South Korean downstream industry wary of currency volatility amid Yoon's arrest resistance

South Korean refiners and petrochemical producers remain cautious of the fragile local currency, which is dampening refining margins as the prolonged domestic political conflict continues to strain Seoul's financial markets.

The volatile dollar-won exchange rate threatens overall refining margins, as the local currency's weakness undermines the purchasing power of refiners and petrochemical makers in the global markets for feedstock crude, naphtha and LPG, industry participants said over Jan. 7-9.

Additionally, the decline of the South Korean won is set to increase interest payments on short-term bank loans and US dollar-denominated corporate bonds issued by refiners and petrochemical producers, according to feedstock managers at two major South Korean refiners and one petrochemical company, as well as an analyst at the state-run Industrial Bank of Korea.

"Typically, many refiners set aside sizable funds to hedge against oil price swings ... Hedging against forex market volatility is also crucial, but these are areas where we would much prefer to worry less," said a feedstock and logistics manager at a major South Korean refiner.

Foreign fund repatriation accelerated after President Yoon Suk-yeol declared martial law Dec. 3. The South Korean won remains under pressure despite the impeachment bill passed Dec. 14 and the arrest warrant issued Dec. 31, as Yoon and the ruling party's resistance to arrest and investigation over the insurrection have undermined investor confidence.

Both foreign and domestic investor confidence remain fragile in the Seoul financial market, as Yoon defiantly refused questioning three times over the insurrection -- described by local media and judicial officials as a "coup d'etat attempt." Yoon had authorized the military to fire on the National Assembly during his failed martial law attempt, according to a prosecutor's report.

The special investigation team, comprising the Corruption Investigation Office for High-ranking Officials (CIO) and the police, attempted to detain Yoon on Jan. 4, but the effort failed after presidential guards denied investigators access.

According to Bank of Korea data, the dollar-won exchange rate was quoted at Won 1,476.78 on Jan. 1, up 5.2% from Won 1,403.96 before the Dec. 3 martial law, marking the highest level since Won 1,481.20 on March 13, 2009. The currency pair was last quoted at Won 1,456.4 at 11:32 am Seoul time.

The latest data from the state-run Korea National Oil Corp. showed that South Korea imported 950 million barrels of crude over January-November 2024, with refiners paying an average of $83.30/b during the period. KNOC's import cost data includes freight, insurance, taxes and other administrative and port charges.

Crack spreads over currency

Refiners wish to focus entirely on oil market fundamentals and crack spreads, rather than on domestic politics and financial market volatilities, according to middle distillate sales and marketing sources at three South Korean refiners, including S-Oil.

Platts, part of S&P Global Commodity Insights, assessed the second-month Singapore gasoil swap crack against Dubai crude swaps at an average of $16.04/b for 2025, as of Jan. 8.

"The Asian refining industry is widely hoping to see industrial and consumer fuel demand fundamentals improve in 2025, and middle distillate cracks have gotten off to a positive start this year ... Currency volatility and political issues shouldn't really be hurting private-sector business margins, and I hope the [domestic political] matters will be resolved soon," said a middle distillate sales executive at a South Korean refiner based in Ulsan.

Yoon's attempt to threaten South Korean citizens and the country's legislative system at gunpoint by deploying troops with weapons at the National Assembly on Dec. 3 was a serious breach of the constitution. Without his prompt arrest and prosecution, South Korea's democracy and financial market credibility would be under scrutiny, according to lawmakers from the Democratic Party, Rebuilding Korea Party and New Reform Party.

Lawmakers from the ruling People Power Party, however, indicated that Yoon's martial law decree was justified, arguing that opposition members of parliament had been abusing their majority seat power at the National Assembly.

The Constitutional Court has up to 180 days to determine whether to formally terminate Yoon's presidency, but political analysts in Seoul widely expect the decision to be made in February or March.