South Korea extends automotive fuel tax cuts until Aug to support consumer confidence

The South Korean government decided April 18 to extend retail fuel tax cuts by four months until the end of August to help ease consumers' burden amid rising crude prices.

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

Despite faltering tax revenue in recent months, the utmost priority goes to help easing consumers' financial burden, the Ministry of Strategy and Finance said in a statement.

"We strongly believe that it is necessary to continue help easing consumers' burden on high fuel prices since the sharp rebound in benchmark oil prices following the surprise crude production cuts announced by OPEC+ April 2 will likely maintain the uptrend in domestic retail fuel prices," the Ministry said.

Seoul first introduced the automotive fuel tax cut 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 Dec. 31, 2022.

Seoul decided last December to extend the duration of the tax cuts once again until end-April, though 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% remained applicable for diesel.

The government has been introducing some bold measures to boost consumer confidence and private spending as the economy struggles to cope with high inflation and lackluster goods and services exports.

The finance ministry said March 29 the government would temporarily exempt tourists from 22 visa-waiver countries, 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.

Refiners assess supply-demand fundamentals

Extending the automotive fuel tax cuts should effectively support domestic diesel demand, though poor refining margins remain a concern for second-quarter earnings, refining margin analysts at major South Korean refiners and middle distillate traders said.

"Peak summer driving season is approaching and automotive fuel demand should hold up. The tax cut for diesel is especially crucial because the fuel is mainly used by cargo truckers and taxi drivers, who are generally low-income folks," said a marketing manager at S-Oil.

Domestic wholesalers had been stockpiling diesel in April on expectations that the tax cut would not be extended, some industry and trading sources have said.

"There was strong demand from wholesalers in April so South Korean refiners were allocating barrels to the domestic market instead of exporting last month. There could be less demand in May, resulting in more exports," said a regional gasoil trader with close knowledge of South Korea's middle distillates output and spot sales.

Still, South Korean refiners were broadly expected to continue lowering run rates and throughput as poor margins bode ill for both domestic sales and exports.

Domestic refining margins have fallen sharply to just $3.90/b in the second week of April from around $13.50/b in the fourth week of January, said an official at the country's top refiner SK Innovation.

Platts assessed the FOB Singapore 10 ppm sulfur gasoil cargo crack spread against front-month cash Dubai at $14.17/b at the Asian close April 18, rebounding from a 16-month low a day before at $13.64/b, S&P Global Commodity Insights data showed.