SK Innovation to invest in battery business growth as profit target delayed

SOUTH Korean energy group SK Innovation said on Tuesday (Feb 7) that it would focus spending on growing its electric vehicles (EVs) battery business this year, even though it was taking longer than expected to turn a profit.

The owner of South Korea’s top refiner SK Energy said it had a capital spending budget of about 10 trillion won (S$10.6 billion) this year, up from about 6 trillion won last year, with 70 per cent allocated for batteries as it looked to ramp up production at factories abroad.

The company is boosting its exposure to the EV battery market as it bets on a faster-than-expected electrification of cars, with battery unit SK On accounting for 15 per cent of revenue in the fourth quarter. Battery customers include Ford Motor, Hyundai Motor and Volkswagen.

SK posted an operating loss of 683 billion won for the three months ended Dec 31 amid lower oil prices that narrowed margins, compared with a loss of 62 billion won a year earlier.

Fourth-quarter revenue rose 40 per cent to 19 trillion won, slightly missing an average analyst estimate of 20 trillion won, according to Refinitiv SmartEstimate.

SK shares were 3 per cent lower in early afternoon trade, versus a 0.6 per cent rise in the broader Kospi, which analysts attributed to disappointment over the battery unit’s financial performance.

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Battery losses

The battery business was loss-making in 2022 amid headwinds from a global chip shortage, raw material price hikes, rising labour costs, unfavourable exchange rates and delayed production ramp-ups at Hungary and US factories, SK On chief financial officer Kim Kyunghun said in a post-earnings conference call.

Last July, the company had forecast its battery business would break even by the end of 2022.

Kim forecast the battery business would turn a profit in 2024 as it leveraged its bargaining power with automaker customers.

SK On raised 2.8 trillion won from parent SK Innovation and 800 billion won from financial investors including Korea Investment Private Equity in December, and Kim said it would consider attracting more financial investors.

“There has been growing interest among investors in battery firms targeting the US market because of the US government’s EV subsidy policy,” said Cho Hyunryul, a senior analyst at Samsung Securities. “That is positive for SK On’s efforts to attract financial investors to fund its expansion.”

SK, which has a total refining capacity of 1.115 million barrels per day at its plants in Ulsan and Incheon, said it expected its refining margin this year would be solid as Covid-19 retreats and China’s demand recovers.

It had operated its facilities at 71 per cent of capacity on average in the fourth quarter, down from 85 per cent in the third quarter, which analysts attributed to worsening market conditions.

Peer S-Oil, whose main shareholder is Saudi Aramco, said last week that Asia’s regional refining margins were expected to remain elevated in 2023 over pre-2022 levels amid ongoing refinery shortages, despite demand growth woes. REUTERS