Asia’s refining profits slump as Mideast exports surge

Singapore refinery margins have collapsed following a rise in fuel exports and a jump in oil prices. Tighter margins and rising labor costs mean many Asian refineries struggle to make a profit. (Shutterstock)
Updated 23 February 2019
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.


Stocks tumble as bond markets sound US recession warning

Updated 14 sec ago
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Stocks tumble as bond markets sound US recession warning

  • Concerns about the health of the world economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018
SYDNEY: Investors ditched shares on Monday and fled to the safety of bonds while the Japanese yen hovered near a six-week high as risk assets fell out of favor on growing fears about a US recession, sending global yields plunging.
US stocks futures fell, with E-minis for the S&P 500 skidding 0.5 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4 percent to a one-week trough in a broad sell-off in equities in the region.
Japan’s Nikkei tumbled 3.2 percent to the lowest in two weeks, South Korea’s Kospi index declined 1.6 percent while Australian shares faltered 1.3 percent.
Chinese shares also declined with the blue-chip CSI 300 index down 0.8 percent.
On Friday, all three major US stock indexes clocked their biggest one-day percentage losses since Jan.3. The Dow slid 1.8 percent, the S&P 500 was off 1.9 percent and the Nasdaq dropped 2.5 percent.
Concerns about the health of the world economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018.
US 10-year treasury yields were last 1.9 basis points below three-month rates after yields inverted for the first time since 2007 on Friday. Historically, an inverted yield curve — where long-term rates fall below short-term — has signalled an upcoming recession.
“The bond market price action is an enormous blaring siren to anyone trying to be optimistic on stocks,” JPMorgan analysts said in a note to clients.
“Growth, and bonds/yield curves, will be the only thing stocks should be focused on going forward and it’s very hard to envision any type of rally until economic confidence stabilizes and bonds reverse.”
Compounding fears of a more widespread global downturn, manufacturing output data from Germany showed a contraction for the third straight month. And in the United States, preliminary measures of manufacturing and services activity for March showed both sectors grew at a slower pace than in February, according to data from IHS Markit.
National Australia Bank’s yield curve recession modelling is pointing to a 30-35 percent probability of a US recession occurring over the next 10-18 months.
“The risk of a US recession has risen and is flashing amber and this will keep markets pricing a high chance of the Fed cutting rates,” said London-based NAB strategist Tapas Strickland.
As bonds rallied on Monday, yields on 10-year Japanese government bonds slumped to minus 9 basis points, the weakest since September 2016. Australian 10-year year yields plunged to a record low of 1.754.
Some analysts, such as ING’s Rob Carnell, advised against rushing to place bets on the yield inversion.
“We suspect that drawing a recession conclusion from such data is not warranted until the 3M-10Y yield curve is inverted by a substantial amount,” Carnell said. “Just inverted as today’s markets indicate, doesn’t do it for me.”

POLITICAL HEADWINDS
Much of the concerns around global growth is stemming from Europe and China which are battling separate tariff wars with the United States.
Politics was also in focus in the United States and Britain.
A nearly two-year US investigation found no evidence of collusion between Donald Trump’s election team and Russia, in a major political victory for the US President as he prepares for his 2020 re-election battle.
Political turmoil in Britain over the country’s exit from the European Union also remains a drag on risk assets.
On Sunday, Rupert Murdoch’s Sun newspaper said in a front page editorial British Prime Minister Theresa May must announce on Monday she will stand down as soon as her Brexit deal is approved.
The British pound was a shade lower at $1.3198 after three straight days of wild gyrations. The currency slipped 0.7 percent last week.
In currency markets, the Japanese yen — a perceived safe haven — held near its highest since Feb. 11. It was last 0.1 percent higher at 109.77 per dollar.
The Australian dollar, a liquid proxy for risk play, was down for its third straight session of losses at $0.7076.
In commodities, US crude fell 61 cents to $58.43 per barrel. Brent crude futures eased 60 cents to $66.43.