Refining margin in South Korea to decline as capacity expansion continues in China and Middle East

02-Jan-07

Supply of refined oil is estimated to expand 4.9% pa in the Asia Pacific region over the next four years, as against a 3% increase in demand. International refining margin averaged US$4.5 per barrel in 2006, down by one dollar a year ago. Refining margin, a key indicator of a refiner's earnings, is slated to decline further as China and Middle East nations improve downstream facilities. This could create problems for major Korean oil refiners that rely heavily on exports, despite a boom in demand for energy across the region. As China and India, Asia's emerging economies, increased energy consumption over the past several years, price of gasoline has skyrocketed. South Korea's refineries, which export over 50% of their output, stood to gain heavily from this rise in demand. But the demand-pull inflation prompted many Asian economies to build new facilities in a move to tap the soaring energy demand. With more refineries coming onstream in the region, the market will face a supply glut from H2-2007, and is expected to slide, exerting downward pressure on the refining industry in 2007. Several Korean refiners have been expanding oil development projects and high-tech facilities in recent years, making offshore oil exploration projects more attractive, offering a competitive edge over rivals. S K Corp is currently engaged in a total of 24 overseas oil exploration projects in 14 countries, including Yemen, Egypt, Vietnam and Brazil. Analysts forecast the profit resources from overseas investment will double in five years. S-Oil Corp. will also stave off the mounting pressures from rising global competition due to its large-capacity cracking facilities, due to an ever-rising demand for gasoline and heating fuel that has substantially raised margins for refining cheap heavy oils into high quality fuels. Petrochemical makers are also expected to face similar setbacks in the New Year, as new capacities are projected to go onstream in Taiwan and Iran early this year, threatening Korean rivals with a large volume of cheap output. Korean manufacturers are currently shipping nearly half of their output to the Chinese mainland, indicating that a minor drop in Chinese imports can pose a considerable threat. More projects coming on stream in China will reduce the country's dependence on imports.