Trade Pact to Boost Korean Base Oil Exports to China

A looming free-trade agreement could boost South Korean base oil exports to China, according to industry analysts. South Korea is already one of Chinas largest sources of base oil imports, and the new pact could help South Korea move past or solidify its ranking ahead of Singapore.

After 30 months of negotiation, presidents Xi Jinping of China and Park Geun-hye of South Korea reached a conceptual during a conversation at the Asia Pacific Economic Cooperation summit in Beijing Nov. 9. Some details have yet to be fleshed out, but officials say the pact will eliminate or sharply reduce tariffs on 90 percent of trade between the two countries, including oil products.

China is one of the worlds two largest lubricant markets - along with the United States - and must import large volumes of base oil to make up for a significant domestic supply gap. Singapore has long been the regions biggest hub of base oil exports and was Chinas largest supplier.

South Korean exports to China increased in recent years, partly because of capacity increases by South Korean refiners. The latest, a joint venture between Hyundai Oilbank and Shell, recently opened a plant in Daesan, South Korea, with capacity to produce 400,000 metric tons per year of API Group II base stocks. The shareholders said that output from the plant would mostly be used internally by Shell and exported to markets such as China.

Currently, China charges a 6 percent tariff on base oil imports from South Korea. Industry insiders say that eliminating or significantly lowering that tax would increase the base oil flow between the two countries.

So far it is not known when the tariff will be entirely lifted - whether it will be done gradually or in one step, I.C. Kim, a top official with S-Oils base oil business, told Lube Report Asia. Once the tariff is lifted, I expect Korean base oils would get more competitive, but I am not sure whether the savings will be passed on to our export price. That would depend on the specific market environment when the tariff is lifted.

Officials with the two governments say they expect the trade pact to be finalized and adopted by the middle of next year. Oil products are expected to be some of the goods that are first affected.