Export Korea Pushed to the Brink by Oil-Producing Countries' 'Chicken Game'

Major Impact Expected on Oil Refining, Steel, and Construction
Production Cuts Inevitable as Global Demand Declines
Preparing for Worst-Case Scenarios Including Order Cancellations

[Asia Economy Reporter Hwang Yoon-joo] Following the global spread of the novel coronavirus infection (COVID-19), international oil prices have plummeted to the low $30s per barrel due to conflicts among oil-producing countries, pushing front-line industries such as refining, petrochemicals, steel, shipbuilding, and construction?which hold significant weight in exports?to the brink. Experts point out that if oil prices fall further amid the sharp decline in global demand and rising inventories caused by the COVID-19 crisis, the survival of South Korea's front-line industries could be threatened. Voices expressing concern over a 'contract cliff' are already growing in key export sectors like shipbuilding and construction.

◆ Refining and Chemical Industries Face Inevitable Production Cuts Due to Demand Slowdown = According to the Korea National Oil Corporation on the 10th, the international gasoline price stood at $42.68 per barrel, down 27.73% compared to the same period last year. Diesel and jet fuel (kerosene) were priced at $46.14 and $43.52 respectively, decreasing by 34.77% and 35.51%. These are the lowest prices recorded since the compilation of international petroleum product prices began this year.

The refining margin, which gauges refiners' profitability, has also significantly decreased. The refining margin, which was $0.4 in January this year, rose to $3.0 last month but fell back to $1.4 in the first week of this month. This level is below the breakeven point for refining margins, which is around $4 to $5.

While concerns about oversupply in the crude oil market persist, demand for petroleum products has already sharply declined due to economic slowdown and COVID-19. In January this year, domestic consumption of petroleum products decreased for both gasoline (-16.02%) and diesel (-23.52%). These figures represent declines of 5.3% and 12.0% respectively compared to the average consumption over the past five years (2015?2019).

Given this situation, SK Energy has reduced the operating rate of its refining plants by up to 15% since the beginning of this month. Hyundai Oilbank has also lowered its operating rate to around 90%, down from last year, while GS Caltex is reported to have advanced its scheduled maintenance. Consequently, the refining industry's performance in the first quarter is expected to deteriorate sharply. SK Innovation's consensus forecast for the first quarter of this year is 10.6 billion KRW, a 96.7% decrease compared to the same period last year. Similarly, S-Oil's operating profit consensus is expected to plummet by 90.1% to 26.7 billion KRW.

Major domestic chemical companies have also started cutting production of ethylene, a basic raw material. LG Chem has lowered the operating rate of its two naphtha crackers (NCC) by 5 percentage points to 95% from this month due to the slowdown in chemical product demand. Other companies are also considering production cuts one after another. It is anticipated that Daehan Petrochemical and Yeochun NCC will reduce their operating rates to around 80% and 90%, respectively. Hanwha Total has not changed its NCC operating rate but has cut production of styrene monomer (SM), made by mixing ethylene and benzene, by 15 percentage points since the beginning of this year. An additional 5 percentage point cut is also planned.

◆ 'Bleak' Steel, Shipbuilding, and Construction Industries... Endless Recession = The steel industry's situation is also grim. As orders from front-line industries such as shipbuilding and automobiles decline, demand for heavy plates and steel pipes is also rapidly decreasing. To overcome the current situation, production cuts are necessary, but unless global steel industries in countries like Japan and China also cut production simultaneously, this will be ineffective, resulting in continuous operation of blast furnaces 365 days a year and accumulating inventory. Moreover, the oil price crash has eliminated expectations for increased demand for well pipes used in oil drilling and heavy plates used in shipbuilding. The decline in construction investment due to the economic downturn in the Middle East is also a factor reducing demand for rebar.

The shipbuilding industry is also in a serious state. According to Clarkson Research, a ship and shipping market analysis firm, cumulative ship orders for January and February over the past three years have sharply declined from 7.72 million CGT in 2018 to 4.89 million CGT in 2019, and further down to 1.17 million CGT in 2020. In particular, there are forecasts that offshore plant orders will sharply decrease due to the rapid drop in oil prices.

The construction industry is also concerned about cancellations or delays of orders for Middle East plants. The construction sector plans to prepare for the worst-case scenario in response to the prolonged situation. Hyundai Engineering & Construction expects no immediate large-scale order cancellations but plans to respond by forecasting order and contract plans in Saudi Arabia, the United Arab Emirates (UAE), and other markets according to market conditions.

Daewoo Engineering & Construction has projected that if the COVID-19 crisis prolongs, orders could drastically decrease. A senior official from a construction company said, "The benchmark for Middle East plant orders is roughly around $60 per barrel," adding, "If low oil prices persist for a long time, there are concerns not only about new orders but also about delays in the handover of completed projects."

This content was produced with the assistance of AI translation services.