Korean refiners see worst over for crack spreads

South Korean refiners said profit margins in their core fuel production businesses will continue to widen in this year's final quarter after recovering during July-September amid rising demand and maintenance-related supply disruptions in Asia-Pacific.

The region's variable cost margin benchmark, the Singapore gross refining margin, rose to an average of $3.90/bl in the third quarter from a decade low of $1/bl in the previous quarter. The margin was up by 22pc from the year-earlier average of $3.20/bl and marked the highest level for the benchmark since the first quarter of 2018.

S-Oil said profits were helped by seasonal demand gains, tight supplies and an inventory build in preparation for the International Maritime Organisation (IMO) cap on sulphur in marine fuels from 1 January next year. These same factors will help drive further margin gains in the current quarter, the company said, with regional oil product demand projected to rise by 700,000 b/d from a year earlier.

SK Innovation said third-quarter profit margins on gasoline averaged $7.90/bl, up by 39pc from April-June, helped by a temporary fall in Saudi Arabian exports. The average crack spread on diesel widened to $16.20/bl, up by 25pc on the previous quarter and a 5.2pc gain from a year earlier. Even high-sulphur fuel oil margins firmed in the latest quarter amid low inventories, SK said. But these spreads will weaken again in the current quarter and head into next year as the IMO rules kick in.

Refinery turnarounds in the US and Europe will further boost fourth-quarter profit margins on middle distillates, and the upwards momentum for diesel crack spreads will continue and strengthen early next year, SK said. Gasoline margins will be little changed or down slightly amid seasonally lower demand as 2019 winds down, the company said, but these spreads will widen next year as supplies are reduced by lower plant utilisation.

Hyundai Oilbank said it sees gasoline spreads strengthening even in the current quarter because of lower supplies and solid demand in such countries as Indonesia and Vietnam.

S-Oil said paraxylene (PX) profit margins dropped to $300/t in the third quarter, down by 39pc from a year earlier, and will remain weak during October-December after Chinese capacity additions created oversupply. Supply cuts by the weakest PX producers will do little to help because downstream plants are having turnarounds, the refiner said.

Benzene spreads, which plummeted earlier this year, largely recovered in the latest quarter as Asia-Pacific supplies were reduced. Hyundai Oilbank said it expects renewed weakness in benzene margins in the current quarter as US prices drop and downstream maintenance disruptions reduce demand.

Spreads on naphtha-derived olefins were weaker than a year earlier in the July-September quarter. Polypropylene (PP) margins averaged $518/t, down by 6pc, and propylene oxide (PO) profits fell by 24pc to $642/t. But S-Oil said it expects an improvement in the fourth quarter as maintenance cuts supplies and demand for home appliances and packaging rise. Delays in PO capacity expansions also are seen helping. Regional PP capacity additions will exceed demand growth again in 2020 and 2021, the company said.

S-Oil's returned to profit in the third quarter after posting a loss during July-September, but operating earnings fell by 27pc from a year earlier to 230.7bn won ($198.6mn). Profit from its refining business dropped by 42pc the previous year to W99.7bn, while the petrochemical segment posted a 22pc fall to W79.4bn.

SK's operating profit slid by 61pc from a year earlier to W330.1bn, led by an 84pc plunge in its refining segment to W65.9bn. Operating profit from petrochemicals fell by 44pc to W193.6bn.

Hyundai Oilbank's operating profit fell by 34pc to W157.8bn. Profit dropped by 56pc in its core refining business to W88.2bn, while its largest petrochemical unit posted a 92pc gain in operating earnings to W48.2bn.

GS Caltex has yet to report its third-quarter results.