South Korea removes import tariffs on naphtha, crude oil for petrochemicals feedstock

South Korea will abolish import tariffs on naphtha and crude oil to be used for naphtha production, the country's finance ministry said July 6, paving the way for local refiners and petrochemicals makers to procure feedstock at a lower cost and support downstream margins.

Seoul will cut the current 0.5% import tax on naphtha and crude oil for naphtha production to zero, as part of the government's ongoing efforts to tame high inflation, lift consumer demand and boost the petrochemicals sector's competitiveness, the finance ministry said in a statement.

"Since the outbreak of the Ukraine-Russian conflict, it has become difficult [for South Korean petrochemical makers] to procure cheap Russian naphtha, which has led to much higher feedstock procurement costs, while growing petrochemicals production capacity in China, India and the Middle East continues to threaten local downstream firms," said the ministry.

South Korea is Asia's biggest naphtha importer and the country on average imported around 50 million b/year from Russia prior to the war. This tumbled to 16 million barrels in 2022, down 72% from 57.6 million barrels in 2021, Korea Petrochemical Association and Korea National Oil Corp. data showed.

South Korean petrochemicals companies have not purchased any naphtha cargo from Russia to date in 2023.

The finance ministry also highlighted that the removal of the tariff would play a significant part in bringing consumer prices down as naphtha is the key feedstock for ethylene, which is the raw material for plastics, synthetic fiber and rubber.

"Overall, the zero import tax would significantly reduce the petrochemical industry's feedstock cost burden, while stabilizing various household goods and consumer product prices," the ministry said.

Naphtha, condensate economics

South Korea's naphtha import cost economics will improve thanks to the tax removal, but Asia's tepid downstream margins would limit any upside in demand for the petrochemicals feedstock, industry and trade sources told S&P Global Commodity Insights.

"I don't think [petrochemicals makers] would buy more [naphtha because of the reduced tax], but we may have more demand than we bought," said a source at a South Korean naphtha end-user.

In the second quarter, South Korea was estimated to have imported around 49.5 million barrels of naphtha, down 7.2% from 53.34 million barrels received a year earlier, according to data from state-run KNOC.

"I think that [the tax relief] boosts a little because cracker margin is not so good," said a light distillate trader based in Singapore with close knowledge of daily petrochemicals and naphtha flows in and out of South Korea.

The Platts-assessed spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical, closely watched by olefin producers, stood at $251.25/mt at the July 6 Asian close, widening $19.50/mt on the day due to lower naphtha while ethylene remained stable, S&P Global data showed.

This was below the typical $350/mt breakeven spread for non-integrated producers, but had just moved above the $250/mt typical breakeven for integrated producers, sources said.

End-users faced mostly unhealthy margins since late-2021 as the ethylene-naphtha spread averaged $207.95/mt over July 2022 to June 2023.

In the face of unfavorable market conditions, LG Chem, which runs naphtha-fed steam crackers, has shut its No. 2 unit with a capacity of 800,000 mt/year ethylene and 480,000 mt/year propylene since an April maintenance.

Business newspaper The Korea Economic Daily reported July 2 that LG Chem is looking to sell off the No. 2 NCC and has made contacts with potential bidders in South Korea and overseas.

LG Chem refused to comment on the report when contacted by S&P Global.

"LG Chem is weighing various options to strengthen competitiveness and corporate values, but nothing has been decided yet," a company official said.

Meanwhile, refiners and petrochemicals makers equipped with condensate splitters said the import cost for bringing in Qatar's deodorized field condensate, low sulfur condensate, as well as Australia's North West Shelf and Ichthys condensate could fall by $3-$4/b.

Condensate, or ultra-light crude, is the most ideal feedstock to crack and produce naphtha.

"But we are not sure if the zero tax would still be applicable if part of the condensate we purchase are used for gasoline blending, not entirely for naphtha and petrochemical purposes," said a feedstock manager at a major South Korean refiner that typically buys Qatar's DFC and Australia's NWS condensates on a regular basis.