/b in the third quarter, Kwak said
The won gained 7.6% against the dollar last year compared with 2011, with
most of the appreciation occurring in the fourth quarter.
The appreciation -- its biggest percentage gain since 2009 -- comes in
the wake of a massive credit injection by other countries to prop up their
economies, according to the Bank of Korea.
The South Korean currency is expected to gain more ground going forward
as they will likely continue this quantitative easing, the central bank has
BETTER TIMES EXPECTED
Analysts forecast refining margins to improve in the first quarter of
"Refining margins are at $10.30/b currently from $6.3/b in early
January," Kwak said, noting that global demand will also improve on the back
of higher consumption in China.
Yoo of KTB Securities forecast a bigger gasoline margin, thanks to solid
demand from the US, China and Southeast Asian nations.
"European refiners have cut operating rates, while the Chinese will shut
down for maintenance, which will reduce supplies," he said.
Lee Da-Sol, an analyst at Hanwha Investment & Securities, also said
Wednesday that earnings of local refiners have recovered since late November
driven by higher margins for gasoil and kerosene on stronger heating demand.
A similar sentiment was echoed by SK Innovation and S-Oil on their
outlook for 2013.
"Refining margin is anticipated to display a recovery trend owing to
solid demand in the Asia Pacific region and planned refinery maintenance in
Europe and Asia," SK said.
--Charles Lee, firstname.lastname@example.org
--Edited by Mriganka Jaipuriyar, email@example.com; Geetha Narayanasamy, firstname.lastname@example.org