Refining Companies Shift Focus to 'Lubricants,' High-Value Profit Products

Lubricant Export Value Increases by 46.2% in One Year
Despite Q3 Earnings Shock, Profitability Decline Offset by Lubricants
Resilient to External Factors and Relatively Stable Demand

The view of SK Innovation's Ulsan Complex, the largest oil refining company in Korea. Photo by SK Innovation

[Asia Economy Reporter Choi Seoyoon] There is one business that has emerged as the sole 'profit driver' for refiners hit by an earnings shock in the third quarter. It is the high-grade base oil business. Although it accounts for about 10% of sales and is classified as a non-core business, its profitability has been outstanding, playing a key role during periods of poor performance.

According to the Korea National Oil Corporation's petroleum information site Petronet on the 19th, domestic lubricant production from January to September this year reached 25.083 million barrels, up 11.7% from 22.458 million barrels during the same period last year. Lubricant export value increased by 46.2%, from approximately $3.353 billion to about $2.3 billion during the same period.

The lubricant business of refiners is generally divided into base oils used for manufacturing automotive engine and transmission lubricants (gear oils) and automotive lubricants. Unlike refining businesses, which are linked to earnings and oil prices, the lubricant business is less vulnerable to external variables and demand tends to remain relatively stable.

In particular, in the third quarter of this year, a global lubricant supply shortage drove prices up, positively impacting profitability. Bunker C oil (marine fuel oil), a raw material for base oils, saw supply decrease and prices rise as refiners increased its use as a diesel substitute amid worsening diesel shortages.

Thanks to this, domestic refiners saw their operating profits cut to as low as one-quarter due to declining refining margins amid the global economic downturn in the third quarter, but the lubricant business helped partially offset the deterioration in profitability.

SK Innovation, the nation's top refining and chemical company, saw its third-quarter operating profit shrink by about 70% from the previous quarter to 703.9 billion KRW, but its lubricant business grew 32%, setting a quarterly record high.

GS Caltex and S-Oil also experienced operating profit declines of about 62% and 70%, respectively, during the same period, but their lubricant businesses posted strong results. S-Oil grew about 46%, achieving its best performance since its founding. GS Caltex's lubricant business segment increased by about 61%, and Hyundai Oilbank recorded the largest growth among the four refiners with an increase of approximately 71%.

The lubricant business is a high value-added sector in which refiners have consistently invested. SK established a specialized lubricant affiliate, SK Lubricants, while S-Oil is focusing its capabilities on developing lubricants for electric vehicles. Recently, S-Oil developed four types of lubricants optimized for transmissions and reducers of hybrid and electric vehicles.

An industry insider said, "In the third quarter, the lubricant sector benefited greatly from improved spreads (the difference between product prices and raw material costs) due to lower raw material burdens caused by falling oil prices," adding, "Since net regional base oil volumes have been steadily declining since peaking in 2019, the spread improvement trend is expected to continue."

This content was produced with the assistance of AI translation services.