SK Innovation Co Ltd
KRX:096770
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
92 800
143 100
|
| Price Target |
|
We'll email you a reminder when the closing price reaches KRW.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
SK Innovation Co Ltd
Earnings Call Analysis
Q3-2024 Analysis
SK Innovation Co Ltd
During the third quarter, SK Innovation faced significant challenges in its petroleum segment. A global recession loomed over the U.S., Europe, and China, leading to a decrease in refinery demand and falling oil prices. Operating profit in the petroleum sector plummeted by KRW 760.8 billion, resulting in a loss of KRW 616.6 billion. The anticipated gradual recovery in demand for crude oil may provide some support, but concerns still persist. The company expects a recovery in refining margins by Q4, driven by lower supply amid seasonal demand increases and anticipated economic stimulus measures in China.
In the Exploration and Production sector, SK Earthon's operating profits fell slightly to KRW 131.1 billion due to declining crude prices. However, the company is optimistic about future production, planning to drill new exploration rigs in Vietnam and increasing output from China. They expect these initiatives to enhance their competitive position in the region while exploring more opportunities in Southeast Asia.
In the battery business, SK On reported a revenue decline of KRW 122.7 billion to KRW 1,430.8 billion due to decreases in battery average selling price (ASP) and temporary production halts. However, the company sees potential for recovery in 2024, with projected increases in sales volume as new manufacturing capacities are activated in North America. They foresee demand to gradually recover, albeit lower than previously anticipated. Furthermore, mergers with SK Trading International strengthen the company's financial stability and sourcing capabilities.
SK Innovation is also adapting its capital expenditure (CapEx) strategy in response to the slowing EV market growth. The company plans to lower its CapEx for FY 2025 due to significant investments already made this year and align further expenditures with market conditions. New automotive partnerships are on track, although future adjustments may be necessary based on demand fluctuations.
With the recent merger with SK E&S, which received overwhelming shareholder support (85.75%), SK Innovation aims to bolster its competitive edge in the energy sector. The company targets a return on equity (ROE) of 10% and plans a total shareholder return of 35% by 2027. Despite facing recent market pressures, the company is committed to enhancing overall financial stability and generating shareholder value through ongoing operational synergies and strategic business integration.
You don't have any saved screeners yet
[Interpreted] Good morning. We will now start the 3Q earnings conference call for SK Innovation.
Good morning. I am Chong So Yong, from the IR team at SK Innovation. Thank you for joining the company's third quarter 2024 earnings presentation. I have with me SK Innovation's CFO, Kim Jinwon, Lee Woo-Hyun, Head of IR; and the members of management from each business subsidiary for the agenda today.
Therefore, Kim Jinwon will first run through the company-wide business results for the third quarter, followed by presentations from each of the officers of each business vision, after which we will have a Q&A session.
Please note that the earnings we are presenting today have not yet been audited by the external auditor, and thus are subject to change upon the review. With that, I will invite CFO, Kim Jinwon, to present the third quarter performance.
[Interpreted] Good morning. I am Kim Jinwon, CFO of SK Innovation. Allow me to start by thanking shareholders, investors and analysts for your continued interest in the company. And I will begin with the highlights of the third quarter 2024 business performance.
First, as of November 1, SK Innovation completed its merger with SK E&S. At the extraordinary shareholders meeting held on August 27, 85.75% of the attendant shareholders voted in favor of the merger and the level of shareholder appraisal rates executed was KRW 335 billion, which was less than half of the KRW 800 billion initially budgeted by the company. Based on the strong support from our shareholders, the merger of SK Innovation and SK E&S was successfully completed. With this merger, the company will strengthen the competitiveness of its energy portfolio and integrate the businesses, resources and capabilities of the 2 companies to continue efforts to grow into a leading energy company, not only in the Asia Pacific region, but in the global market.
Second, amid continuing internal and external uncertainties and slower demand growth SK On's efforts to improve profitability and some gains from reconciliation activities with customers led to the company reaching breakeven on an operating profit basis.
In the fourth quarter, key customers will be going online with new capacity in North America. And in 2025, new cars will be launched, which we expect to result in an increase in battery shipments.
Lastly, on October 30, the company announced its corporate value enhancement plans, which include a target ROE of 10% and a total shareholder return of 35% as of 2027. Through the merger with SK E&S, the company has been able to create a foundation for a stable financial structure, and we'll continue to accelerate synergies to continue to strengthen shareholder return.
So this concludes my discussion on the third quarter highlights. And now let me delve into the Q3 business performance in more detail. On the third quarter top line, weaker sales from the refinery business, driven by lower oil prices led to total sales declining KRW 1,142.2 billion quarter-on-quarter to KRW 17,657 billion. In terms of operating profit, though the profitability of the battery business improved, inventory-related losses from lower crude prices and weaker key petrochemical strip spreads led to operating profit falling KRW 377.5 billion Q-o-Q to recur a loss of KRW 423.3 billion.
On the nonoperating profit side, FX-related gains from a stronger won, and product derivative gains from lower oil prices led to a Q-on-Q improvement of KRW 175.5 billion, resulting in a nonoperating loss of KRW 306.3 billion. In detail, FX-related gains was KRW 118.7 billion. Product derivative gains KRW 73.9 billion, net interest expense, KRW 277.9 billion, equity method losses KRW 14.8 billion and other expenses, KRW 206.2 billion.
Next, let me walk you through our financials. As of the end of the third quarter, total assets were KRW 85,173.9 billion. When compared to the second quarter, tangible assets increased by around KRW 6.7 trillion due to new battery capacity constructed overseas, but trade receivables dropped by approximately KRW 0.9 trillion due to lower crude prices.
Liabilities totaled KRW 53,176 billion and borrowings grew by KRW 3.3 trillion due to an increase in CapEx. The debt equity ratio was less by 3% points versus the end of 2023 at 166%.
Next, we will present the Q3 performance by business line. The performance and outlook for each area will be presented by management from the respective businesses. First, the petroleum business, [ Soon Sang Cha ], Head of Corporate Planning from SK Energy, will give the presentation.
Good morning. This is [ Soon Sang Cha ], Head of Corporate Planning from SK Energy, and let me go over our petroleum business. In the third quarter, concerns of a recession in the U.S., Europe and China, coupled with less refinery demands from China, created an unfavorable background economic backdrop.
Oil prices and refining margins weakend, which led to the operating profit of refining decreases -- decreasing KRW 760.8 billion Q-o-Q to a loss of KRW 616.6 billion. To elaborate, crude prices slightly improved in the beginning of the third quarter due to expectations of rate cuts in the U.S., but later on, concerns on less crude demand in China and a global recession was highlighted during the quarter, which resulted in a drop in oil prices. In particular, September, our U.S. manufacturing and employment index numbers were weak, fueling concerns about a slowdown in demand, which led to a fall in 2024 of Dubai prices of $71.
On the market demand side, though this Q3 is a high season, mobility and industrial demand was less than expected, leading to a limited improvement in the market. In addition, U.S. refineries maintained high utilization levels without any issues and new capacity added in the Middle East increased supply, leading to a weak product bucket.
In short, lower crude prices and a more challenging product backdrop resulted in weaker refining margins and inventory-related losses in the third quarter, and the operating profit of the business also declined Q-o-Q.
Next, let me discuss our market outlook for the fourth quarter. In the case of crude, concerns about a global recession still persist, but the U.S. continues to post solid growth and there are higher expectations about economic stimulus measures in China, which we expect to support the lower band and oil prices.
On product demand, the rate cuts in the U.S. and economic stimulus measures in China, coupled with seasonal events such as an increase in reserve demand for heating purposes is expected to result in a recovery in demand levels.
On the supply side, in October, TAs in Europe and Middle East are expected to decrease supply. And if that happens, this is expected to support the lower bound.
In conclusion, less concern about a global recession together with less supply during the fall turnaround peak season is expected to drive a recovery in refining margins in the fourth quarter. Thus, the company is planning to adjust utilization according to the developments in refining margins and market outlook to ensure it can be flexible in an ever-evolving market. Thank you.
The next presentation on the petrochemicals business will be given by the Head of the Management and Planning Office of SK Geo Centric, Kim Yong-soo.
Good morning. I'm Kim Yong-soo, Head of Management and Planning Office from SK Geo Centric. I will present on the petrochemical business. Despite an uptick in sales volume after the completion of scheduled turnaround in Q2 for No. 2 PX, there was inventory impact following a decline in naphtha price and major petroleum spreads, which drove profit down by KRW 113.8 billion Q-on-Q, and the business reported a loss of minus KRW 14.4 billion.
Moving on to Q4 market outlook for each product category. Let's first take a look at paraxylene, PX, which is the company's core aromatics product. On dampened demand for gasoline blending, bearish MX market triggered an increase in PX utilization and coupled with concerns over China's slowdown, we saw a sharp decline in spread in September. In Q4 on the back of higher polyester demand for winter clothing needs and new PTA capacity coming online, there will be levers behind recovery in demand, which is expected to push up spread as compared to September.
For benzene in Q4 due to new capacity additions from China and regional and global year-end destocking activities spread is expected to be softer versus the third quarter but will still be at elevated levels, both on a year-over-year basis and versus per annum average. For the olefins, although we see very little improvement in the demand and supply dynamic once the effect of Chinese government pump-priming measures starts to feed through, we may be able to see improvement in demand.
Thank you. Next, [ Kim Seo Gwon ], PL of Corporate Planning and Management Officer, SK Enmove will present on the Q3 lubricant business result.
Hello. I'm Kim Seo Gwon, PL of Corporate Planning and Management from SK Enmove. Despite negative inventory effect following the dip in raw material prices, increases in sales volume and margin improvement drove operating profit up by KRW 22 billion Q-on-Q, reporting KRW 174.4 billion. Despite weaker ASP trend in the third quarter, lower cost base following crude price decline drove stronger spread versus last quarter.
In terms of sales volume on the back of economic slowdown in China, demand from Asia was temporarily bearish, but rise in sales volume in U.S. and Europe supported robust performance.
Usually, fourth quarter is start of the off season, but anticipation of China's stimulus measures and possibly a recovery of domestic demand levers behind weaker demand may mitigate, and we expect sales volume to be similar to the level seen in the third quarter. All in all, the sales volume will be quite similar to that of Q3, and spread is also expected to be at steady state with profitability kept in the positive domain.
[Interpreted] Next from SK Earthon, [ Ji-Yong Min ], Head of Planning and Support will present on Q3 E&P business.
[Interpreted] Good morning. My name is Ji-Yong Min, Head of Planning and Support from SK Earthon. On the back of decline in crude price and compelling selling price, reflecting higher percent of gas content and due to a slight downturn in production, Q3 operating profits for the E&P business fell KRW 11 billion Q-over-Q to KRW 131.1 billion.
In Q4, we have plans to drill two exploration rigs in Vietnamese Block and increased production from China 17/03 Block, which are in step with our endeavors to scale up our core competitiveness. Also in July, we newly acquired operation rights to Ketapu Block in Malaysia. We also have operatorships in the nearby SK 427 Block and thus will be able to create synergies across these E&P sites and increased likelihood of success in exploration.
We plan on adding more blocks regarded as having good potential in Southeast Asia which is our strategic region with a view towards sustaining the growth momentum.
[Interpreted] Next, on battery business, CFO of SK On, Kim Kyung Hoon will provide you with the details.
[Interpreted] Good morning. I am Kim Kyung Hoon, CFO of SK On. I will walk you through the company's Q3 battery business results. On continuing downward trend in battery ASP guided by metal price declines, Q3 revenue was down KRW 122.7 billion Q-over-Q to KRW 1,430.8 billion.
Levers impacting operating profit includes depletion of high cost inventory, base effective downtime loss and initial ramp-up costs from the new facility in Hungary last quarter, cost structure improvement and payment settled by clients which drove turnaround of KRW 24 billion in quarterly profit. However, in terms of AMPC, which is a credit given to batteries produced and sold inside the U.S. due to recalls and temporary halt in production at customer site, sales volume was down in turn, driving AMPC down Q-over-Q to KRW 60.8 billion.
Demand recovery in '24 is lower than originally expected, but we expect sales volume to inch up slightly following new capacities for finished vehicles and OEMs coming online in North America in Q4 and in new car launches slated for the first half of 2025.
Lastly, merger with SK Trading International was completed as of November 1, reinforcing the foundation for financial stability and strengthening sourcing capabilities for raw materials. And as per our disclosure, we will also complete the merger process with SK Enterm by first of February 2025.
Next is on the materials business. The material business saw its losses widen due to a decline in sales volume to major customers. However, we expect to see gradual improvement in sales to new customers as we move into the fourth quarter.
[Interpreted] This ends our presentation, and we will now start the Q&A session. Before taking live questions, we would first like to address a few questions that we received in advance on our website. Prior to this earnings conference call, we received questions from the investors and analysts and to be effective in responding to those questions, we selected most frequently asked questions and will provide the answers through simultaneous English interpretation.
So moving on to the first question. It is on the second half of 2025 outlook for SK E&S. The response will be delivered by Im Seo-euk, who is the Head of Finance, No. 2 financial unit.
Now before answering your question, merger between SK Innovation and SK E&S was complete as of November 1, so Q3 earnings for SK E&S was not included in the company's third quarter presentation. However, we will be able to share with you the details of SK E&S's earning starting Q4 earnings call, which is scheduled for early next year.
Let me first present on the second half outlook. We expect SK E&S will sustain solid performance on the back of profit enhancement efforts spanning all of its businesses. For its electricity and LNG business, we saw record high demand following heatwave in August and hot temperatures continuing into September. And based on competitive LNG supply, power plant operation has been quite steady.
And for the city gas business, despite decline in sales due to depression in economy, we expect solid earnings to follow, thanks to new revenue sources such as fuel cells.
We project geopolitical risk in the Middle East may deepen and impact of La Nina could trigger extreme winter temperatures until the end of the year. And so we plan to control LNG inventory at steady levels for running the power plant and focus on optimized operation.
Next is outlook for '25. Global LNG market is facing tight supply and delays in commercial operation of new LNG project, and on the resumption of gas supply between Russia and Ukraine and China's economic situation, LNG spot price in Europe and Northeast Asia will experience significant volatility.
For the electricity market, demand will not increase that much but on the impact of base load generation capacity, which either has come online in '24 or is expected to be added in 2025, we expect competition between LNG plants for dispatch orders will intensify.
Even in the face of such headwinds, SK E&S will secure in a timely manner, low-cost LNG supply from gas reserve in Barossa of Australia, with commercial operation will commence from second half of 2025 in order to drive cost competitiveness and generate steady profit grounded on integration of our LNG value chain. We will also generate meaningful levels of operating profit from other businesses, including city gas and renewable energy business.
Moving on to the next question, SK On's CapEx outlook for years 2025 and '26. I will ask CFO, Kim Kyung Hoon to respond to this question.
Yes. Thank you for the question. On slowdown in EV market growth, we are closely monitoring customer demand and market development to lower the planned CapEx or push back investment schedule so that we may be able to manage CapEx in a more flexible manner.
We are currently collating CapEx items for FY '25 business planning and since major part of 2024 CapEx, which are both in joint venture project with Hyundai Motor Group in North America have been invested this year, we expect CapEx to be significantly lower as we move into year 2025.
In terms of financing, we are not only tapping into financing from financial institutions, but also policy directed funding from Korea and abroad and use JV partner loans to secure a steady stream of funds and minimize funding cost.
Out of 3 plants under the BO Project that we are building with Ford, number one Kentucky plant and Tennessee plant are being built as planned while we pushed back SOP for number two Kentucky plant in light of market conditions and will respond in a flexible manner also in light of volume requirements at Ford.
The Hyundai Motor Group JV plant under construction in Bartow County in Georgia is on schedule at this point, but there may be changes in line with EV production plant in Hyundai Motor Group and operational optimization at our production line. We are committed to enhancing investment efficiency to drive financial soundness and optimize profitability and we'll come back to you with details on annual CapEx plan at the fourth quarter earnings release call.
[Interpreted] This is the end of the Q&A session, responding to questions that we received in advance. We will now start the live Q&A, and we will switch to consecutive interpretation. Please remember to state your affiliation and name before you ask your question. Now Q&A session will begin. [Operator Instructions]. The first question will be provided by Hong Jo Shin from Shenyang Securities.
[Interpreted] There are 2 questions that I would like to ask you about SK E&S. The first question is that if you look at SK E&S' LNG business, could you share the short-term and also mid- to long-term forecast or outlook that the company has for LNG and also what the company's growth strategy accordingly?
The second question I have is that if you look at the company, it has a presence in the full value chain for LNG. So as a result of that, what type of synergies does the company believe it can enjoy as a result of that?
[Interpreted] Yes. Let me address the questions that you have asked first with regard or short- to mid- to long-term global LNG market outlook. In terms of the outlook, I think that if we look at the short-term outlook, I think that we can look at both the supply side and the demand side. In terms of supply, from the North American side, there are new LNG export projects that are looking like they are going to be delayed. So it does seem to be that as a result of that, the additional supply may somewhat be limited.
In terms of demand, after the winter season in Europe, how much the inventory actually represents and also the going forward outlook in terms of relationship between Russia and Ukraine also will have an impact because whether the overall Russia P&G that flows through Ukraine will be -- whether it will be suspended or not and whether there can actually be alternative pipelines that would be identified as a supply factor would actually also have a determining factor.
In addition to that, in China, there also is an expected growth that will be seen in terms of the overall demand. So we do think that for this reason, there may be some volatility in the outlook going forward.
Over the mid- to long term, right now in the U.S. and also in the Middle East, focusing in Qatar, there are many LNG export projects that are planning to go online. So over the mid- to long-term horizon, we do think that in terms of the supply and demand, there should be a balance that we will be able to see. So in relation to that, maybe to elaborate a bit about our growth strategy. First, in terms of integrating the overall energy value chain and operating such, we do think that we have a differentiated competitive edge that we are able to enjoy.
So since 2022, if you look at our operating profit, we have been able achieve a very healthy profit of more than KRW 1 trillion each year. And for this year, again, we do think that our operating profit level will be similar to the previous year. In particular, as mentioned, from the third quarter of next year in Australia, we will see the Barossa gas field go into commercial operations, and as a result of that, we will have a more competitive manufacturing cost base which will actually contribute significantly to our future profitability.
So after the Russia-Ukraine battle is over because of energy security issues and also because we do think that LNG provides one of the most realistic low-carbon energy sources, we expect LNG demand to continue to grow. So in relation to that overall view, we are setting a plan in which the assumption would be that LNG demand going forward will increase.
In addition, in the Yongin Semiconductor industrial complex area, we are securing the operating rights for the community energy system there. And by applying CCS technology, we do want to pursue a conversion to a low-carbon LNG business model. So going forward, SK Innovation, E&S' value chain integration and synergies by strengthening such and by engaging in new businesses, we do believe that we will be able to continue to secure our competitive edge in the LNG business.
So maybe to move on to the second question that you have asked. For SK E&S, we have presence not only on the upstream side, which would be the gas field development, but also on the midstream side, which would be our liquefication (sic) liquefaction facilities, also our LNG ships and also LNG terminals and also on the downstream side, which would be the LNG power production facilities that we have. So as a result of that, we have presence and are operating the full value chain in terms of integration across all of the LNG areas.
For the company in itself, by completing such LNG value chain, we are able to address various restrictions or constraints that may persist in terms of the full LNG supply chain in itself. So by utilizing our upstream and midstream assets, even amidst a very uncertain internal and external environment, we are able to supply on a very stable basis, competitive fuel and also through our sourcing portfolio and diversified LNG sales network, we are able to flexibly deal with and address changes in the market environment. Going forward, based upon the synergy that we have across this integrated value chain, we will continue to and generate profits very stably. Thank you.
[Interpreted] the following question will be presented by Hyunryul Cho from Samsung Securities.
[Interpreted]. I am Cho Hyunryul from Samsung Securities. I would like to ask you 2 questions regarding your petroleum business. First question relates to your capacity. If we look out into 5 years, I would like to understand what the size of your net addition in terms of the capacity is and what impact that will have on your petroleum and refinery business going forward?
Second question is in terms of the import of the crude oil. Recently, we've seen elevated level of interest on the oil coming in from Canada. I would like to understand what the percent of North American sourced crude oil is out of your total portfolio? And compared to the Middle Eastern crude oil, what are the price merits.
And also, if you could share with us what your strategies are going forward with regards to the crude oil input that will be -- import, that would be helpful.
Thank you for the question. I am [ Sun Song Cheol ], the Head of Corporate Planning Office from SK Energy. Responding to your question on our global refining facility capacity, for 5 years to come. I would like to first respond to that question, including the profitability impact it will have.
Now first of all, if you look at the upcoming 5 years, global refining facility in net addition, which is that is up to 2029, we are expecting that to be a per annum average of 250 kb barrels per day.
Now basically, if you just look at year 2025 up to '26, we're expecting a net addition of, on average, 530,000 barrels per day. But going after that point in time, we expect the size of the global capacity net addition to trend down.
Now we expect that because of more stronger regulation and aging facilities, the total capacity and size of the refinery is going to continuously actually trend up. However, after -- and therefore, 2027 afterwards, the net addition is going to be very limited. And from 2024 to '26, we believe that on a per annual average basis, the net addition size is going to account for about 0.5% of the global petroleum demand, and if you compare that to about on average 1% global petroleum demand, which is led by countries like India, we believe that the impact that such net additional capacity we will have on the market is going to be limited.
And post year 2027, the number of refineries that are slated to be closed down is going to be bigger than the confirmed amount of capacity addition. So we believe that going forward we will be able to secure favorable level of margin.
Also moving on to the second question regarding our strategies with regards to sourcing from North American market, including Canada and what competitive edge or pricing-related attractiveness it has versus the crude oil from Middle East as well as our strategy in terms of the percent that we are looking to carry with regards to this North American-sourced crude oil, I will respond to that second question.
So there are multiple factors that SK Energy considers when it analyzes the economics of certain crude oil that we source and those factors include pricing, freight as well as product yield -- production yield that is. So as of today, if you were to compare the U.S. and Canadian crude included compared to the Middle Eastern crude, it actually has a little better economics. And out of our total import crude currently, the U.S. crude accounts for about 20% to 30% of our total portfolio.
So under this backdrop, we're going to continuously source Middle Eastern crude oil, which are supplied under a long-term contract. But since the region is exposed to geopolitical risk, we will also very closely monitor how things develop. Having said that, our strategy is to make sure that we pure maximum level of margin and will create our feedstock portfolio that will help us achieve that objective, and that will be supported by diversification of our sourcing.
The following question will be presented by Hyun-hee Jung from Daiwa Securities.
[Interpreted] This is an Hyun-hee Jung from Daiwa Securities and there are 2 questions that I would like to ask you. The first question is related to ER-EV. If you look at right now the Chinese manufacturers are increasing their ER-EV sales and Hyundai Motors also announced plans to launch such a model. So what would be your outlook for the ER-EV market? And are there any discussions that you currently have with customers ongoing?
In addition, I do believe that some believe that because ER-EVs do represent a smaller battery capacity that it may have a negative impact on the overall market. So what's the company's view about such a situation?
The second question I would like to ask you is about the outcome of U.S. elections. Of course, we do have U.S. elections taking place tomorrow, and I do think that this is a hot topic of interest for the market. So in relation to the U.S. election-related risks, how is the company accounting for that?
[Interpreted] Yes, this is [ Jung Hya-nuk ] from the IR Office of SK On and maybe I can address the first question. As you have just mentioned, for ER-EV, there is a lot of increasing interest, and I do think that for Hyundai Motors they have announced their plans to release ER-EVs which would be utilizing existing engines and also represent a smaller battery capacity. So with this, they want to strengthen their cost competitiveness.
So as one of the key vendors for the Hyundai Motor Group not only for pure electric vehicles, but also in terms of ATVs and PHEVs, we do have a leading position within that overall market. So for the Hyundai Motor Group and also the expansion that they are looking for in their hybrid vehicle fleet, we do think that we will be able to secure a position to benefit from such. So we do want to strengthen our competitiveness across the BEV, PHEV, HEV and Er-EV portfolio. And as a result of that, we will be actively engaging for ER-EV related battery business also.
So with regards to ER-EV, it is true that there is a lot of interest in this area right now, but we do believe that it will not be a leading driver driving the EV market as a whole. And we don't believe that it will replace pure electric vehicles. If you look at various market research institutions, I do believe that ER-EV is more regarded as a transitional technology. So rather than for BEVs, it does seem to be somewhat of a replacement for the PHEV market. And as a result of that, if you compare ER-EVs to PHEVs, ER-EVs do have a larger battery capacity. So as a result of that, over the longer term, we do think that the negative impact on the battery market would be limited.
So maybe just the second question that you have. In the case that former President Trump does reelected, I do believe that there could be a reduction in the EV subsidies that are provided and maybe some easing of various emissions-related regulations. So as a result of that, it may be inevitable that the overall EV conversion would slow down. However, having said that, related to the IRA in itself, if you look at where the investment is taking place, a lot of it is focused on the Republican states. In addition to that, for the lower house, 18 house members and also the head have objective making any negative measures towards the IRA. And if you look at the newer generation of Republicans versus the existing or older generations, they seem to be more interested in environment protection.
So added to that, a lot of the U.S. major oil companies, which had previously opposed to the IRA are now changing their position and are asking the Trump camp to actually maintain the position on the IRA. So as a result of that, we do think that even within the Republican party, in terms of the supporters of such party with regards to the IRA, there do seem to be some conflicting and different views.
So as of the current time, of course, it would be very difficult to make any expectations or forecast on the results of the elections. But even if Trump does win and as a result of that, the camp that had negative views on the IRA, we do believe that the result of that rather than leading to a full scrap of the IRA in itself would be resulting in maybe less subsidies for EV vehicles and also maybe some other limitations on the subsidy budget in itself.
So we do think that it would be more restrictive in terms of the nature of the results. And as a result of that, in line of a possible slowdown in the U.S. EV market after the U.S. elections and also to ensure that we are less the volatility of our overall profits due to the demand situation or cycles in the EV market. We are looking to develop more products for other alternative applications such as ESSs.
And in addition, regardless of the elections in themselves, we do think that the overall trend of building our supply chain outside of China and also strengthening in terms of trade protection will continue. So as a result of that, we do want to continue to strengthen our production capability on the ground in the U.S. and also continue to enjoy and maintain our competitive edge versus Chinese batteries.
[Interpreted] The following question will be presented by Young Kwang Choi from NH Investment & Securities.
[Interpreted]. I am Choi Young Kwang from NH Investment Securities. I have 2 that I would like to ask. The first is that I see that your secular run rate for your refinery facility seems to be on a downward trend. I would like to understand as to the reason why that is? And what is your utilization plan for these facilities going forward?
Second question relates to your battery business. On the back of strengthening European regulations and more eco-friendly policies being implemented, there is expectation building that there will be a rebound in demand. Would like to understand what the company and outlook is with regards to demand going forward.
[Interpreted] Yes. This is [Sun Song Cheol] from SK Energy, Head of Corporate Planning Office. I will respond to your question regarding the utilization and run rate of our refinery facilities. During the third quarter, as you have correctly mentioned, we were in an unfavorable macro backdrop which drove down the crude oil price and the overall product market was squeezed and displayed weakness, which ended up in driving down the refining margin. Under this backdrop, in Q3, the company continued to maintain a minimum utilization plan for our CDUs so that we can effectively defend against negative topping margin and also so that we can maximize operation of our upgrading processes.
Now however, under the situation and under a very conservative approach in operating the facilities we've actually the externally sourced FO, fuel oil, so that we could improve upon our margin once the market starts to show signs of recovery. And in Q4, our CDUs will run at lower levels in case the margin continues to fall. So because market uncertainties are persisting, we're very closely monitoring how things develop out to -- develop in the market. And once the market shows signs of recovery, we are going to be quite flexible and agile so that we can immediately increase and respond with increasing utilization.
[Interpreted] Responding to your second question regarding batteries, I am [Jung Hya-nuk] from SK On's IR Office. As you have correctly mentioned, the emissions control and related regulations and rules in Europe is going to strengthen as we go into the future. EU has actually decided to strengthen regulations on CO2 emissions for passenger cars and commercial vehicles starting from January 1, 2025. And under that change the requirements of passenger cars will be subject to 20% stringent requirement.
So this is a very stringent requirement and regulation -- requirement that is being levied. And considering that the percent of electrification in EU, is about 15%, if they were only to respond with purely EVs, that means that the requirement would have to be further beefed up to 25% level.
If you were to think about these types of regulation going into place and if we were looking at the percent of purely EVs that exist in the European market, it may help with further expanding the EV penetration in Europe. Having said that, at this point, we hear that many OEMs are currently talking to European regulatory authorities, demanding for a mitigation or the easing of the applied regulations. And also, there's moves that these OEMs are coming together to employ a carbon CO2 emission pooling schemes plans. We hence need to look -- wait and see how the macro environment in Europe actually plays out as we go into the future. And at this point in time, it will be quite difficult for us to share with you any specific implication what the regulatory environment has on our business.
SK On, we are also in close talks with our customers regarding year 2025 supply volume, but they have -- they are yet to be decided. And so no details have yet been confirmed.
[Interpreted] The last question will be presented by Jae Sung Yoon from Hana Securities. Please go ahead with your question.
[Interpreted] There are 2 questions that I would like to ask you. First, if you look at the petroleum market in general, it seems to be that in the U.S., China and also India when compared to pre-COVID levels in terms of the net exports from these regions, it seems to be less. However, I have seen news reports that in the case of Korea in terms of the third quarter YTD numbers, that exports have reached an all-time high. So in terms of the overall trends that we see in Korea is SK Innovation following these trends? And if so, you also mentioned that there is a possibility that utilization would be increased further. Then where do you actually believe this additional volume could be sold to in terms of the overall region?
The second question that I would like to ask you is about your SK Earthon business. There is new capacity going online in China in terms of the production and utilization there. What is the current status? And in terms of 2025, if there are any elements that you believe would contribute to a higher top line for 2025, we would like to understand what that is.
[Interpreted] Yes, this is the Head of Planning -- Corporate Planning Office at SK Energy, and maybe I could address your first question, which was talking about the 3Q YTD numbers in terms of reaching a historic high in terms of exports from Korea and also whether there would be any potential upside that we would be able to see going forward.
So in terms of explaining Korea as a whole in terms of the market, just from SK Energy, whether this would be fully accurate or not is something that we're a bit cautious about. But maybe just to talk about it from the company standpoint, if we look at our overall utilization plans, in terms of our exports, we actually did not see an increase. There was a decrease in the overall level.
However, if we look at the 3 other petroleum companies in Korea, as far as we understand, based upon our market intelligence, it does not seem to be that they have adjusted their utilization according to the market backdrop. But have been maintaining utilization at around 80% to 90%. So in light of this fact, it seems to be that for Korea as a whole, utilization of existing facilities did not decrease. And as a result of that, exports for the country as a whole have increased because of such a factor.
So as mentioned before, of the overall market situation, we do see an improvement there. And accordingly, we are planning to increase the overall production volume at the company level. So if you look at the overall market situation in October, we did actually see signs of recovering market across the board. And in addition to that, going into the peak turnaround season in the Middle East and also in Europe, we do think will add to a rebound within the market.
So we are being prepared to run our utilization at our level. And in particular, in terms of the markets that we're trying to address, we want to look at the markets in which we think are most competitive for us in terms of the overall freight rates that we have. So right now, we are planning to increase our exports to the Southeast Asian and also Australian market.
So this is SK Earthon, and maybe I can address your question. Right now, if you look at the production sites that we have, there are 5 different sites in the locations, including Peru and Vietnam. And if you look at the over production volume in terms of the number of barrels per day, it's 57,000 of which 40% would be oil. And if you look at the China 17/03 Block, which started production last year in terms of October, in terms of daily production, it was 27,000 barrels.
And to talk about additional production for next year in terms of the China 17/03, we do have plans to drill additional production wells. And if that does come in, we do think that there will be an increase in production in the second quarter of next year. In addition, in the Vietnam 15-105 block that we have right now, the overall development is going smoothly. And if everything does continue to go as planned in the third quarter of next year, we do think that we will be able to start commercial production.
[Interpreted] This brings us to the end of the Q&A session. Thank you very much for joining SK Innovation's earnings conference call the third quarter of 2024. Thank you for -- to analysts and investors for joining us despite your very busy schedules.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]