The Korea Herald


Refiners consider following SK price cuts

By 고영아

Published : April 4, 2011 - 18:57

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GS Caltex, S-Oil and Hyundai Oilbank may follow largest refinery’s decision to lower gasoline and diesel costs

Leading oil refiner SK Innovation’s decision to lower retail fuel prices has prompted its smaller rivals to consider following suit.

SK Innovation announced Sunday that it will reduce the prices of gasoline and diesel sold at its stations nationwide stations by 100 won ($0.09) per liter for three months starting Thursday.

GS Caltex Corp., S-Oil Corp. and Hyundai Oilbank Co. said on Monday they are considering taking similar measures.

“We will make our official decision shortly. SK’s decision has been somewhat abrupt as it was announced on a Sunday,” said an industry official who asked not to be named.

Price reduction will cause short-term losses for the firms in the second quarter with its impact both on their balance sheets and on overall oil prices, analysts said.

Whether the government will decide to cut taxes on oil products, which is said to account for half of fuel prices, is thus drawing attention as it is considered the only long-term solution to curb the surging oil prices in the country.

The three refiners’ price cuts seem unavoidable as a considerable price gap in the industry is not easily compensated through brand power and consumer loyalty, KB Investment & Securities Co. said.

“The decision by SK Innovation may lead other refiners to join the price cuts and this may adversely affect their second-quarter profits,” said Lee In-jae, an analyst at KB Investment & Securities Co.

The planned price cuts would cost SK Innovation an estimated 245 billion won, GS Caltex Co 195 billion won and S-Oil Corp. 84 billion won, according to the securities company. The amounts account for 8, 6 and 3 percent of those firms’ prospective earnings for this year.

The government and oil refiners have been at loggerheads over how to stabilize fuel prices as the nation fights an uphill battle to curb inflation resulting from soaring international commodities prices.

Oil companies, along with mobile carriers, have been the key target of the government’s campaign against inflation since early January.

Officials have been calling on them to cut margins while regulators have been conducting sweeping probes into possible price collusion. Refiners have cut the prices of lamp oil in February in response to the pressure.

The Fair Trade Commission and related ministries launched a probe, often called the “oil price task force,” into alleged price-fixing and other irregularities involving four local refiners in January.

Despite claims by oil firms that the real culprit is fuel taxes, which account for nearly half of local oil prices, the government has been remaining reluctant to carry out a tax cut.

Rather, the Ministry of Strategy & Finance has been trying to bring down fuel prices by the results for the oil price task force, which is to be revealed by the Ministry of Knowledge Economy on Wednesday.

The government had lowered the petroleum tax by 82 won per liter during the 2008 financial crisis. The tax cut was only temporary and is not in place now. It currently stands at 529 won per liter.

The country is expected to collect more than 12 trillion won from such taxes in 2011, according to the National Assembly Budget Office.

Nevertheless, analysts projected that Seoul will eventually have to reduce its fuel taxes should the oil prices continue to stay at the current level.

“We assess that it would be too hard on private firms to continue keeping their prices low despite losses in a free, competitive market,” Kim Yang-taek, an analyst at Taurus Investment & Securities said.

“The government will have to cut taxes or import tariff on oil products should fuel prices continue to stand at current high level through the third quarter.”

Meanwhile, SK Innovation saw its steepest drop in more than 10 months in Seoul trading on Monday. The refiner’s rivals also fell on concerns they may follow.

SK Innovation plunged 10.33 percent to 191,000 won on the Korea Exchange, heading for the biggest drop since May 17. The benchmark KOSPI ended at 2,115.87, down 5.14 percent points from Friday.

GS Holdings Corp., parent of South Korea’s second-largest refiner GS Caltex, lost 8.21 percent to 87,200 won. S-Oil, the third-biggest, lost 5.92 percent to 143,000 won.

Korea’s consumer prices rose to a 29-month high last month and were far above Bank of Korea’s target, stoking expectation that the nation’s central bank may raise its key rate soon.

The consumer price index rose 4.7 percent in March from a year earlier, the fastest since October 2008. The figure far exceeded the upper end of the central bank’s target band of 2 to 4 percent, and was higher than February’s 4.5 percent.

The average prices of gasoline and diesel in the country stood at 1971.07 won and 1800.77 won, respectively, on Monday, according to Korea National Oil Corp.

By Koh Young-aah (