SINGAPORE: South Korea's SK Energy is set to ramp up straight-run fuel oil imports from Europe, bypassing Asian trading hub Singapore as weak processing profits prompt refiners to seek feedstocks that are cheaper than crude, trade sources said.
South Korea's top refiner will handle the fuel oil imports from its office in London, the trade sources said, directly tapping into the well-supplied West and avoiding Singapore's benchmark prices, which can sometimes swing widely.
SK's move may also prompt other Asian refiners to look at Europe's surplus of straight-run fuel oil, sources said. Many European refineries cannot break down the heavy product, while Asia's modern plants have crackers and cokers that can process it into high value fuels such as gasoline and diesel.
Importing on its own cuts costs for SK Energy and gives it more control and flexibility in chartering tankers, said a source familiar with the matter.
It also cuts out trading houses in Singapore that buy the fuel oil from Europe to sell onwards to Asian customers.
"It makes sense to buy directly from Europe and avoid double-handling," said a Singapore-based Chinese trader.
SK Energy first tested importing the heavy distillate directly from London in June, trade sources said. It has also transferred a fuel oil trader to London from Singapore as it makes more regular purchases, two South Korean traders said.
The company's spokesman could not be reached for comment.
SK Energy recently chartered two Suezmaxes - Pecos and Genmar Spyridon - to load straight-run fuel oil for shipment to Ulsan, according to Reuters shipping data and trade sources.
Pecos loaded 130,000 tonnes of fuel oil from Skagen, Denmark, on Sept. 12 and is expected to arrive in Ulsan early November. The second vessel loaded a similar-sized parcel on Oct. 8 from Southwold, Great Britain, for arrival in Ulsan around mid-November.
CHEAPER FEEDSTOCK
With China becoming a bigger exporter of fuels such as gasoil, Asian refiners have had to find ways to stem a slide in margins. Poor profits have already spurred Asian refiners to trim runs, and South Korean plants may extend their cuts to this month if processing yields remain weak.
Another way to tackle the poor margins is by switching to a feedstock that is cheaper than crude, said a Singapore-based Western trader.
The margin for producing 180-centistoke fuel oil from a barrel of Dubai crude hit a five-year low at minus $14.97 a barrel at end-August and averaged minus $11.32 over the third quarter this year.
In comparison, the profit from processing a barrel of Dubai crude into 500-parts-per-million gasoil averaged $17.64 a barrel in the third quarter, Reuters data showed.
That wide spread between the fuel oil and gasoil cracking margins gives a huge advantage to using fuel oil as a feedstock. And the lower the fuel oil crack goes, the more profitable it is to break it down into diesel and gasoline.
SK Energy operates two refineries with a combined capacity of 1.115 million barrels-per-day in Ulsan and Incheon.
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