South Korean refining margins projected to remain strong through March


South Korean refining margins have started the year on a strong note and are likely to remain robust through March, supported by seasonal plant closures for maintenance.

Refining companies are likely to keep run rates high, until maintenance season in March, to take advantage of the better margins. This, in turn, will support export volumes.

Oil products were South Korea's largest export item last year, with shipments totalling $56.2 billion, preliminary government data showed. The country is the world's sixth-largest refiner.

South Korean refining margins are now supported by strong demand for middle distillates, especially kerosene, due to winter demand in North Asia.

South Korea has already tied up more than two million barrels of kerosene exports to Japan for February.

However, Japanese buyers are careful about paying high premiums to import kerosene from South Korea because if the weather gets warmer, cargoes for delivery in the second half of February will go to waste, a Japanese trader said.

"We believe refining margins bottomed in December 2012 and will improve through the summer," analyst Yeon-ju Park of Daewoo Securities said in a note.

Asian refining margins are forecast to rise after refinery units go into seasonal maintenance in the spring and due to stronger fuel demand as economies make a comeback. Analysts also expect global refining capacity to remain constrained until new capacity begins coming onstream in the second half of the year, helping to underpin margins.

"Growth in electricity consumption in China, which normally moves in tandem with growth in diesel demand, soared in December 2012," Mr. Park said.

South Korea's refiners -- SK Energy, Hyundai Oilbank Corp., GS Caltex and S-Oil Corp. -- are expected to maintain full utilization levels until maintenance kicks in.

SK Energy, South Korea's largest refiner by volume, is running its main Ulsan refinery at around 900,000 bpd for February, but March utilization will be lower due to maintenance, a Seoul-based trader said.

The four South Korean refiners will process around 2.7 million bpd of crude in February, according to a Dow Jones Newswires survey. They processed around 2.65 million bpd of oil in December, roughly flat compared with 2.60 million bbl a year earlier, data from Korea National Oil Corp. showed.

Korea Investment & Securities said there were big swings in last year's refining margins due to crude oil price volatility, and margins should stabilize this year as operating costs are unlikely to be as volatile.

"Also, the manufacture of high-margin products using less profitable products, such as heavy oil and naphtha, should also enhance earnings quality," Korea Investment & Securities said, adding that refinery upgrades and the expanding petrochemical business will add to profits.

Dow Jones Newswires

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