Working capital held by South Korea's major oil refiners has more than doubled since the end of last year, as rising crude costs driven by the Middle East war go unrecovered under government price controls that have prevented companies from passing higher costs on to consumers.
According to the Financial Supervisory Service's DART corporate disclosure system, working capital held by the country's four major refiners as of the end of the first half stood at 3.54 trillion won ($2.52 billion) for SK Energy, 4.04 trillion won for HD Hyundai Oilbank, 9.83 trillion won for GS Caltex and 2.32 trillion won for S-Oil.
Combined, the four refiners' working capital totaled 19.73 trillion won in the first half — well above their combined operating profit of 14.79 trillion won for the same period. The figure also represents roughly a 2.4-fold increase from 8.13 trillion won at the end of last year, before the Middle East war escalated. By company, HD Hyundai Oilbank saw a 2.6-fold increase, SK Energy a 2.5-fold rise and GS Caltex a roughly 1.6-fold gain. S-Oil had been an exception: its working capital stood at negative 810 billion won at year-end after its largest shareholder and crude supplier Aramco extended payment deadlines, but that position has since reversed.
Working capital for refiners refers to the funds that must be kept tied up on an ongoing basis to keep refineries running and petroleum products moving. It is typically calculated by adding trade receivables to inventory and subtracting accounts payable. Working capital rises when inventories grow or when receivables — revenue recognized but not yet collected in cash — increase, and an excessive buildup can weigh on cash flow.
A sharp and sustained rise in working capital is also read as a warning sign of operational inefficiency. Even when a company appears profitable on paper, it may be unable to deploy that cash freely for new investments, instead being forced to channel it into simply maintaining current operations.
The primary driver of the refiners' growing burden is the surge in oil prices stemming from the Middle East war. Companies have been buying crude at elevated prices but cannot pass those costs on to consumers after the government introduced a maximum price system — a cap on petroleum product prices aimed at stabilizing inflation. Earlier this year, global credit rating agency S&P warned that during periods of sharp oil price increases, "the lag between when losses occur and when actual compensation is received will lead to higher working capital demand and greater volatility in earnings and cash flow."
The government has pledged to compensate refiners for losses incurred from selling below cost since the price cap took effect in March, but the industry has pushed back against the methodology used to calculate those losses. Refiners contend that losses attributable to the price cap already exceeded 4 trillion won in the first half alone.
The government had earlier set aside 4 trillion won in its budget for loss compensation, but observers warn that amount will fall short if the price cap remains in place through the second half. "Each company is fighting to identify new businesses to reduce exposure to oil price risk," an industry official said, "but with the war dragging on and the scale of loss compensation still unclear, it is difficult to accelerate those new ventures in the current environment."
klee@heraldcorp.com
