South Korea refiners focus on exports as fuel tax cut extension unlikely to boost domestic sales

The South Korean government's recent decision to extend retail fuel tax cuts may not necessarily boost domestic automotive fuel sales amid tepid economic condition and refiners may put more focus on gasoline and diesel exports to capture improving Asian crack spreads, industry sources said Feb. 20.

Seoul will extend tax cuts on auto fuels by another two months through the end of April in an effort to tame rising consumer prices and support consumer confidence, according to the Ministry of Economy and Finance.

The extension would allow retail gasoline prices to continue reflecting a tax cut of 25% and a 37% cut for diesel.

"The ongoing geopolitical tensions in the Middle East continues to put global oil price outlook highly uncertain. The tax cut extension should reduce retail fuel cost burden for consumers," the Finance Ministry said in a statement Feb. 16.

With the cut, the tax on retail gasoline price is currently at Won 615/liter (46 cents/liter), down from Won 820/l (61 cents/liter) before the tax reduction, while the tax on diesel price is currently at Won369/liter, compared with Won 581/liter before the tax cut, according to the Finance Ministry.

The extension announcement came ahead of the crucial parliamentary elections slated for April 10, which is considered as a mid-term judgment for unpopular President Yoon Seok-yeol who took office in May 2022. Yoon's approval rating was as low as 29% in recent media polls.

Domestic demand assessment

Still, first quarter gasoline and diesel demand in Asia's fourth biggest economy will likely undershoot previous year levels as private spending, consumer confidence and small-business sentiment remain weak, while industrial performance including manufacturing and construction continues to lag pre-COVID levels, according to oil product marketers at two major South Korean refiners and analysts at Meritz Securities and Industrial Bank of Korea based in Seoul.

In December 2023, South Korea's gasoline consumption fell 15.3% year on year to 7.86 million barrels, while gasoil/diesel demand in the month dropped 10.9% from a year earlier to 13.85 million barrels, latest data from the state-run Korea National Oil Corp. showed.

Gasoline demand in Q1 might struggle to push above 200,000-210,000 b/d as private spending and small business activities remain very weak, according to a product marketing strategist at a South Korean refiner. In Q1 2023, South Korea consumed 230,256 b/d of gasoline and 217,489 b/d in Q1 2022, KNOC data showed.

"Had the government decided to expand the rate of the tax cuts, on top of the duration of the tax cuts, our demand outlook assessment would have been higher," he added.

The government has provided tax cuts for auto fuels -- diesel, gasoline and butane -- since November 2021 to help cope with upward pressure on inflation.

On Jan. 1 this year, the government restored tax reduction for gasoline to 25% from a legal cap of 37% cut, while maintaining tax cuts for diesel and butane at 37%.

Before the tax cut, taxes accounted for about 50% of the retail gasoline price and 40% of the diesel price, and these have prompted consumers to ask for tax reductions.

Taxes currently account for 37.8% of gasoline pump prices and 23.6% of diesel pump prices.

Export margins

Reflecting the tepid near-term domestic automotive fuel sales outlook, major South Korean refiners would consider putting more focus on export earnings in the first half of 2024 as the industry broadly maintains a cautiously upbeat tone on regional cracks and export margins.

Demand in Northeast Asia is rather tepid but sales to Southeast Asia, South Asia and Oceania appear attractive with cracks showing improvement in the past few trading cycles, oil product marketers said.

Platts FOB Singapore 92 RON gasoline crack against second month Dubai swaps averaged $12.70/b to date in Q1, more than double the Q4 2023 average of $6.3/b, S&P Global data showed. The Platts second-month Singapore gasoil swap crack against Dubai crude swaps has averaged $24.68/b to date in February, higher than $21.81/b in January.

"China's economic stimulus measures, coupled with firmer travel demand during the Lunar New Year holiday period, are anticipated to push up [regional] refining margins, particularly for jet fuel and diesel," an official at the country's top refinery SK Innovation told S&P Global previously.

Heating demand in winter and the spring maintenance season should support margins in the first quarter, while summer mobility would further lift margins, an official at S-Oil Corp. said, indicating that the refiner would raise crude throughput to capture possible uptick in cracking margins.