S Korea's H2 gasoil exports seen limited on improving domestic demand, China tax

South Korean gasoil producers are poised to trim exports and shift focus to the domestic market as industrial fuel demand improves amid a rapid pickup in the country's economic activity, while Beijing's decision to slap a consumption tax on diesel blendstock has dented the sales outlook to China.

South Korea's gasoil exports fell 17.1% month on month at 14.76 million barrels in April, easing back from a six-month high of 17.81 million barrels in March, showed latest data from the Korea National Oil Corp, or KNOC.

The fall in gasoil exports for April snapped two straight months of increase, and middle distillate shipments to overseas markets could be limited in the near future as local refiners reserve more barrels for domestic consumption.

Industrial and consumer fuel demand at home will likely continue to improve on the back of a robust economic recovery, with the nationwide COVID-19 vaccination program gathering pace, refinery officials based in Seoul told S&P Global Platts.

South Korea's manufacturing sector is upbeat on the back of robust semiconductor and automobile exports. Together with the government's and the Seoul metropolitan city's plan to boost housing supply, which is driving construction activity, these will continue to propel domestic diesel demand, leaving limited supply for refiners to sell overseas, refinery officials and market analysts at Korea Petroleum Association said.

The country's goods and services exports, including electronics, semiconductors, automobiles and medical devices and equipment, surged 46% from a year earlier in May, marking the fastest growth since August 1988, according to the Ministry of Trade, Industry and Energy.

The Bank of Korea on May 27 raised the country's 2021 economic growth forecast to 4% from a 3% growth projection made in February.

South Korea's gasoil demand rose 9.1% year on year at 14.11 million barrels in April. Over January-April, gasoil consumption rose 5.9% on the year at 52.86 million barrels, the KNOC data showed.

Reflecting the uptrend in domestic gasoil/diesel consumption and requirement, South Korean exports of the middle distillate could be limited to about 15 million barrels/month on average in the second half of the year, compared with the average 16.7 million barrels/month exported in 2020, according to fuel marketing sources at three major South Korean refiners surveyed by Platts.

Gasoil blendstock sales

South Korea's gasoil exports are also under pressure as sales of light cycle oil, or LCO, to China would likely be impacted after Beijing's surprise move to levy a consumption tax on imports of the gasoil blendstock from June 12.

Industry sources said Chinese fuel distributors and refiners will likely prefer to produce more middle distillates entirely by themselves after June as the latest consumption tax could mean that making gasoil barrels blended from imported South Korean LCO becomes less competitive.

South Korean gasoil shipments to China averaged about 7.73 million barrels/month, or 1.03 million mt/month, to date in 2021, sharply higher than the 5.72 million barrels/month, or 763,000 mt/month, average exports in 2020, showed latest data from state-run KNOC. LCO was counted as a part of overall gasoil exports in the KNOC data.

However, the monthly average shipments to China could fall below 5 million barrels, or 667,000 mt, in the second half of 2021, according to multiple South Korean fuel marketers and refinery sources surveyed by Platts.

LCO is typically offered at a premium to the Means of Platts Singapore 10 ppm gasoil on an FOB South Korea basis. In April, it was commanding a premium of about $1-$1.40/b for May-loading cargoes, gasoil traders said at the time.

In comparison, 10 ppm sulfur gasoil for loading from South Korea was averaging at a discount of 70 cents/b to MOPS gasoil assessments over April, making exports of LCO far more profitable than the middle distillate.