Rising diesel demand in South Korea cuts exports, could enhance margins

By Jessica Jaganathan and Rebecca Jang

SINGAPORE/SEOUL, Feb 18 (Reuters) -- Rising demand for diesel in South Korea is slowing the pace of exports from one of Asia's top shippers of the fuel, offering a rare bright spot in a region where surplus supply has driven down refining margins.

Growing sales of diesel cars and increased use by the freight sector have stoked appetite for the fuel in the country, while subsidies to encourage diesel taxis may provide a further boost this year.

That local demand crimped diesel export growth to 1% in 2015 from 7% in 2014, and could turn it negative this year. Analysts estimate the country's refiners will likely ship 2% to 3% less diesel in 2016.

The export slowdown could buoy Asian margins for refining diesel, which fell to six-year lows in late January on increased exports from China and weak demand elsewhere in the continent where the fuel is often used in construction and mining sectors, traders said.

"Lower retail prices are undoubtedly supporting consumption (and) gasoil has been backing out LPG in the auto sector amidst the (expected) introduction of diesel taxis," said Sri Paravaikkarasu, a Singapore-based senior consultant with energy analysts FGE.

South Korea's consumption of diesel, also known as gasoil, climbed around 8% in 2015 from the previous year to about 156.4 million bbl-- the largest annual growth in at least five years, according to data from Korea National Oil Corp.

Demand for the transport fuel is expected to strengthen another 1.5% to 4% this year, said analysts from FGE and BMI Research.

Diesel technology has been promoted internationally to address climate change because, though high in nitrogen oxide emissions, it is low in carbon dioxide.

The South Korean government last September started offering incentives for taxi firms to launch diesel vehicles, looking to provide more fuel options for taxi drivers. Although no diesel taxis have been registered so far due to stringent specifications on the quality of diesel that must be used.

The number of diesel-registered cars jumped by 9% to about 8.6 million in 2015, according to government data. There were nearly 10 million gasoline cars in the country.

The recent scandal over Volkswagen cheating US pollution tests on diesel vehicles will do little to dent overall demand for cars powered by the fuel, said BMI Research's Asia oil analyst Peter Lee.

"Any loss in demand for Volkswagen cars is expected to be offset by the growing number of diesel car options available in the market," he said.

Diesel use in South Korea's freight sector is also expected to rise, Lee added. Diesel accounted for 51% of total fuel consumed by the freight sector in the first half of 2015, with road freight volumes expected to climb further over the next five years, he said.