SK Enmove's base oils operating profit rose more than fivefold in the second quarter, lifting margins to their highest level since 2021
Base oils generated a fifth of SK Innovation's operating profit despite contributing just 7% of sales
SK Innovation expects margins to ease as Middle East exports eventually recover, with new Group III capacity also set to add to supply
SK Enmove's second-quarter profit surged more than fivefold to a record high, as Middle East supply disruptions pushed Group III margins sharply higher.
The world's largest Group III producer posted operating profit of 691.9 billion South Korean Won ($483 million) in the three months to end-June, up from W134.5 billion a year earlier and well above W188.5 billion recorded in the first quarter.
The unit of SK Innovation saw sales rise 88% to W1.98 trillion. The steeper rise in profit lifted the operating margin to 34.9%, from 15.4% in the first quarter to the highest since the third quarter of 2021.
Middle East disruptions slashed exports from one of the world's largest Group III producing regions, increasing demand across Asia, Europe and the US for supplies from alternative producers.
Tighter supply and strong demand triggered a surge in prices. Europe's Group III prices almost tripled from a year earlier during the second quarter, while Brent crude rose about 40%. That increased Group III's premium over crude to levels that were almost four times wider than a year earlier.
Key Highlights
· The unit’s sales accounted for just 7% of SK Innovation’s total revenue, but 20% of its profit.
· SK Innovation attributed higher earnings to stronger margins following Middle East supply disruptions.
· South Korea's premium-grade production remained elevated in May and June as refiners responded to stronger prices and demand.
· SK Innovation expects spreads to moderate as competing supply disruptions ease, although volatility would depend on when the Strait of Hormuz blockade is lifted.
Market Repercussions
The surge in earnings showed how Group III suppliers with uninterrupted operations benefitted from the supply squeeze, while diversified production added a further advantage.
SK Enmove operates production across three countries in Asia and in Europe, allowing it to continue supplying customers even if one facility is disrupted. That contrasted with major Middle East producers, whose Group III output depended on individual plants.
Such elevated margins were unusual and unlikely to last, with even SK Innovation expecting margins to ease in the coming months as high prices attract more supply. That would require new Group III projects to start on schedule and Middle East exports to recover.