South Korea refiners look to gain on strong 2022 products cracks, but cautious on 2023 margins

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South Korean refiners are expected to report stellar 2022 earnings when they release financial results in February, helped by strong oil products cracks and export margins last year. However, the global economic slowdown and a possible increase in Chinese supply would likely compel the industry to err on the side of caution in 2023.

Limited Chinese exports and trade hurdles for Russian barrels worked heavily in favor of the South Korean refining industry, which has the biggest exporting capacity in Asia. This was despite feedstock costs surging for Asia refiners, with the global physical crude benchmark Platts Dated Brent averaging above $107/b during the second and third quarters of 2022, refinery officials, product marketers and plant operation managers based in Seoul, Ulsan and Incheon said.

"Asia-wide refiners broadly should be reporting strong 2022 calendar year earnings. South Korean refiners probably took the maximum advantage of robust margins as they reaped full benefits of both domestic and international sales," according to a middle distillate marketing manager at a South Korean refiner.

Major South Korean refiners are due to report their full-year 2022 earnings progressively from mid-February.

Hyundai Oilbank had posted a third-quarter 2022 operating profit of Won 2.8 trillion, or around $2.2 billion, more than double from a year earlier. It has handed out 1,000% of base salaries to staff as bonuses, according to local media reports and a middle distillate trading source at the company, who declined to be identified.

SK Innovation's refining arm SK Energy reported Q3 operating profit of around $2.66 billion, up more than 400% from a year earlier, while S-Oil Corp. saw Q3 operating profit jump 104% year on year to $2.87 billion and GS Caltex's Q3 profit surged 186% from a year earlier to $3.47 billion.

"The country's smallest refiner [Hyundai Oilbank] has set a very positive and high standard for the rest," said a feedstock management source at another South Korean refiner, who declined to be identified due to the sensitive nature of corporate earnings.

Cautious 2023 margin outlook

Refining margins still appear attractive although middle distillate crack spreads have come off from June 2022 peak levels, product marketing managers at two major South Korean refiners said.

Platts assessed the second-month gasoil crack spread against Dubai crude swap at $29.34/b Jan. 10, down from the record $67.41/b reached June 24, 2022, but well above the five-year average of $16.60/b, S&P Global data showed.

China easing COVID-19 movement controls and restrictions on Russian oil products trades should provide adequate support for crack spreads, middle distillate marketers based in Seoul and Ulsan said.

However, South Korean refiners would maintain a cautious stance as rising interest rates could put pressure on consumer and business demand. A slowdown in Asia's property sector, as well as potential increases in China's oil products exports this year, pose a big risk to refining and export margins, the middle distillate marketers said.

Industry sources said they expect more competition in the regional export market in the early part of 2023 as Beijing issued 18.99 million mt export quotas for clean oil products in its first batch for 2023.

The quotas for China exporting gasoline, gasoil and jet fuel are 46% higher from 13 million mt issued in the same batch for 2022.

In addition, the region's commercial flight traffic and jet fuel demand remains far behind prepandemic levels. The global economic slowdown is a real concern since no matter how good the cracks are, margins must be backed up by solid consumer and industrial demand, according to the product marketers and a senior official at a third South Korean refiner.

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