South Korea's refiners limit Apr diesel exports as Seoul aims to boost domestic consumer spending

South Korean refiners are expected to limit diesel exports in April as they prioritize domestic sales after the government rolled out new measures to bolster tourism arrivals and consumer spending, while many vehicle owners are expected to fill up their tanks before the expiry of the tax cut scheme at the end of the month.

The country's top refiner SK Energy recently cancelled a sell tender for 300,000 barrels of 10 ppm sulfur gasoil from Ulsan for April 16-18 loading, according to market sources and traders with direct knowledge of the matter. Another similar-sized cargo from Ulsan for April 21-23 was also heard cancelled, S&P Global Commodity Insights reported previously, citing middle distillate trading sources based in Singapore and Seoul.

The government is introducing some bold measures to boost consumer confidence and private spending as the overall economy struggles to cope with high inflation and lackluster goods and services exports. Automotive fuel demand could spike in the near term, though It remains to be seen how sustainable the demand increase would last, a middle distillate marketer at S-Oil said.

The ministry of finance said March 29 the government will temporarily exempt tourists from 22 visa-waiver nations, including Japan, Taiwan and the US from mandatory online travel permits and transit visa requirements in an effort to spur private spending and support small business owners.

The government also plans to hand out around $100 worth of cash-equivalent coupons to employees of small businesses for their domestic holiday travel and accommodation.

South Korean refiners would adjust their domestic sales and export ratio, reflecting the government's tourism and consumer support packages, while the recent downtrend in Asian benchmark gasoil crack spread bodes ill for external fuel sales, said a senior market research analyst at Korea Petroleum Association.

Platts assessed FOB Singapore 10 ppm sulfur gasoil cargo crack spread against front month cash Dubai at $17.79/b at the Asian close April 5, compared with the Q1 average crack spread of $28.24/b and Q4 2022 average of $41.41/b, S&P Global data showed.

South Korea exported on average 17 million barrels/month of diesel in 2022 amid stellar middle distillate cracks, but the shipments could average under 16 million barrels/month in the second quarter, according to middle distillate marketers at three major South Korean refiners surveyed by S&P Global.

The supply of gasoil in Asia could tighten in April because the region's top oil products supplier South Korea is not exporting much and it is a turnaround season, said a regional gasoil trader familiar with daily Asian middle distillate spot trade flows.

Tax cut expiry or extension?

South Korea's automotive fuel export volumes after April will likely depend on whether the government decides to either extend or end its current oil tax cut scheme, fuel marketing sources and traders based in Seoul and Singapore said.

Any reduction in Seoul's auto fuel tax cut rates or a complete end to the tax cut policy itself could dampen domestic consumption and alter local refiners' throughput and marketing plans, oil product marketers and traders said.

The Ministry of Economy and Finance first introduced the auto fuel tax cut scheme on Nov. 12, 2021, reducing taxes on diesel and gasoline by 20% until April 30, 2022. The ministry then extended the duration of the policy and raised the scale of the tax cut to as high as 37% effective until Dec. 31, 2022.

Seoul decided last December to once again extend the duration of the tax cuts until end of April 2023.

However, officials at three major South Korean refiners indicated that the refining industry's main concern is that the government may no longer actively support automotive fuel consumers and the finance ministry may reduce the scale of the tax cuts or even abolish the tax reduction policy due to the sharp decline in government revenue amid an economic slowdown.

Seoul has yet to announce its auto fuel tax reduction policy for May onwards and the finance ministry did not reply to S&P Global's email regarding the outlook for diesel and gasoline tax cut rates for the rest of 2023.

The scale of the tax cut for gasoline was lowered to 25% over January-April from the previous 37% cut. The tax reduction rate of 37% remains applicable for diesel until end-April.

The government may not decide to end the tax cut scheme straight away but the most likely scenario is for Seoul to progressively reduce the scale of the tax cuts, an official at a major South Korean refiner said.