Refining and Petrochemicals See 10 Trillion KRW Surge in Net Borrowings in One Year... Battle Against Inefficiency

SK Inno, Net Debt 17 Trillion
HD Hyundai Oilbank 9 Trillion

Financial Burden Due to Rising Global Oil Prices
Working Capital of Four Refining Companies Tripled

Industry CEOs' Management Focus This Year
Emphasis on 'Efficiency'... Priority on Cost Reduction

The net borrowings of oil refiners and petrochemical companies, which are going through a period of stagnation, have surged by more than 10 trillion won in a year. Net borrowings refer to the total interest-bearing debt minus the cash or deposits held by a company, serving as an indicator of the company's financial burden.

The CEOs of refining and petrochemical companies have placed emphasis on "efficiency" as the key management theme this year, and it appears they will focus on cost reduction.

According to the industry on the 5th, the net borrowings of six companies?including the four domestic refiners (SK Innovation, GS Caltex, S-OIL, HD Hyundai Oilbank) and petrochemical companies LG Chem and Lotte Chemical?reached 54.3 trillion won as of the third quarter of last year. This is a 24.5% (10.7 trillion won) increase from 43.6 trillion won at the end of 2022.

The company with the highest net borrowings is SK Innovation, amounting to 17.1 trillion won. After rising significantly from 10 trillion won in 2021 to 16.2 trillion won in 2022, it increased by another 5.5% (900 billion won) last year. HD Hyundai Oilbank (9.4 trillion won) and S-OIL (4.8 trillion won) also saw their net borrowings increase by about 1 trillion won each.

LG Chem's net borrowings surged dramatically by 75.6% (5.6 trillion won), from 7.4 trillion won at the end of 2022 to 13 trillion won in the third quarter of last year. Lotte Chemical (4.9 trillion won) also saw its net borrowings jump by 88.4% (2.3 trillion won).

GS Caltex (5.1 trillion won) was the only one among the six companies to see a decrease in net borrowings, dropping by 100 billion won. This marks a decline for two consecutive years since recording 5.5 trillion won in 2021.

The short-term increase in net borrowings among refining and petrochemical companies can be attributed to rising oil prices. As international oil prices rise, companies are purchasing crude oil at higher costs, increasing working capital. Working capital refers to funds tied up within the company, such as accounts receivable and inventory. The more funds tied up, the greater the financial burden. According to Korea Ratings, the working capital of the four refiners increased nearly threefold from 9.4 trillion won in 2020 to 25.3 trillion won in the third quarter of last year.

The strong oil prices have also negatively impacted the profitability of petrochemical companies. As the price of naphtha, the raw material for petrochemical products, soared, the ethylene spread (the price difference between ethylene and naphtha), a profitability indicator, fell below the break-even point ($300) to the $200 range per ton last year. This means margins have shrunk significantly.

SK Innovation Ulsan Complex

In particular, the petrochemical industry faces additional pressure from the continuous capacity expansions by competing Chinese companies. Last year, the global ethylene capacity expansion?the so-called "rice" of petrochemicals?reached a record high of 9.6 million tons. As a result, there is speculation that companies struggling under debt pressure may pursue restructuring this year, such as selling naphtha cracker complexes (NCC) or general-purpose business units.

The need to transition from fossil fuel-centered business structures in line with the carbon-neutral era is also a factor increasing debt. Large-scale investments worth trillions of won have been made, including S-OIL's Shahin Project, SK Innovation's battery business, and LG Chem's bio and battery materials.

Refining and petrochemical CEOs are emphasizing "efficiency" as the management focus this year. In his New Year's address, Lee Hoon-ki, CEO of Lotte Chemical, called for innovative business structure reforms and organizational improvements, mentioning "cost and productivity innovation, as well as efficiency in working capital and investment expenses."

Shin Hak-cheol, Vice Chairman of LG Chem, also stated, "We will expand emergency management systems to non-manufacturing areas and all global business sites," urging to "improve cash flow through increased working capital efficiency."

Park Sang-gyu, CEO of SK Innovation, emphasized, "Let's re-examine the overall strategic direction from the perspective of efficiency, focusing on output relative to input, and derive ways to strengthen competitiveness."

However, the outlook is not optimistic. Kim Moon-ho, senior analyst at Korea Ratings, said, "Demand for petroleum products will decline in the long term," adding, "We need to monitor changes in the business bases of refiners and the profit-generating capabilities of non-refining sectors." He further assessed, "If financial burdens increase relative to the effects of business diversification or investment performance, it will negatively affect credit ratings."

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