Bangkok--28 Sep--Moody's
Moody's Investors Service maintains its negative outlook for the refining and marketing ("R&M") industry in Asia Pacific over the next 12-18 months. The negative view matches Moody's outlook for the sector elsewhere in the world.
"We see business conditions for the sector weakening over the next 12 months as the impact of new refining capacity will likely outweigh improved demand seen in recent months, particularly from China and India," says Terry Fanous, a Moody's senior vice president.
"While these signs of growth are encouraging, they follow major contraction which gathered pace from mid last year until recent months,"
Fanous says, adding "We expect continued demand growth in China and India, and this will lead a pick-up in regional demand for next year, and which would most likely outpace global trend."
"However, as we have seen in other sectors such as base metals, recent demand growth in China, which makes up about a third of Asia's overall demand, has been partly driven by restocking and strategic reserve build up," Fanous says, adding "Therefore the next few months will be crucial in assessing whether the strength of China's growing demand can be sustained."
"On the supply side and despite deferrals and cancellations of certain new growth projects, recently completed projects have added considerable refining capacity, which would be exacerbated by projects currently under development," says Renee Lam, a Moody's vice president. "As such, we are likely to see further worsening in the environment, especially in light of the high level of inventory accumulated," Lam adds.
Because of these factors, ratings within the R&M sector in Asia have become more vulnerable.
Most R&M companies in the region saw weak year-to-date results from their refining operations. Those companies that have expanded downstream into petrochemicals have managed to partially offset the squeeze in refining profits thanks to stronger petrochemicals earnings. However, new petrochemicals capacity due to be completed during 2H09, and primarily from the Middle East and China, will likely add pressure to petrochemical operations.
Finally, rising crude oil prices are heightening companies' working capital needs, further pressuring operating cash flows.
As the refining industry fundamentals remain weak, companies that are more susceptible to declining credit profiles are those with lower extent of downstream integration, or with relatively low product upgrade capability, or those that have high financial leverage and committed sizeable capital expenditures.
For further details on the sectors' issuers in the region, refer to Moody's previous regional outlook, published at www.moodys.com in March 2009, and entitled, "Snapshot: Asia-Pacific (ex Japan) Oil, Gas, and Petrochemical Sectors". For a global perspective, readers can access a report from Sep 2009, entitled "Global Refining and Marketing Capacity Outpaces Demand".
In determining corporate ratings, Moody's uses its rating methodology on the global independent refining and marketing industry, published in Oct. 2005.
Hong Kong
Renee Lam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Sydney
Terry Fanous
Senior Vice President
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100