China's halt on exports of gasoline, diesel and jet fuel starting in October has raised the prospect of windfall gains for South Korean refiners. With Russian and Middle Eastern supply disruptions already tightening the global market for refined products, the loss of Chinese volumes could push international product prices and refining margins higher still.
Yet analysts say Korean refiners cannot fully translate those price gains into earnings, because they too are constrained by government limits on export volumes and a domestic price ceiling on petroleum products.
S-Oil (010950) closed regular trading on the 2nd at 166,200 won, up 17,400 won, or 11.69%, from the previous session, according to the Korea Exchange. SK Innovation (096770) jumped 10.3%, while GS (078930) and HD Hyundai (267250) — holding companies for unlisted GS Caltex and HD Hyundai Oilbank, respectively — rose 4.1% and 1.8%.
Shares of Korea's four largest refiners rose in tandem after foreign news reports that Chinese refiners would suspend exports of petroleum products this month to all destinations except Hong Kong and Macau. The four companies have combined refining capacity of about 3.2 million barrels a day, an export-oriented structure in which output exceeds domestic demand. The market expects that if lower Chinese volumes deepen a global supply crunch, particularly in diesel and jet fuel, Korean refiners' refining margins and inventory valuation gains could rise further.
If crude supply remains smooth and there are no major disruptions in product supply, higher international product prices can feed through to better margins. Kim Hyung-gun, a professor at Kangwon National University, said Chinese companies had been competitors because their export destinations overlapped with those of Korean refiners, leaving Korean firms in a relatively better position now.
There are limits, however, to how much profits can grow, because Korean exports of petroleum products are capped under government supply-stabilization measures. To stabilize domestic supply, the government restricts monthly exports of regular gasoline, automotive diesel and home heating kerosene this year to no more than 100% of the volume shipped in the same month last year. Even if overseas sales conditions improve, exports of those products cannot be expanded sharply from last year's levels. Ultimately, the effect of the Chinese supply gap on Korean refiners' earnings depends less on export volumes than on how long international product prices and refining margins stay elevated.
Jet fuel offers more room for Korea to step in as an alternative supplier. It is not covered by the government's export restrictions, and the drop in Chinese supply is already lifting demand for Korean products. After China restricted petroleum product exports in March, Korea's jet fuel exports reached 1.14 million tons in May, the highest in nine months since August last year. The increase is attributed to overseas buyers securing Korean jet fuel in response to reduced Chinese supply. If Chinese jet fuel volumes disappear from the market again, Korean refiners could emerge as a substitute source of supply.
In the domestic market, however, refiners cannot simply pass higher international prices on to consumers, because the government has extended a price ceiling that holds down refiners' supply prices. If the situation drags on, the amount the government must pay refiners to compensate for losses under the ceiling will grow, adding to the fiscal burden.
Meanwhile, higher crude prices also put upward pressure on naphtha, the main feedstock for the petrochemical industry. That has raised concerns about rising production costs for basic petrochemical products such as ethylene. An industry official said that unlike refiners, petrochemical makers face oversupply that makes it difficult to pass cost increases on to product prices, which could erode profitability.
