July 26, 2019 / 8:08 AM / a month ago

SK Innovation sees diesel demand for IMO 2020 improving refining margins

FILE PHOTO: The logo of SK Innovation is seen in front of its headquarters in Seoul, South Korea, February 3, 2017. REUTERS/Kim Hong-Ji/File Photo

SEOUL (Reuters) - South Korea’s SK Innovation (096770.KS), owner of South Korea’s biggest oil refiner SK Energy, said on Friday that refining margins are expected to improve, driven by solid diesel demand before new rules on marine fuels take effect from 2020.

The company posted a 42% drop in its operating profits for the second quarter to 498 billion won ($420.91 million), dragged down by weaker margins during the period, compared with 852 billion won over the same period a year earlier.

Shares of SK Innovation closed up 0.6% before the earnings announcement, while the KOSPI index .KS11 ended 0.4% lower.

“Diesel demand is expected to grow as the International Maritime Organization (IMO)’s new shipping fuel regulations will be implemented from 2020,” the company said in an earnings statement.

The IMO’s marine fuel regulations will limit the sulfur content in shipping fuel to 0.5% from the current 3.5%. The stricter rules will require the shipping industry to switch to cleaner fuels based on gasoil or diesel fuel from high sulfur fuel oil (HSFO).

Kim Ji-yong, a senior official at SK Energy, said in a call with analysts that the profit margin for producing gasoil, known as crack spreads, are likely to rise in the fourth quarter due to pre-stocking process ahead of the IMO implementation.

On Wednesday, S-Oil (010950.KS), South Korea’s third-largest refiner, also said it expected the inventory build-up for IMO compliant fuel to lift refining margins in coming months.

In preparation for change over to lower sulfur fuels, SK Innovation announced in 2017 that it would build a vacuum residue desulfurization unit (VRDS) by 2020, with a capacity to produce 40,000 barrels per day of low sulfur fuel oil.

The company’s VRDS is planned to start commercial operations in May 2020, Kim said.

Reporting By Jane Chung, additional reporting by Sangmi Cha; editing by Christian Schmollinger

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