Refining Industry Struggles Despite High Oil Prices: "Rising Costs Cloud Earnings Outlook"

According to The Financial News, South Korea’s refining industry, which had been expected to post improved results in the first quarter, is still voicing concerns. The Middle East war has pushed up crude prices and boosted operating profit on paper, but higher freight costs and shrinking refining margins are weighing on the sector. Some analysts warn that, depending on how losses from the oil price cap system are compensated, the cost burden could shift into the second quarter.
As of the 29th, industry sources said that about a month after war broke out between the United States of America (U.S.) and Iran, the domestic refining industry is watching closely as first-quarter earnings are finalized.
After suffering weak results last year due to falling refining margins, the refining industry had expected a gradual earnings rebound starting in the first quarter of this year, at least before the Middle East war erupted.
However, the surge in international oil prices triggered by the Middle East situation has increased volatility in refining margins, adding to uncertainty. Refining margin is the profit left after deducting feedstock, transportation, and operating costs, and serves as a key gauge of refiners’ profitability. This month’s refining margins are expected to be compiled in the latter half of next week.
A source in the refining industry said, "Since the Middle East situation began, March refining margins have been like a roller coaster every single day," adding, "It is very difficult to forecast refining margins for the purpose of closing the books."
Brokerage firms expect first-quarter earnings in the refining industry to improve significantly, driven by higher inventory valuation gains. As oil prices have jumped, the value of crude oil stocks held by each company has risen, creating a positive accounting effect.
The refining industry, however, stresses that these are accounting figures expressed in numbers and do not reflect the actual operating profit generated by their core business.
With crude supply destabilized by the partial blockade of the Strait of Hormuz, refiners are facing heavier cost pressures from higher shipping rates and delivery delays. At the same time, prices of petroleum products such as gasoline and diesel are capped by the Government of the Republic of Korea’s oil price cap system, raising the possibility that refining margins will be squeezed.
The fact that losses stemming from the price cap are fully reflected in first-quarter results is another factor dragging down earnings.
An industry representative said, "Because neither the method nor the scale of compensation for losses caused by the oil price cap system has been decided, the amount we must immediately shoulder in the first quarter is quite large."
To improve profitability, refiners would normally increase exports of petroleum products to benefit from the weak won. However, this has become difficult due to the Government of the Republic of Korea’s restrictions on export volumes.
Since the 13th, the Government of the Republic of Korea has enforced the oil price cap system, preventing refiners from exporting more petroleum products than they did in the same period last year. It has also imposed export restrictions to stabilize the supply of Naphtha, a basic feedstock for the petrochemical industry.
Typically, domestic refiners import crude oil from overseas, refine it, and export about half of the resulting products. As the Government of the Republic of Korea considers extending export restrictions from Naphtha to a broader range of petrochemical products, the burden on the refining industry is expected to grow even heavier.
A refining industry official said, "We are suffering what is literally a ‘triple whammy’ from deteriorating refining margins, export restrictions, and the implementation of the oil price cap system," adding, "If the Middle East situation drags on, expectations for an earnings rebound this year will be sharply reduced."

chlee1@fnnews.com Lee Chang-hoon Reporter