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Analysis: South Korea's 2020 oil product exports under pressure amid bleak China sales outlook

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Exports fall for first time in 6 years in 2019 amid China slowdown

Diesel, gasoline exports to China seen 22%-36% lower in 2020

Gasoline cracks recover in Asia as refiners slash output

Seoul — South Korea is on course to register a second consecutive year of decline in oil product exports in 2020 as gasoline, jet fuel and diesel fuel sales bear the brunt of major buyer China's slowdown in industrial and transportation activities due to the coronavirus outbreak, industry officials and market analysts in Seoul said this week.

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South Korean refiners exported 522.96 million barrels of oil products in 2019, down 1.6% from 2018 and marking the first year-on-year decline since 2013, data from state-run Korea National Oil Corp. showed.

The decline was attributed mainly to a drop in shipments to China, which fell 6.8% on year to 105.19 million barrels in 2019, the KNOC data showed.

"The decrease last year was mainly due to less shipments of [high sulfur] fuel oil, diesel and jet fuel amid China's slowing economic growth and the [shipping industry's preparation for] IMO 2020," a KNOC official told S&P Global Platts.

Analysts in Seoul and Singapore said South Korea's shipments of oil products to China were likely to extend that downward momentum this year as the coronavirus outbreak could further slow China's economic growth.

China is by far the biggest market for South Korean oil product suppliers, and a domestic slowdown would inevitably pressure South Korea's exports, said Park Young-houn, a senior analyst at Hanwha Investment & Securities in Seoul.

"China is an important outlet for South Korean refiners of certain key products such as fuel oil, jet fuel and diesel. So when China catches a cold, Korean refiners will suffer as well," said JY Lim, oil markets adviser at Platts Analytics.

Goldman Sachs has already cut its first quarter real GDP growth forecast for China to 4.0% from 5.6%. "Even with the assumption of a relatively quick rebound in Q2 and Q3, this would lower full year 2020 growth to 5.5% from 5.9% previously," the bank said in a research note.

LIGHT, MIDDLE DISTILLATES

South Korea's transportation and industrial fuel exports to China appear most vulnerable as road and air traffic volumes fall drastically as Chinese authorities step up efforts to contain the spread of the virus.

China's Ministry of Transportation said the country's air passenger turnover slumped 36.5% year on year to 37 million people over January 10-February 10. Road transportation turnover fell 44.1% year on year to 1.12 billion people in January on a one person per 100 km/day basis, ministry data posted on its official WeChat platform showed.

Reflecting the downbeat signals for Chinese fuel demand, South Korea could see its diesel fuel and gasoline exports to China tumble to around 22 million-27 million barrels this year from 34.46 million barrels exported in 2019, according to traders and fuel marketing sources at major South Korean refiners SK Innovation, S-Oil Corp, GS Caltex and Hyundai Oilbank surveyed by Platts.

South Korea's overall jet fuel exports could fall between 15% and 35% on year to around 17 million-22 million barrels in Q1, Platts reported earlier, citing a separate survey conducted in late January.

GASOLINE CRACKS RECOVER

However, while the outlook for jet fuel and fuel oil sales is weak, there are some indications emerging that could prove move positive for South Korea's auto fuel suppliers.

Unlike jet fuel refining margins, which remain under pressure from a slew of flight suspensions to China, Asian gasoline cracks have recently staged a strong recovery as refiners slash production across the region, paving the way for South Korean auto fuel suppliers to seek other sales outlets in Asia and Oceania.

The FOB Singapore 92 RON gasoline crack spread against front-month ICE Brent crude futures surged to $9.30/b at the Asian close Tuesday -- almost double the $4.71/b averaged in January, Platts data showed.

The refinery output cuts were in response to China's sluggish gasoline demand, which fell sharply in line with the government's coronavirus quarantine shutdown measures imposed in 16 cities, market sources said.

China's state-owned Sinopec has cut throughput across its refineries by 600,000 b/d in February, equating to around 10% of its total 2019 output, Platts reported earlier. Other state-owned refiner PetroChina similarly cut throughput by 320,000 b/d, while at least nine independent refineries in Shandong province have temporarily shut a total 693,000 b/d of capacity.

China's total gasoline output in February is therefore poised to fall, market sources said.

"Earlier in January, [gasoline] fundamentals in Asia were tilted toward supply. But now with all refineries [in China] cutting runs, there is hope that the pressure could be lifted as fundamentals re-balance," one gasoline trading source based in Singapore said.

Park noted that the recovery in Asian gasoline cracks could provide some relief to South Korean refiners, as it could enable them to find alternative viable outlets for their exports, such as Australia, Indonesia and the US.