Good morning. I'm Chew Lee, I am a Product Leader at SK Innovation. Thank you for taking the time to join us today. Today, we will first present Q2 earnings release, which will then be followed by a presentation on battery and E and P business split off disclosed early today. After the two presentations, we
will have a Q and A
session to entertain your questions. Without further ado, we would like to begin the earnings call for Q2 2021. Today's presentation has yet to be reviewed by our external auditor, so the results are subject to change based on such review. Now I invite our CFO, Mr. Yang Seok Kim for the presentation.
Good morning. I am Yang Seok Kim, CFO at SK Innovation. At the outset, I would like to thank our shareholders and investors for your continued interest in the company. On the call with me today are executives from SK Innovation and its major subsidiaries to entertain your questions. With that, I will present to you SKI's SK Innovation's Q2 business results for 2021.
First, let me go through the overall Q2 performance, including sales and operating profits. Rise in crude oil prices and subsequent increase in petrochemical product prices as well as strong battery sales drove off revenue in Q2 by KRW1.879.8 billion quarter on quarter to KRW11.119.6 billion. Despite a drop inventory related gains, operating profit increased KRW4 1,000,000,000 quarter on quarter to record KRW506.5 billion, thanks to increased margins in petrochemicals and base oil, improved profitability of the battery business. Non operating profit increased KRW171.7 billion KRW1 quarter on quarter and came in at KRW141.6 1,000,000,000. To elaborate, FX related gains recorded KRW 9,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000.
Equity net revaluation gains are KRW 288.5 billion including Beijing's K Tower equity sell off. Next, let me go over balance sheet. As of the end of Q2 2021, assets totaled KRW45,930,300,000,000, up by KRW7432,200,000,000 versus 20.20 on the back of increased inventories and accounts receivable resulting from rising oil and petrochemical product prices. Liabilities increased KRW5 214.5 billion versus 2020 to post KRW28,200,000,000,000 54,100,000,000 due to increased accounts payable and borrowings following oil price hike. The debt to equity ratio recorded 160%.
Gross debt stood at KRW 8,22,800,000,000, down by KRW 702.6 1000000000 compared to 2020 despite increased CapEx, thanks to cash inflow following SK IET's IPO. Let me now move on to Q2 market overview and business results of each business. First is the refining market backdrop. Crude oil price in Q2 rose as concerns over oversupply eased with delayed Iranian nuclear deal and fueled by expectations for demand recovery with continued rollout of vaccines. Product crack in Q2 stayed strong despite increased output by refineries with growing expectations on stronger demands as U.
S. Europe expand vaccination campaigns. Gasoline crack also increased quarter on quarter, thanks to reduced inventory burden, the arrival of peak season and the U. S.-led gradual demand pickup. Diesel crack strengthened as demand bottomed out, investment appetite increased in the U.
S. And Europe. Carrot crack also climbed up, backed by steady U. S. Demand for air travel and impending lift and travel ban in Europe.
Next, I will discuss our Q2 refinery business performance. Refinery operating profit fell despite strong crack in key products, including gasoline, kerosene and diesel due to weak f crack, margin dip effect by weak dollar, reduced inventory related gains from slowdown in crude rally. As a result, operating profit dropped KRW183,000,000,000 quarter on quarter and posted KRW233,100,000,000. Due to inventory related gains for the refining, KRW 243,000,000,000 including LCM. Refining margin is projected to gradually improve in the second half as COVID-nineteen retreat and demand rebounds.
Next, let me move to the petrochemical market. 1st, polymers. In Q2, supply increased as the region finished TAs and added new capacity. Moreover, the resurgence of COVID-nineteen cases in Asia hurt downstream demand. As a result, our PE spread remained flat, while PP spread was weak.
Aromatics, meanwhile, saw stronger PX and Benson spreads quarter on quarter as downstream demand improved and the new downstream businesses came online. Next, I will talk about Q2 performance of the business. Sales volume increased showed a slight drop following TAs in PX units, but strong aromatic spread and overall product margin increase helped Petrochemical operating profit to rise of 49.6 1,000,000,000 quarter on quarter to record KRW 167.9 billion. In the second half, polymer products are projected to see their spread soften compared to the first half despite modest growth in packaging demand and a rebound in automotive demand due to increased supply coming from capacity additions in the region. As for PX, the main aromatic, spread is forecasted to be flat in the latter half despite new PTA capacities scheduled to come online later this year as new PX facilities in the region including Zhejiang, China will balance out supply and demand.
Next is on lubricants. Base oil supply continued to be tight with the arrival of the tea season and low refinery run rate. This led to a rise in sales prices in the region and an increase in base oil margin. As a result of lubricants operating profit increased KRW89.4 billion quarter on quarter to KRW 226.5 billion. In the second half, base oil supply will expand, but also will the restocking demand.
Also, as the real economy picks up, the real demand is expected to become bullish, which will help limit the spread from falling. Next is E and P performance in Q2. Oil and gas prices rose in Q2. Nevertheless, E and P operating profit in the same period fell KRW7.7 billion quarter on quarter to KRW3.6 billion due to reduced sales volume and increased SG and A. Next, I will move on to the battery business.
The battery business saw its sales in Q2 jump KRW103.9 billion quarter on quarter to record KRW630.2 billion, backed by solid sales of new programs including Henry Motor Company's IONIQ five. Operating loss also improved by around KRW 78.8 billion quarter on quarter and posted minus KRW 97.9 billion. Thanks to increased sales and early stabilization of a new plant in Yancheng, China that commenced production this year. Our plants in Yancheng and Hezhou, China started their commercial production in Q1 this year. Besides number 2 plants in Europe and the U.
S. Located in Hungary and Georgia respectively are in construction. The Vermont plant in the U. S. Is near completion and is preparing for commercial production in 2022.
SK Innovation recently announced a launch to launch a JV with Ward to manufacture batteries in the U. S. The initial output will be around 60 gigawatt hour with the potential to expand up to an additional 180 gigawatt hour by 2,030. Please refer to the appendix for a detailed CapEx plans by region. Despite recent telecoms shortage in the auto industry, our battery business is projected to post sales of KRW3 1,000,000,000,000 level in 2021, in line with our earlier guidance.
And when it comes to profitability, we expect the operating profit to surpass the breakeven point in 2022, reach a mid single digit in 2023 and attain a high single digit in 2025. Next, let's take a look at SK iit's Q2 performance. SKIIT's Q2 operating profit recorded KRW 41.4 billion, up KRW 9.7 billion quarter on quarter, thanks to additional capacity and production stabilization in our Chinese plant. Furthermore, LIDS capacity additions are underway and the total output will grow from 860,000,000 square meters in late 2020 to 1.3 37,000,000,000 yen by the end of 2021. Our Chinese plant completed Phase 2 expansion in April and commenced commercial production.
Another global production hub, the Polish plant is under construction as planned and will start production in Q3 this year. Please refer to the appendix for more detailed CapEx plans per region. This brings us to the end of our presentation on Q2 business results. We will continue our presentation on battery and E and P business split off. CFO, Mr.
Kim, will continue to serve as a presenter. Afterwards, we will open the floor for questions for both topics, Q2 earnings and the separation. Amidst a rapidly changing business environment, both at home and abroad, we feel it is necessary to enhance management efficiency via fast decision making and to effectively procure funds for investment. In this slide, we seek to split off the battery and E and P units. Major countries, including the U.
S, China and Europe have strengthened their eco friendly policies, accelerating energy transition. Against this backdrop, our battery division is aimed to expand capacity from the current 40 gigawatt hour to more than 500 gigawatt hour by 2,030. And E and P also has undertaken various environmentally friendly projects to transition to a sustainable green business portfolio. By carving them out, the 2 new business entities will be able to raise management efficiency for future growth and if needed, secure diverse sources of investment funds, including strategic and financial investors. On the next page, I will explain to you the new corporate structure following the split off.
After the separation, SK Innovation will keep its stake in the new battery and E and P entities as before and cement its position as Korea's leading refinerchemical company in one hand and continue its R and D initiatives for new projects such as battery, metal recycling and the other. Next, I will elaborate on future growth strategies of the new battery business. The new battery subsidiary aims to join global top 3 battery makers by 2022 in terms of sales volume and has a plan to ramp up its global production capacity to more than 200 gigawatt hour by 2025 and to greater than 500 gigawatt hour by 2,030. To turn this vision into a reality, the new battery company will strengthen the 6 dimension virtual cycle consisting of leading edge product, customer trust, fastest growth, strong market position, solid financial figures and technology leadership. At the same time, it aims to leapfrog into a global top tier battery company by expanding battery applications.
SK Innovation succeeded in commercial production of 622 and 181 NCM batteries for the first time in the world and leveraged such competitiveness to recently sign an MoU with Ford and secured an order backlog of around 1,000 gigawatt hour. Our operating profit is expected to reach DDP in 2022 and gradually post higher profits from then onwards. With this, we will strive for even better next generation battery technologies to maintain our leadership as a global top tier battery player. Next is on the new E and P business. The new E&P subsidiary aims to build a sustainable upstream business through digital transformation and technologies designed to cut carbon emissions.
At the same time, it seeks to design its portfolio to be pro green by embarking on new projects such as CCS. Today, the company is building a value chain linked with deep sea lean aquifers in Korea to sequester carbon and and exploring various government projects and overseas business opportunities to ensure sustainable growth. Next, I will share with you SK Innovation's mid- to long term growth strategies after separation. SK Innovation, the surviving entity, will perform its role as a green portfolio designer and developer in line with its vision Carbon2Green. This year, SK Innovation reinvented and reinforced its R and D arm with environment and future oriented projects in mind.
Furthermore, we will actively leverage external competencies through open innovation and CPC to ensure speedy and successful technological development. SKA Innovation will also explore additional growth options in the area of green energy and materials such as battery and metal recycle and turn them into business opportunities to establish a virtual cycle of value creation. Next, I will briefly touch upon one of SKA Innovation's growth pillars, the BMR business. As was presented at the SKA Story Day event on July 1, SK Innovation developed a proprietary technology to recover lithium hydroxide utilizing its long standing refinery technology. Lithium extracted using this technology is not only cost competitive, but also emits 40% to 70% less CO2 compared to conventional methods.
SK Innovation plans to build a demo plant by early 2022 for battery metal recycle and start commercial operation by early 2025. We will grow this into a promising business generating EBITDA of more than KRW 300,000,000,000. Next is SKU Innovations' mid to launch a roadmap. Under the vision Carbon 2 Green, SKU Innovation's existing businesses will develop green business models such as CCUS and plastic recycling to strengthen their top tier leadership and contribute to enhancing SK Innovation's corporate value. Next is on split off timeline.
With the target to achieve a split off on October 1, SK Innovation plans to convene an extraordinary meeting of shareholders on September 16th at Dupix Hall on the 3rd floor of SK Innovation's headquarters. SK Innovation will maintain its leadership in other existing businesses following the split off and commit to further raise its corporate value by exploring new business opportunities. Thank you. Please refer to the attachment for post split off financial statements. This brings us to the end of the presentation and the topic of split off.
Now we will open the floor for questions. Please state your name and affiliation before you ask your questions.
The first question will be presented by Yong Chan Baek from KB Securities. Please go ahead with your question.
So thank you for the opportunity to ask questions. I would like to ask 2 questions. The first question that I would like to ask is about your order book for the battery business. If you include the overall orders that you have through the JV with Ford, I do believe that currently your order book stands at 1,000 gigawatt hours, which is a very robust order book. If you could provide the breakdown of that, that would be appreciated.
And in addition to that, for the orders for the next 2 to 3 years in terms of the overall outlook of the orders that you expect, if you could share some detail about that, that also would be appreciated. The second question that I would like to ask is a very simple question. It seems to be that at the SK Innovation level, if you look at the overall equity gains that you have, equity valuation gains, that there is some gains from a sale at the China entity that you have or the Beijing entity. Could you share that, please? So this is Eunhyung Jo from I'm the Head of the Battery Business Support Office and maybe I can address your two questions related to the battery business about our order book and also the forecast that we have going forward.
So in terms of the orders that we currently have, they represent orders from existing customers such as Hyundai Kia Motors, Ford and also Daimler, but they also include efforts that we have been made to win orders from other OEMs. So if we currently look at the order book outstanding, it represents 1,000 gigawatt hours. And if you convert that into revenue numbers, that would represent KRW 130 1,000,000,000,000. In addition, there were some uncertainties related to the business. However, because that has been alleviated with the ongoing discussions that we have about other orders, we do believe that in the not too far future, those will also be realized.
In addition, if we look at the overall growth within the EV market, it is accelerating. And also, with regards to the orders that we are winning, we are trying to make sure that the order book growth at a pace that out speeds the overall market growth. Yes. This is Yi Dong Heng, the Head of the Finance III office and maybe I can share with you the details about the sale of the Beijing Tower. So to share with you the details, at SK China in June, there was a sale of the Beijing Tower.
The total sales amount represented KRW 1.6 trillion. According to our ownership in that overall asset, according and to the equity valuation gains that we have represented, the overall gains to the company was KRW 230,000,000,000.
The next question will be presented by Hyun Yeo jo from Samsung Securities. Please go ahead with
your question.
Thank you for the opportunity to ask questions. There are 3 questions that I would like to ask you. First is related to your overall battery business. You did discuss and mention the JV that you have with Ford. Because it is in the initial stages, maybe it's too early to share a lot of details.
But with regards to capacity in the beginning, when do you think commercial operations of that capacity would be able to start? And when do you think that the 60 gigawatt hours would be able to be fully utilized? So if you have any details that you can share with us, that would be appreciated. The second question that I would like to ask is about your overall petrochemical business. It seems to be in the Q2 that the overall Benzin and PX market was very strong.
If we look at the PX margin levels, it seems to be that it's similar to that of the mid of last year, which was a very good time. So the question that I would like to ask is about the PX market outlook for the second half of the year and also for next year. If you have any views that you could share with us that would be appreciated. The third question that I would like to ask you is about the overall split off that you will be conducting. After the split off for the remaining company, you did say that it would be engaging in the battery materials recycling business or the BMR business and that as a result of that you do expect it to generate an EBITDA of around RMB300 1,000,000,000.
However, in addition to the BMR business, are there any other growth strategies that this entity would be engaging upon? And in addition to that, if you could share some more details about the BMR business, that would also be appreciated. So this is Eun Hyung Do, the Head of the Battery Business Support Office, and maybe I can address your first question. In May of this year, we did sign an MOU with Ford about business plan. So for the overall JV factory, the overall commercial operations right now, we are targeting 2025 and preparing accordingly.
In addition,
the initial capacity is slated to be 60
gigawatt hours. And with regards plan. In addition, in May, Ford did announce that it is planning to convert around 40% of its overall production of global automobiles to EVs by 2,030. And for that, it would require around 2 40 gigawatt hours in battery supply per year. So when taking into consideration our cooperation and our partnership with Ford, in addition to the currently 60 gigawatt hours, which are under discussion, we do believe that there is a potential for a further opportunity of around 180 gigawatt hours.
So that would be our expectations, but nothing has been finalized as of yet. So please understand this is an ongoing discussion as of the current time, so we would not be able to share more details with you. But once the details do become finalized, we will try to share that with you through other communication events. So this is Song Haseop, and I am the Head of the Planning Office for SKGC. So if we look at the overall PX market, because of the improvements that we see in COVID related to the vaccination distribution and also the general economy improving, we do see more demand coming from the polyester market.
And as a result of that, the PX spread on a Y o Y basis has improved significantly. And if we look at the second half outlook for the PX spread in the second half, there is new capacity of 3,300,000 tons that will be coming in on the PTA side in July. In addition, ZEIZAONG PC on the PX side is also going to be also has started operations of 2,200,000 tons since the end of July. So as a result, if we look at the overall PX demand dynamics in terms of the supply and demand, we do think that will balance out. So going into the second half of the year, we think that the PX spread levels will be similar to the current levels.
And if we look at Benzen in the second quarter, the overall spread levels improved significantly because we did have a very strong downstream demand. In addition to that, on the supply side, there were various troubles and also there were turnarounds that were conducted. However, going into the second half of the year, the turnarounds will be completed. Added to that, there are new plants that are going online, which will increase supply. So as a result of that, we do believe the spread levels will moderately lower to a lower level than the current level.
So this is Kim Cho Chung, the Head of the Corporate Strategy and Development Division at SKI and maybe I can talk about the remaining company's overall growth strategies and the BMR strategy that we have for the future. So as we mentioned during the July 1 Story Day, for SKN Innovation going forward, we do have a green anchoring strategy at which in the center will be the overall battery business as our anchor. And we do want to expand the value chain surrounding that into new growth new businesses. So currently, I mentioned before, for these new business areas, we do have the BMR business that we have identified. However, in addition to that, in the battery materials area and also into the next generation battery areas.
We continue to look for opportunities that we would be able to develop in those areas. And in addition to that, we also are interested in new green areas and for future growth drivers. So we look at various options that we have Next to talk about the BMR business in more detail. As the overall battery business growth accelerated, we do believe that from the standpoint of battery material feed that the importance of recycling is something that will continue to grow going forward. So what the actual battery materials recycling business represents is that it would be focused on the overall scrap material that we are generating from battery production and also the overall waste battery that we would see after 2025 in which the market will fully take off.
So those would be feeds that we would be looking at for this overall business. So through those batteries, we would be looking to extract not only the lithium, but also the NCM materials that we would be able to enjoy. So in terms of the technology that is required to be engaged in this business, for the NCM components, the actual technology to extract that is something that has already been commercialized. However, for this business model, at the core of it is whether you would be able to extract the lithium. For SK Innovation right now, we do have the technological competitiveness to be able to extract highly pure lithium in an early manner.
So using this differentiated technology in this area and also the strong battery presence that we have within the battery market, we are planning to build various production facilities for this BMR business in to cater to the China, U. S. And European market. So taking this overall plan into consideration and looking at the overall scrap volume and also waste battery volume that we are expecting going forward, raw capacity that this business would represent in 2025 is expected to be around 260,000 tons.
The next question will be presented by Jaesung Yoon from Hana Financial Investments. Please go ahead with your question. The next question will be presented by Jaesung Yoon from Hana Financial Investment. Please go ahead with your question.
So thank you for the opportunity to ask questions. There are 3 questions that I would like to ask you. First is that if you look at the overall split off that you're expecting for the battery business and also the investment plans that you have, I do believe that the split off is an exercise that you are having to prepare for an upcoming IPO. If there is an IPO in the future, how much dilution in ownership should we expect in terms of the overall size? And with regards to your overall plans, if there is anything that you could share with us, that would be appreciated.
The second question that I would like to ask is about the overall future direction of the company. If you look at the recent actions that the company has engaged upon, for the SK IAT business, you did conduct an IPO. For the AMPA business, you have been selling assets. For the lubricants business, you have sold some ownership. And it seems to be that also for the petchem side of the business, you are engaging in a sale there also.
So the question that I would like to follow-up with is on the refinery side, do you have any plans to maybe sell some assets there or sell any ownership there? The third question that I would like to ask you is that, in light of the overall sales that you are conducting of ownership in various entities that you have, for the remaining company after the split off, how is that company going to finance and fund the overall requirements that it has? What plans would it have there? And in addition to that, for the existing shareholders of SK Innovation, what do you think we should focus on in terms of the value as an investor for continuously investing into this company? So this is the CFO, Kim Young Sabe.
Maybe I can address your first question about a possible IPO. As you are aware, one of the purposes of the current split off that we want to have for the battery business is to ensure that in the future when we need to do so that we could raise the appropriate financing for investments that are needed in a timely manner. However, that happens that in terms of the actual size or method or how we want to go about and actually raising that financing or funding, nothing has been determined yet. However, that have been said, I do believe that outside of equity financing, there are various ways that we can actually raise the financing that we require. For example, we would have our own operating cash flow that we would be able to take from the business.
There would also be the part of investment or CapEx that would be burned by any JV partners that we have. Also there are incentives from the various governments that are provided for our various operational locations. And also raising debt would be another option. So that having said, any equity financing that would include an IPO would only take place after certain preconditions have been satisfied, such as us actually being able to realize the performance that we want. So when those actual prerequisites would be satisfied is something that we would have to see based upon a wide range of considerations, including the necessary resources that are needed and also the market environment going forward.
So as a result of that, as of the current time, please understand that there's not a lot of detail that we would be able to share with you. However, once we do have more details and more concrete views, then we will make sure that we have an opportunity to share that with you. So this is Kim Cho Chung, the Head of the Corporate Strategy and Development division. And maybe I can take your second question. So to ensure that we can continue to secure the resources that we require for future growth, SK Innovation continues to review and execute various options that we see for in the areas, for example, options including joint venture, partnerships, equity sales or ownership sales in ITOs.
And this is not only to funnel or drive the overall future growth, but also to decrease our overall carbon exposure and to make sure that we secure the sustainability of our individual businesses. So for the refinery business also this would apply. So going forward based upon the overall market backdrop and the business model innovation that we're able to engage upon, we would look at various options to use the equity that we have, whether it be through a JV or a partnering. So all options are open. So after the overall split off of the battery and ENT business for SK Innovation as the holding company for all of these businesses, we will continue to engage upon actions that would increase the overall portfolio value of our businesses and execute such options accordingly.
So what is most important is to be able to continuously generate value for the SK Innovation company in itself. So as a result of that, for future growth areas, we will continue to identify new business opportunities and commercialize them, so we can continue on these momentum. So as just mentioned, by continuously increasing the value of our existing portfolio and identifying new growth areas, we do want to continue to enhance the overall firm value and corporate value of our company and continue to give a reason for investors to invest into the company.
The next question will be presented by Parsley Ong from JPMorgan. Please go ahead with your question.
Hi. Thank you for your presentation. My first question is on your battery business. Previously, you mentioned that you need about KRW17 1,000,000,000,000 within 5 years for financing. Can you confirm if this KRW17 1,000,000,000,000 refers to is for building the 200 gigawatt hours by 2025 capacity target you have or does it include some of the money that you'll need to expand to your 2,030 target of 300 gigawatt hours?
And out of this RMB17 trillion, how much money does FQ think it can generate via its own cash flow? And potentially how much via asset sales, how much debt can you raise, etcetera? The second question is on the margin targets that you have. I understand company wants mid single digit by 20 23, high single digit by 2025.
Could you tell us some of
the key milestones that will take the company there? And can you confirm if this OP margin target already includes the settlement fee for the licensing agreement with Aldecan? Thank you.
Yes. So this is the CFO, Kim Yang Saob, and maybe I can address your first question. With regards to the Xin trillion CapEx that we have mentioned, it includes the 200 gigawatt hour target that we have for our capacity expansion and also some of the 300 gigawatt hour capacity also. However, I do believe that it would be difficult for us to go through all of the details of that today. And in terms of the funding of that overall amount, I do believe that once the battery business is more fully matured and fully ramped up, there will be operating cash flow from that business that we would be able to utilize.
In addition to that, there are investments forthcoming from Ford through the JV and also there are incentives in the manufacturing sites that we have, whether it be coming from the central government or maybe from the local economies or local state governments where those sites are located. So if there is any shortfall, then again raising debt would be another option that we have available. In addition, in terms of the operating cash flow and also the investment from Ford, that would depend upon how the current negotiations are finalized. So we do believe that there could be some up and down in the overall investment resources that we're able to acquire according to the different timelines. So as necessary, if we do believe it would be necessary to engage upon other asset sales or other funding options, then we would fully utilize them to fund the CapEx.
And this is Eunhyung Zhou, the Head of Business Battery Business Support Office and maybe I can address your second question. If we look at the battery business, we do believe that the overall EV market will accelerate further. And in addition to that, for the 2nd factory in Hungary and the 1st factory in the U. S, once the construction of those sites are completed, we do think that in 2022 that will enable us to have presence on all three continents and that will give us a global footprint. So as a result of that, in that year, we do think that we will be able to have a revenue of around KRW 6,000,000,000,000 and be able to reach breakeven.
In addition, as the overall utilization or the running of operations of additional sites that are under construction come in and as the overall sales volume increases on an ongoing basis, we do think that, that will take us in 2023 to an operating profit margin of a mid single digit and then in 2025 of a high single digit. So it is true that for the overseas factory in the initial stages, because there will be a new ramp up taking place, there could be some increase in the fixed costs that we have and there could be a temporary impact from that. However, if we look at our global manufacturing base, we do continue to engage upon various efforts to improve the overall profitability that includes value engineering and reaching a larger economy of scale. So with this various cost savings and cost innovation efforts and in addition to that, various efforts to continuously ramp up the yield that we have and the utilization of our various facilities, we do think that we can reach a meaningful level of growth and also profit. And this is an effort that we engage upon across the board on a global basis.
And over the mid to long term, we will continue to improve the various material that we engage upon at or use and also achieve more performance in the R and D area through innovation. So as these results come in, we do think that we would be able to create a virtuous cycle. And in addition to that through the battery as a service initiatives that we will have and also by expanding the applications that are based upon our battery business, we will be able to create new sources of profit going forward. So through these various efforts, the company will be engaging in its most efforts to try to reach the target levels that we have shared with you. And in the overall assumptions that we have for the future, the royalties that will be paid have been included in those numbers.
The next question will be presented by Uho No from Marisa Securities. Please go ahead with your question.
So thank you for the opportunity to ask questions. There are a few questions that may overlap with some of the questions that were previously asked, but I would like to go ahead with them anyway. So the first question that I would like to ask is that this morning there was a disclosure that the company has made about SKGC and a possible sale of ownership in that company. If there are any details about that that you could share as of this time that would be something that I would be interested in. And in addition to that, though this is something that has not been recently mentioned, what would be the overall business strategy going forward for SKIPC?
The second question that I would like to ask you is that during the July Financial Story Day, there was mention that for the refinery business and the petrochemical business that you did believe that these businesses would be back to more normal level next year. So for the refining margins and the outlook going forward, is it still valid that next year you do think that the refining margins will be at a more normal level? And in addition to that, for the refinery business, over the mid to long term, in terms of the overall green transition that you want to engage upon, what would be the strategy for that? If you could share more detail about that, that would be something that I would like to hear. The third question that I have is about your overall lubricants business and base oil business.
It seems to be that this quarter, again, there was a significant contribution from that business. So if we look at the forecast or the outlook for the second half of the year and look at, for example, the supply side of the overall supply demand dynamics, what new capacity will be coming online in terms of supply? Or what type of turnarounds would be taking place? So if there's any market intelligence that you would have to share with us about that, that would be something that I would like to hear about. So this is the CFO, Kim Young Seob, and maybe I can address your first question.
From last year, our company has been reviewing and also executing various strategic options in order to secure our financial soundness and also secure the resources that we need to invest in new businesses going forward. So for the SKGC ownership sale that was mentioned in the press yesterday, please understand that this is an effort that is making being made within the scope that we have just mentioned. However, please understand again that it would be difficult for us to share any details about a specific size or maybe specific timeline for any possible transaction. So with regards to this issue, if there's anything concrete that does take place, we will make sure to provide a disclosure other type of information at a future time. Thank you.
So this is Kim Cheol Chung, the Head of Corporate Strategy and Development Division at SKI, and maybe I can address the second part of your first question. So for SKI PC and the business strategy going forward, on one hand, we continue to enhance the profitability of the company by making sure that our operations are optimized and that we can continue to increase the fundamental competitiveness of this business. However, at the same time, we are also reviewing various options for green initiatives by using the hydrogen that is generated through the operational process in the area of biofuel. So in the area of green technology, we do believe that there are various business opportunities through which we would be able to use this hydrogen. And as a result of that, we are currently looking at detailed opportunities in the area of biofuel and maybe partnering with other companies.
So this is Yi Dong yeare, the Head of Corporate Planning Office at SKE, and maybe I can address your question about the market. So if we look at the market in the first half, there was some improvement that did take place. And in the second half of the year, though the delta variant is expanding and broadening more in terms of the overall impact, we do believe that with the stronger distribution of vaccinations that some of that impact will be alleviated. So we do think that product crack in the second half focusing on the European and U. S.
Market will improve. So if we look at the 2nd quarter versus the Q1 in terms of the overall demand, there was an increase of around 1,000,000 barrels per day. Going into the Q3 on a Q on Q basis, we think that it will be an additional 30,000 barrels per day. And if we look at the overall supply side, in 2021, there was some new capacity coming on in the Middle East and China. However, when compared to the scrap that took place in 2020, it will be a lesser volume.
So as a result of that, we do think that the refining margins in the Q3 will continuously improve gradually. And then at the end of the Q3 to the Q4, we will see a fuller improvement. And in addition to that, over the mid to long term, in light with the energy transition and also carbon reduction efforts that are taking place, we're trying to create a business model that fits this overall dynamic. So we're in the process of identifying the core agenda items that we want to engage upon and executing those projects. So in light of the carbon reduction efforts, we are engaging upon various greener projects going forward and we also want to increase the energy efficiencies that we have and also explore CCUS and other carbon friendly and carbon reduction areas to ultimately reach the target of net 0.
In addition to that, using the overall gas station network that we have, we are interested in a more distributed energy platform going forward and also providing total transportation services using the existing platform that we have for our business. So this is Harjoong Hoon, the Head of the Management Support Office for SKL. And maybe I can address your question about the supply and demand dynamics going forward for the lubricant market. So first to address your question about the second half and also in terms of the supply side of things, any new capacity that would be coming online in the high quality base oil market, which we are mostly focused on. In the second half and also going into next year, we don't believe that there is any meaningful capacity that will be coming online.
So for the overall market backdrop, I do believe that we will have to continue to monitor the situation at refineries in light of the backdrop that was mentioned by the Head of the Corporate Strategy and Development Division before to see whether there is truly a recovery taking place in the refining margins and also the overall utilization of facilities. But in the second half, as the overall COVID situation subsides a bit more and there is more demand from those drivers that we see within the market. Not only that, but added to the various environmental regulations and the tightening of that, that is taking place, we do think that there will be new specifications that will be adopted. And as a result of that, that will continue to maintain the overall demand that we see for the premium base oils that we engage upon. And as a result of that, we do think that the overall supply demand dynamics will remain tight.
So that ends my answer and I would like to thank you for your interest in the lubricants business.
The next question will be presented by Oscar Iy from Citi. Please go ahead with your question.
Hi. Thank you for the transfer of the question. I just have one question on SKIET because most questions have already been asked. Could I ask for your Q2, it seems that your Q on Q increase in the revenue was a bit light despite the capacity increase. Could I just double check what is the current utilization for your new Chinese factory?
Thank you.
So this is Otaek Song from FKIET and maybe I can address your question. As we have mentioned before for the Chinese factory in terms of the overall utilization of that, of course, we do have a Phase 1 and Phase 2 that is taking place and the test operations and also for commercial operations are something that we are engaging upon. However, for this capacity to actually contribute to the overall revenue, as mentioned before, it will have to be 9 to 10 months in from operations. So in terms of timing, that would be the end of the Q3 or maybe a Q4 of this year. If we look at the Q2 performance versus the Q1, you may notice that our overall profitability has improved.
And the reason for that is because if we compare the profitability of the Chinese business or Chinese factory versus that of the Korean factory. The Chinese factory does provide better profitability. So that contribution has actually been the reason for the uplift there. And if we talk about the utilization on a per hour basis, we are close to normal utilization as of the current time. So for the Chinese factory, we are accelerating the overall speed up of those facilities.
As we are able to normalize the Phase 1, the second the Phase 2 will be normalized in a more accelerated manner. So as a result of that, if we look at the overall guidance that we shared with you for the top line and also for the profits for this year, we do think that we will be able to hit that target as of the end of the 4th quarter.