Refiners to keep riding Middle East windfall in H2, but petrochemical firms face reversal

South Korean refiners and petrochemical companies that benefited from the Middle East war earlier this year are expected to see their fortunes diverge in the second half. After a first half in which profits surged on raw materials bought cheaply before the conflict, petroleum product shortages continue to support refiners heading into the second half — while chemical makers face a market with little sign of meaningful demand recovery.

According to third-quarter earnings forecasts compiled by financial data provider FnGuide, S-Oil is expected to post operating profit of 1.06 trillion won ($786 million) for the quarter, a 360 percent jump from a year earlier. SK Innovation is forecast to report 1.37 trillion won in operating profit, up 139.4 percent year on year.

The gains reflect continued instability in global crude supply stemming from the US-Iran conflict in the Middle East. The Strait of Hormuz — the world's busiest crude oil shipping lane — remains blocked, and a Saudi Arabian pipeline that had served as an alternative route was recently knocked out of operation by a drone strike. As the supply crunch deepens, international oil prices have rebounded above $100 a barrel after falling to $70 in July.

Rising crude prices would normally squeeze refinery margins, but conditions now are different. The shortage of refined petroleum products has grown even more acute than the rise in feedstock costs. Diesel — the top export product for South Korean refiners — has for the first time surpassed $6 per gallon at US retail. Base oil, long dominated by Middle Eastern exporters, has also shifted toward Korean refiners as much of the region's refining infrastructure has been destroyed, opening a new revenue stream.

Refiners are thus expected to follow first-half "lagging" gains with a supply-shortage tailwind in the second half. The lagging effect refers to the profit earned by selling products made from cheaply purchased feedstock at elevated prices. Combined operating profit at the four major refiners — SK Innovation, S-Oil, HD Hyundai Oilbank and GS Caltex — swung from a combined loss of 1.2 trillion won in the second quarter of last year to more than 8 trillion won in the second quarter of this year.

Chemical companies, by contrast, are losing the tailwind from Middle East-related conditions as the third quarter begins, putting them on a diverging path from refiners. The four major petrochemical firms — LG Chem, Lotte Chemical, Hanwha Solutions and Kumho Petrochemical — posted combined operating profit of 1.86 trillion won in the second quarter, up 114.0 percent from a year earlier, as raw material prices surged.

In the third quarter, however, the dynamic is expected to reverse. With companies now processing feedstock bought at elevated prices, a so-called "reverse lagging" effect is anticipated. FnGuide's compiled forecasts show LG Chem's third-quarter operating profit falling 71.9 percent year on year to 190.6 billion won, while Lotte Chemical is expected to post an operating loss of 142.5 billion won, extending its streak in the red.

Differences in downstream industry structure also play a major role. Jeon Yu-jin, a researcher at iM Securities, said petrochemicals' key end markets — automobiles, home appliances and IT products — are relatively price-sensitive in terms of demand, whereas diesel and jet fuel serve industrial, heating and transportation uses that make demand far less elastic. "Asian buyers have said they are not confident enough in demand to increase purchases right away, and will not rush to replenish low inventories," she said.

Manufacturers of chemical-based products such as automotive interior components can adjust output flexibly in response to price changes. Petroleum products, by contrast, are tied to fixed global shipping contracts, meaning buyers must continue purchasing them regardless of price. "A structural price recovery for chemical products absolutely requires a rebound in purchasing demand," Jeon said.