Good afternoon. This is S-Oil Treasurer, Katie Kong. First of all, thank you to all the investors and analysts in and out of Korea for joining conference call for S-Oil's Q2 earnings release. I am joined by CFO, J.W. Bang, Team Leader H.D. Jeong, and IR team members. First on the earnings highlights. In Q2, we recorded KRW -344 billion in operating income and KRW -106.3 billion in income before tax. In Q2, refining margin went up, but inventory loss from lower crude oil price and lower FX widened loss in the refining business segment. Petrochemical business segment's loss narrowed thanks to spread rebound, and lube business segment ended with higher operating income thanks to spread rebound as well. Next is outlook. Uncertainties associated with geopolitical issues in the Middle East are adding volatility to both crude oil price and product prices.
We expect market fundamentals to gradually improve as demand may pick up from the relatively low crude oil price environment. On the supply side, we expect limited capacity expansions and shutdown of aging facilities, largely in the U.S. and Europe. Subsequently, we project refining margin to keep up the upward momentum into the second half of the year and the fundamentals to keep improving in the mid to long term. Next is Shaheen project. As of July 16th, the project progress rate is 77.7%, well on plan. Engineering and procurement are both nearly complete at 97% and 90% in progress rate, and construction is progressing at 63%. To promptly enter into the market, we are building pipelines to connect to corporate customers in Ulsan. This month, we started supplying trial products to customers as part of pre-marketing.
During the remaining project period, we will bring all our competencies to deliver the project to successful completion and meet investors' expectations. I will now turn over to IR Team Leader, Mr. Jeong, who will go through Q2 performance details.
Good afternoon. This is S-Oil IR Team Leader, H.D. Jeong. Please been noted that financial results for Q2 2025 are provisional and subject to change according to the outside independent auditor's review. Let me first go over Q2 financial results in slide five. S-Oil's Q2 revenues slightly moved up from the previous quarter to KRW 8.0485 trillion. An operating income was KRW -344 billion. Although Singapore refining margin went up from the previous quarter, a temporary spike in OSP offset a considerable part of margin increase. This, coupled with one-off impact from weaker oil price and FX, an operating income widened loss.
Petrochemical business segment's loss narrowed compared to the previous quarter as spread of major products moderately rebounded. Lube and lubricants business segment spread rebounded to previous year's level and posted higher operating income thanks to stable feedstock price and healthy demand. Inventory-related impact reflected in company-wide operating income was KRW -180 billion. Finance and others, net interest gain was KRW -57.6 billion, and net FX gain was KRW 307.1 billion, thanks to lower FX. Income before tax was KRW -106.3 billion. Next is financial status. The company's total cash as of end of Q2 is KRW 1.559 trillion and net debt to equity ratio is 77.2%. Although the external environment has been volatile, the company carried out competitive external financing at a low interest rate on time to support Shaheen project and et cetera. This allowed the company to stay fully liquid with a stable financial structure.
EBITDA in first half of the year stood at KRW 199 billion. I will turn to market environment and outlook by business segment. First, Refining business segment. Dubai crude price was highly volatile in Q2. It plunged upon U.S. reciprocal tariff issue in April but shot up in June when political issue in the Middle East, namely Israel-Iran War, erupted. OPEC+'s announcement to raise output also placed a downward pressure on oil price. Average Dubai crude price fell from $77 in Q1 to $67 in Q2. If you look at Asia's fuel products market, spread widened across the board, driven by greater number of spring T&Is, operational glitches in refineries in and out of the region, and higher profitability of U.S.-bound exports. Subsequently, Singapore refining margin in Q2 marked $4.4 per barrel, which is way higher than in Q1.
The company's Refining business segment ended Q2 with KRW -441.1 billion in operating income because OSP, which is tied to crude oil price, was temporarily high, and it was reflected in the company's cost in April and May. This considerably offset the improvement in refining margin. We also had one-off impacts from weaker oil price and FX. In Q3, we expect refining margin to be supported by higher demand for transportation fuel, which is in high season. Diesel market fundamentals are getting tightened by geopolitical uncertainties in the Middle East, which is keeping its spread wide. Depending on how the uncertainties in the Middle East play out, there's also a chance that the spread will get more volatile. I will share more details on the outlook in key business update with specific data. Next is Petrochemical business segment.
In Q2, the segment posted KRW -34.6 billion in operating income, which is a rebound from the previous quarter. This owes to PX spread against naphtha and PP and PO spread against propylene slightly widening from Q1. If you look at aromatics, PX/naphtha spread was $232 per ton in Q2, which is wider than the previous quarter. Benzene/naphtha spread, by contrast, narrowed from the previous quarter to $151. PX market turned around as new PTA facilities in China started up and polyester facilities raised their utilization rate, both of which supported demand. Benzene market, on the other hand, stayed bearish as U.S. tariff policy pulled down U.S. import demand, leaving more supply in the region. Moving to olefins downstream, both PP and PO spread widened thanks to supply limited by T&Is in the region and demand recovered by the pause in U.S.-China's reciprocal tariff.
Next is Q3 outlook of Petrochemical business segment. We project that T&Is of PX facilities in the region and start-up of new PTA facilities in China will support a healthy PX market. Benzene market is projected to remain resilient as extra demand from new downstream facilities start-up in China will offset slowdown in U.S. import demand. As for Olefins downstream, we project demand and market conditions to pick up when U.S. wraps up tariff negotiations with key countries and clears uncertainties around trade environment. We think market recovery will be slightly limited by ongoing capacity additions, primarily led by China. Next is Lube & Lubricants business segment. In Q2, it recorded KRW 131.8 billion in operating income, which is higher than the previous quarter. The product spread recovered to previous year's level to $30.5 per barrel, thanks to stable feedstock price and healthy demand.
We project Q3 market conditions to be close to the previous year's level in the absence of new capacity addition and limited supply factors. But the spread could temporarily see bigger fluctuations if geopolitical risks add volatility to feedstock price. Next is key business updates. First is outlook on the business environment. Expanding demand for fuel products and limited supply will build a strong business environment, and we expect it to keep the margin firm. Taking from demand side as the left bar graph, we project demand for transportation fuel to pick up as seasonal peak nears. We also project low oil price to support demand. Major institutions forecasted U.S. reciprocal tariff issues in April will sharply impact demand. But contrary to this, demand in Asia went up, which was primarily led by Southeast Asia.
Seeing the momentum towards demand expansion, institutions are raising upward demand outlook for 2025 again. The business environment is also friendly on the supply side. As shown in the right bar graph, there will be refining capacity closures in California in the second half of the year, and we'll see more in 2026. Other than facilities already announced, market intelligence suggests that some refineries in U.S., EU, and Japan are looking into shutting down their old refining facilities. There may be more opportunities to export to U.S. West Coast since they are downsizing refining facilities in the West. To sum up, we expect solid demand and tight supply to keep the refining margins bullish. This favorable situation unfortunately could not be fully reflected in the company's Q2 performance, but we think it'll as we move farther into the second half of the year. Next is progress of Shaheen project.
Its progress rate as of July 16th is 77.7%, which is well according to the plan. Engineering progress rate is nearing completion at 96.9%, while procurement is 89.8% and construction 63%. As for steam cracker, we installed major towers and are now installing cracking heater. In TC2C, we installed TC2C reactors and key equipment. And in the polymer plant, we installed LLDPE, HDPE polymer reactors and extruders. Our target mechanical completion is first half of 2026, commissioning in the second half of the same year, and commercial operation in early 2027. We are going to source 83% of feedstocks like naphtha, heavy oil and off-gas from within, which will give us added competitive edge and help us achieve world-class energy efficiency. Rest assured that we will keep you updated on the project. This concludes my presentation. Thank you.
The presentation in Korean is still in progress. We'll begin the Q and A session once it's completed. Thank you. The presentation in Korean is still in progress. We will begin the Q and A session once it's completed. Now Q and A session will begin. Please press star one, star and one if you have any questions. For cancellation, please press star two. That is star and two on your phone. The first question will be given by Shin Hong-j oo from Shinyoung Securities.
On your first question about the impact of the progress of negotiation on U.S. tariff and its impact on the world oil demand growth outlook. In the beginning of this year, major institutions' global oil demand outlook amounted to 1.2 million BD on average. However, as a result of U.S. tariff policy and subsequent trade tension between the U.S. and China, major institutions have lowered their global oil demand outlook, and their outlook on the reduced demand had ranged up to 500 MBD. However, with the progress of the negotiation on tariff and still strong demand of Asia and the Middle East, their most recent outlook was lowered slightly to 1 million BD.
The world oil demand first outlook slightly lowered from the forecast that they made at the beginning of this year. For now, the price of Dubai crude benchmark is staying at a $70 range, which is lower than that of last year. If this trend continues, we can expect a demand pickup. On your question about the restructuring policy of China. The Chinese government is known to be preparing for the policy to ease the oversupply across all industry, including its major top industry, and that also includes the refining industry. According to the report made in early July, Chinese government plans to announce the industry stability enforcement plan for all industries, and that also includes refining industry.
Under the plan, the refining capacity or CDU, with capacity less than 40,000 BD should be rationalized, and details are likely to be included in the 15th Five-Year Plan that is planned to be announced in October.
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In 2024, China closed down 210 MBD of refining capacity and also plans to close 400 MBD of capacity this year, according to the outlook. On top of this, they are also reviewing to additionally close down other marginal facilities. As such, the Chinese government has the position to restructure its refining industry around the major ones in the mid to long term. The tendency of closing down teapot refinery is likely to continue.
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This concludes my answer.
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On your question about the profitability of the Shaheen project. Currently, the spread of ethylene and propylene over naphtha is still slowing, and it may take longer for the spread to widen compared to the period that we forecasted in the beginning. Even though we are still seeing the low spread, we expect the Shaheen project will deliver us enough profitability.
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As for the steam cracker that we will build for the Shaheen project, it comes with the world-class energy efficiency. As it uses low value of gas and heavy oil that we can get from existing refinery, we have competitiveness in terms of feedstock cost.
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In particular, currently struggling petrochemical industry is constraining the new investment and prompting the restructuring of the industry, both of which are limiting the supply. As negotiations around the tariff is being concluded and we are expecting world economy to grow. Once Chinese economy stimulus package works, we expect the demand for petrochemical product to grow. In 2028, we forecast the oversupply situation of industry to be addressed.
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This concludes my answer.
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The following question is from Cho Hyunryul of Samsung Securities.
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I am Cho Hyunryul from Samsung Securities. Thank you for taking my question. I have three questions. My first question is about the margin of kerosene and diesel. They are showing trends since April. Would you share the backgrounds of that? Was there any impact on the supply and demand side arising from the war between Iran and Israel? My second question has to do with the U.S. tariffs. Does it have impact on your company? My third question is about the one-off impact on your operating income. In Q2, spread of all business segment, all business product went up. Compared to that, your operating income went down. Would you specifically break down one of factors, such as FX impact or inventory impact on your operating side for Q2?
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On your first question about the strong sentiment of Q2 for diesel and kerosene. As you mentioned, the spread of kerosene and diesel is on the rise since April. In particular, the spread of diesel is showing strong movement since mid June. This is because of several bullish factors. First, supply is tightened mostly for European products. Because of the factors, including the war between Iran and Israel, the Middle Eastern product is heading less to the Europe, this is limiting the diesel volume into the European region. Also, the spread in Europe is showing strong strength. That's partly because of the refineries which already closed down in the U.K. and Germany or plan to close down. This is bringing down supply. On top of that, European inventory is maintained at 18-month low level.
As diesel price is showing strong movement in the European region, that affects the Asian region and also pushes the spread higher.
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As for the future outlook from market fundamentals standpoint, refining facilities in the Europe region is closing down and inventory level is maintained at low. This may continue to result in strong diesel spread. However, geopolitical risk still exists in the Middle East despite the ceasefire agreement between Israel and Iran. This may affect the price and the market.
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On your second question about the impact of a U.S. tariff on the company. In conclusion, a tariff issue have a small impact on the company. Our refining and lube base oil and lubricants product are not subject to U.S. import tariffs. Rather, our export to the Europe went up by 20% this year because of the close down of U.S. refineries located in the western part of the U.S.
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Our petrochemical products are subject to the U.S. tariff, and our export to the U.S. is pretty small in terms of volume. Impact from that is pretty limited. However, there were slight impacts. Considering the economics, we had exported our benzene to the U.S. However, due to the economics, we are not making exports to the U.S. currently. We will continue to make economics-driven decision for this considering the freight rate and the tariff policy.
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On your question about one-off impact on the operating loss. As you mentioned during your question, in the second quarter, most of our refining petrochemical and lube base oil and lubricant product spread went up. However, our operating loss widened compared to the last quarter, we could not enjoy the improvement in fundamental margin. However, we had a bunch of one-off factors, which includes the drop in oil price, FX rate, and the temporary rise in OSP, which widened our operating loss.
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If we break down these one-off factors into one by one. First, we had KRW -183 billion of inventory-related impact caused by the drop in oil price, and it was KRW -39 billion for lagging impact caused by the drop in oil price, and it was KRW -174 billion of FX impact on operating side caused by the drop in FX rate. Lastly, a stronger sanction on Russian crude export and the U.S. tariff issue temporarily raised the Saudi OSP by $1.5 per barrel on average, and that amounted to the one-off impact of KRW -109 billion. All in all of these one-off impacts resulted in KRW -505 billion of impact on our Q2 operating loss.
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However, thanks to our FX gain of around KRW 300 billion on non-operating side caused by the drop in the FX rate. These one-off factors were partially offset based on income before tax. Entering into Q3, we are seeing oil price and FX rate to stabilize, and OSP also went down to the normal level. We hope this improvement in the fundamental margin to work in favor of our operating income.
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This concludes my answer.
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The following question is from Lee Jin Myung of Shinhan Securities.
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Speaking of your first question about the ramp-up status of a new capacity in China unlike Dangote refinery. Recently, teapot refinery in China is lowering their circuit, which is shared in the background of that in the future outlook.
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Speaking of your first question about the ramp of status of a new refinery. As for Dangote refinery in Nigeria, market intelligence says its 200 MBD RFCC had unplanned maintenance in April, May, and again in June. Lately, it had another 10-day shutdown from the 2nd of July, which lowered its operation rate. They are forecast to maintain such low rate until October, when it is scheduled to have regular T&I for 40 days. Since this kind of a production failure may work as a factor to reduce gasoline supply.
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As for 340 MBD Olmeca refinery in Mexico, it is said that although it started up, works are still ongoing around some electrical and storage facilities. As a ramp up of this refinery appears to be in delay compared to what's known to the market, we expect it will take more time for on-spec products to have impact on the market. It seems that they'll be able to operate only 140 MBD CDU or coker by the end of this year and reach 80% of operation rate not until late 2026.
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On your question about the utilization of Chinese refineries and the questions on teapot refineries. In Q2, the average throughput of Chinese refineries stood at 76%. It was 77% for NOC and 53% for teapot refineries, down by 2% and 8 percentage point respectively.
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On the latest operation rate, throughput rate was raised to the lower 80% range as regular T&I was completed for NOCs and Sinopec's target of new facility. The throughput of teapot refineries still remain at 50% range.
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We understand that there were several factors that lowered the utilization rate of teapot refineries. First is the export tax rebate cut for the product. This lowered the profitability of teapot refineries, thereby reducing throughput. In addition to that, the reinforced sanctions against Iranian crude also lowered their throughput.
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As we understand, recently Chinese government is pushing for the restructuring of industries. Under such policy, they're planning to rationalize CDU with the capacity of 40,000 BD or less. Given such policy is working, we expect the current low rate of teapot refinery throughput is expected to continue.
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This concludes my answer.
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The next question is by Jeon Yu-jin of iM Securities.
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Thank you for taking my question. I am Jeon Yu-jin from iM Securities. I have one question. Recently, the industrial electricity price is on the rise. I would like to know your self-power generation rate and any changes to that after the completion of the Shaheen project.
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On your question about the self-power generation of our Onsan Refinery. Current self-power generation rate of our Onsan Refinery stands on 10% level. As we presented in our earnings release previously, we are currently making progress of GTG or gas turbine generator projects, targeting December of 2026 for mechanical completion. As this GTG project is building two gas turbine generators, that will raise our self-power generation rates. Given the fact that Shaheen project is also building another two gas turbine generators, the successful delivery of both project will make us four gas turbine generators. The completion of both project will raise our self-power generation rate over 40%.
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This concludes my answer.
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Once again, I'd like to extend my gratitude to investors and analysts for taking your time out of a busy schedule to participate in today's earnings release. We'll always make best efforts for the transparent and fair communications. If you have any further questions, feel free to contact our IR team. This concludes this 2025 Q2 earnings release. Thank you.
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This concludes the fiscal year 2025 second quarter earnings result by S-Oil. Thank you for your participation.