S-Oils base oil business posted higher second quarter operating income thanks to healthy prices for API Group III base stocks, but SK Lubricants had a steeply lower operating profit blamed on a maintenance shutdown at its Ulsan, South Korea plant and weak base oil spreads.
S-Oil announced in its July 22 earnings report that its base oil business had 79.5 billion won (U.S. $67.9 million) of operating income for the three months ended June 30, up 9.8 percent from the same period of 2014. The operation managed this improvement despite the fact that its operating income decreased 27.1 percent to 373.5 billion won.
“The benchmark spread of base oil declined a lot in the second quarter because of supply growth, said Bang Juwan, S-Oil executive director for treasury. However, the spread of high quality base oil, Group III, maintained a relatively positive level. S-Oil supplies mostly API Group II and Group III base stocks.
Usually 70 percent of our total production is Group III, Bang said during a conference call. But considering this market situation, our company increased the ratio of Group III production up to 75 percent in the second quarter. Later he added, Thanks to the increasing oil price, we also enjoyed inventory evaluation gain.
Regarding prospects for the third quarter, Bang said, Considering solid demand growth for high quality products and heavy supply increase for Group II products, a favorable Group III market would continue for the rest of the year.
Meanwhile, SK Lubricants posted an operating profit of 41.5 billion won, down 47.7 percent year to year. Second quarter sales were 656.4 billion won, adecrease of 11.3 percent.
SK Innovation, South Koreas top oil refiner which owns SK Lubricants, said its base oils and lubricants business was still absorbing the negative impacts of unfortunate timing in the preparation last year for a maintenance shutdown.
In preparation for the regular maintenance scheduled for March and April, we had purchased quite a large amount of feed in the second half of 2014 at a relatively higher price, explained Lee Baehyun, head of SK Innovation management and planning office. That had an effect of increasing our production cost. And as you know, there is a time that is consumed from the purchase of feed to actual sales. So there was a time lag effect on our performance.
He added, Going forward in the third quarter, we believe upward pressure on our cost is going to be alleviated, thereby leading to increase in the spread and better performance.
Discussing the outlook for base oils, Lee said, The market condition is expected to be weak due to newly built and expanded facilities in the Middle East. But in the medium and long term, the demand for premium base oil would grow due to strengthening environmental regulations.