Government Sanctions Against Iran Would Hurt Korean Refiners

Government Sanctions Against Iran Would Hurt Korean Refiners

On 17 January, the Korean government said that it would support the US government’s sanctions against Iran, and planned to discuss imposing its own sanctions, including reducing or blocking crude oil imports.
Cutting crude oil imports from Iran would be credit negative for Korea’s refiners, which would face higher supply risks and pressure on margins. As shown in the exhibit, Iran is Korea’s fourth-largest supplier of crude oil, providing around 10% of its total, and its oil is $3-$6 less per barrel than oil from other suppliers (e.g., Kuwait, Saudi Arabia, United Arab Emirates and others).

Koreas Crude Oil Suppliers

An oil embargo would immediately lead some of Korea’s refiners to incur higher costs as they replace cheaper Iranian oil with more expensive non-Iranian oil and change refining facility specifications to process oil of a different quality. If they aren’t able to make up the oil shortfall with oil from alternative suppliers, capacity utilization rates will also decline.
Of Korea’s refiners, SK Innovation (Baa3 stable) imports around 9% and Hyundai Oil Bank (unrated) imports more than 15% of their respective total crude oil requirement from Iran. If the Korean government bans imports from Iran, imported oil costs could rise 0.3%-0.5% for SK Innovation and 0.4%-0.9% for Hyundai Oil Bank, which would translate into respective 3%-6% and 13%-25% of their full-year operating profits.
However, the magnitude of potential negative effects depends on the extent of the oil companies cutting imports of Iranian oil and securing alternative economical crude oil, and their ability to pass any cost increases on to their customers.

GS-Caltex (Baa2 stable) and S-Oil (Baa2 stable) don’t import crude oil from Iran, but we expect their operating performance to weaken because sanctions on Iran would put upward pressure on global crude oil prices as refiners in other countries with sanctions also seek alternative oil supplies. Higher import costs for crude oil, subsequently pushing up prices for refined products, would weigh on demand for the products in the domestic market.
We expect the refining margin to soften this year because the addition of new refining capacity is outpacing global demand growth. Without a sustained improvement in refining margins, refiners will be unable to offset upward pressure on costs.