South Korean energy conglomerate SK Innovation has issued a forecast indicating a deceleration in the growth of global electric vehicle (EV) demand, aligning with a growing sentiment among automakers and suppliers expressing apprehension about the EV market’s trajectory.

Financial performance and analysis

SK Innovation, which owns South Korea’s largest refiner SK Energy, reported an operating profit of 73 billion won (USD 54.75 million) for the fourth quarter of the previous year. This marks a significant turnaround from a loss of 765 billion won recorded in the corresponding period a year earlier. However, the reported profit fell substantially short of the average analyst forecast of 558 billion won profit compiled by LSEG SmartEstimate.

The company attributed its underperformance to challenges in its petrochemical business, which experienced a loss due to weaker refining margins and declining prices. Despite this setback, fourth-quarter revenue witnessed a modest increase of 2.1% to 19.5 trillion won compared to the same period the previous year.

Capital spending and battery business

SK Innovation outlined its capital spending budget for the current year, indicating a slight decrease from the previous year’s allocation. With over 80% of the budget allocated to its battery business, the company aims to bolster its production capacity abroad.

While its battery unit, SK On, narrowed its operating loss in the fourth quarter, it failed to achieve its previously announced target of turning a profit. SK On’s Chief Financial Officer, Kim Kyunghoon, acknowledged the challenges but expressed optimism, anticipating a potential increase in battery shipments in the latter half of the year driven by the launch of new EV models by automaker customers.

Market challenges and competition

The cautious outlook on EV demand follows similar sentiments expressed by SK Innovation’s competitors. Ford Motor Co., a major customer of SK On, recently announced a reduction in the production of its F-150 Lightning pickup truck due to lower-than-expected demand for EVs.

Furthermore, SK Innovation’s rival, LG Energy Solution, also forecasted a slowdown in EV market growth for the current year, indicating mounting challenges amidst intensifying competition from Chinese counterparts.

Refining margins and maintenance plans

Despite concerns in the EV sector, SK Innovation remains optimistic about refining margins, anticipating a boost from economic stimulus measures and increased travel demand during the lunar New Year holiday in China. Additionally, the company announced plans to conduct maintenance on its vacuum residue desulphurisation (VRDS) units at the Ulsan refinery in the first quarter of 2024.

The scheduled maintenance aims to enhance operational efficiency and product quality. However, specific timelines for the maintenance were not provided by the company.

Market reaction

In response to SK Innovation’s forecast and financial performance, shares in the company experienced a 4.6% decline in morning trade, contrasting with the benchmark KOSPI’s 0.6% fall.

SK Innovation’s projection of a slowdown in global EV demand underscores the challenges facing the EV market amidst shifting consumer preferences and competitive dynamics. Despite concerns, the company remains committed to its battery business expansion while navigating market uncertainties and maintaining operational efficiency in its refining operations.