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Jun 04, 2012, 11.38 AM IST | Source: Reuters

New gasoline capacity to crunch Asian refiners' profits

A surge in gasoline prices in Asia, buoyed by a recovery in Japanese demand to a two-year high, will end soon as refineries in China, India and Taiwan bring on new capacity and boost supplies of the automotive fuel.

New gasoline capacity to crunch Asian refiners' profits

A surge in gasoline prices in Asia, buoyed by a recovery in Japanese demand to a two-year high, will end soon as refineries in China, India and Taiwan bring on new capacity and boost supplies of the automotive fuel.

Besides the new capacity, factors set to offset the rise in fuel demand in Japan, the world's third-biggest oil consumer, include Asian plants coming back on line after maintenance, outages and a seasonal slowdown in requirements.

That will close off the window of opportunity for refineries and trading houses to cash in on a tight gasoline market beyond the second half of the year.

"Most Asian refiners have spare capacity as far as gasoline production is concerned, and want to sell gasoline because it is a high-priced product," said Japan-based independent oil economist Osamu Fujisawa.

Last year's deadly earthquake and tsunami shut about 31% of Japan's total refining capacity of 4.52 million bpd from 28 refineries, forcing the country to revert to being a net gasoline importer for the first time in about three years.

Japan will remain a net importer even in 2013, said Alex Yap of FACTS Energy, but he expected a softer market ahead.

"There was some support over spring, but refineries that were under maintenance are starting to return and that will increase supply somewhat."

"There's new capacity coming out of India and China this year. So I am not expecting a tighter market year-on-year, or even when compared to 2010."

The majority of the 2.5 million barrels per day (bpd) of refining scheduled to come online in 2012 is weighted towards the second half of the year, Barclays bank said in a report.

Asia is the largest contributor to this volume, with more than 1.7 million bpd of capacity due over the next six months, with China leading the way with 760,000 bpd.

JAPAN'S HIGHEST IMPORTS IN A DECADE

Japan is expected to import 50,000 bpd of gasoline, up 16% from a year earlier, figures from Fujisawa show, notching up its highest imports in more than a decade. It imported 43,100 bpd last year.

Japan was a net exporter of gasoline from 2008 to 2010 because domestic demand slipped as more buses and cars switched to using cleaner-burning natural gas as fuel.

Average demand for the fuel was about 995,000 bpd in the period from 2008 to 2010 against 1.05 million bpd in the period from 2003 to 2007, when the Asian nation was a net importer.

Exports are projected to fall 10.7% to 25,000 bpd this year, said Fujisawa, who expects domestic demand to rise 1.2% to 990,000 bpd this year from 2011.

Japan's imports tightened the market as a series of outages since late last year at key Asian export refineries constricted supplies at a time of rising demand from markets such as Indonesia, Asia's biggest gasoline importer, and Vietnam.

Monthly gasoline imports by Indonesian state-run Pertamina are now around 9 million barrels, up 12.5% from last year. Vietnam, the second largest gasoline importer in Asia, imports about 92,602 bpd, mostly steady from a year ago.

On the supply front, China, a key exporter, has cut shipments in the face of rising domestic demand, with monthly sales of close to 287,000 tonnes so far this year, or nearly 81,000 bpd, down nearly 15% from last year.

TIGHT MARKET

Asia's gasoline market has been grappling with reduced supplies since last year when a fire forced Taiwan's Formosa Petrochemical, the country's largest independent refiner, to shut its 540,000-bpd plant last July and Shell to idle its 500,000-bpd Singapore refinery in Bukom in September.

That has pretty much left South Korea as the only key exporter to the region to fill the gaps. And because of its proximity to Japan, most supplies have headed there.

"About 90% of Japan's imported gasoline in 2011 came from South Korea," said Fujisawa. "We expect most of the gasoline imports to Japan in 2012 will still be from South Korea."

The supply tightness and spurt in buying pushed profits from processing a barrel of crude into gasoline to a 5-1/2 month high of USD 13.41 a barrel in April. Outright prices for Asia's benchmark 92-octane gasoline touched a high this year of USD 138 a barrel in April, close to an all-time high of USD 140 in 2010.

Japanese gasoline demand accounts for more than a fifth of Asia's total consumption at 4.5 million bpd, according to Victor Shum, senior partner at oil consultancy Purvin & Gertz, which is now part of the IHS consulting firm.

"But Asia is long in gasoline supplies," he added.

TURNING AROUND

Refining profits from making gasoline have eased as participants prepare for the rush of supply. Gasoline cracks had fallen to USD 8.64 a barrel on June 1, down from USD 13.41 about two months ago. Despite the fall, the level was more than double the level of USD 3.65 around the same period last year.

A key factor dulling sentiment is capacity addition in China, India and Taiwan.

India's Mangalore Refinery and Petrochemicals Ltd. s raised the capacity of its plant in the south by 27% to 300,000 bpd, while a new refinery in Bhatinda, with a capacity of 180,000 bpd, has been fully commissioned, Hindustan Mittal Energy Ltd (HMEL) said in March.

As a result, India could import about 8% more oil, or at least 260,000 barrels per day (bpd) in the fiscal year to March 2013.

China, on the other hand, will process about 500,000 bpd more crude oil this year with a spate of new refineries starting production, according to a Reuters poll in January.

The full impact of the additions from both countries will be felt in the second half of the year.

Taiwan's CPC is expected to start up a new 80,000 bpd gasoline-making unit that will produce 180,000 tonnes of gasoline a month.

It has resumed sales of a 30,000-tonne spot cargo for July lifting after an absence of about seven months.

Japan's Cosmo Oil is gradually expected to restore runs from July, increasing fuel availability. In April, Cosmo restarted a 100,000 bpd crude distillation unit (CDU) at its Chiba plant after a shutdown of more than 13 months to repair earthquake damage.

Its remaining 120,000-bpd No. 2 CDU is now under maintenance and is expected to resume operations around the second half of July.

"If we work with the assumption that we do not see a repeat of all the outages in Japan, Taiwan and Singapore as seen last year, the market is not going to be anywhere near as tight," said Yap of FACTS Energy.

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