The increase in fuel exports in Asia reduces the profits of the refining industry

SINGAPORE (Reuters) – Asia's biggest oil consumer is flooding the region with fuel, with refining output surpbading consumption, as demand growth slows, resulting in lost profits for the industry.

Since 2006, the Asia-Pacific region is the largest oil-consuming region in the world. It is dominated by the traditional industrial users of South Korea and Japan, as well as by the rise of China and India.

However, the overbuilding of refineries and the current sluggish demand growth have led to a surge in fuel exports from these demand poles.

Car sales in China, the second largest consumer of oil in the world, fell for the first time in record terms in 2006 and sales in early 2019 also remain weak, implying a slowdown in demand for fuel. ; gasoline.

China National Petroleum Corp. announced in January that demand will fall by 1.1% in 2019. This would be the first annual decline in Chinese demand for a major fuel since the start of its industrial rise in 1990.

The rise in fuel exports, combined with a 25% increase in crude oil prices so far this year, has collapsed on refinery margins in Singapore, the Asian benchmark, rising from over $ 11 a barrel in mid-2017 to just over $ 2.

Combine lower margins with labor costs and taxes, and many Asian refineries are now struggling to make money.

Reduced margins have undermined the stocks of most major Asian oil companies, such as Japanese refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea's largest petroleum processor SK Innovation, the largest Asian refiner, China Petroleum & Chemical Corp. and Indian Oil Corp. businesses have fallen about 40% over the past year.

Jeff Brown, chairman of the energy consulting firm FGE, said the surge in exports and the resulting oversupply of supply was a "big deal" for the sector.

"Pressure on refinery margins is a case of death per thousand cuts … Improvements to refineries across the region are facing slowing growth in demand," he said.

GRAPHIC: Refining Industry in Asia – tmsnrt.rs/2EkfMBa

GRAPHIC: Exports of refined petroleum products from Asia – tmsnrt.rs/2EiUTq1

WAVE OF SUPPLY

The drop in profits follows an increase in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv's navigation data shows that fuel exports from these countries have tripled since 2014, reaching a record of about 15 million tonnes in January.

The largest increase in exports came from China, where refiners sell record amounts of excess fuel in Asia.

"There is a risk of turbulence in the Asian markets if the export capacity (of China's fuel) remains at the current level or increases further," said Noriaki Sakai, general manager of Idemitsu Kosan at from a press conference last week.

But Japan's and South Korea's fuel exports have also increased, with domestic demand decreasing as the industry matures and the population shrinks. Japan's oil demand for 2019 will fall by 0.1% from 2018, while that of South Korea will remain stable, according to Energy Aspects forecasts.

In Japan, oil imports have been declining steadily for years, but its refiners produce more fuel than its industry can absorb.

The situation is similar in South Korea, the fifth largest refiner in the world in terms of capacity, according to data from BP Plc.

Cho Sang-bum, an official with the Korea Petroleum Association, who represents South Korean refiners, said the surge in exports "triggered an overabundance of gasoline."

This overabundance resulted in negative gasoline margins in January.

Middle East fuel exports, which, according to BP data, added more than 1 million barrels per day (bpd) of refinery capacity from 2013 to 2017, have doubled since 2014 to around 55 million tonnes , according to estimates. Refinitiv estimates.

Even more fuel is coming. Malaysian state Petroliam Nasional Bhd starts its RAPID refinery, capable of handling 300,000 b / d of crude, while China and India have also launched several projects this year and next.

"Asia should lead the global refining industry, both in terms of capacity and capital expenditures, between 2019 and 2023," said the company's GlobalData data badysis in a report released this week.

"Between 2019 and 2023, 45 new refineries are expected to become operational in Asia," the report said, adding that it would "increase exports of petroleum products" from Asia.

Despite the many refineries coming onto the market, the outlook is not entirely bleak.

Brown said the new International Maritime Organization (IMO) regulations would force shippers to reduce sulfur in their fuel from next year, which would lead to increased demand for products like diesel and low sulfur fuel oil and improve refinery profits.

"The main relief will come from the move to the IMO2020 mode in the fourth quarter," said Brown. "Margins will recover, restoring order in the market."

GRAPHIC: Exports of refined products from the Middle East to Asia – tmsnrt.rs/2VbZArc