Bangkok--10 May--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.
"The R&M sector continues to be plagued by surplus capacity, aggravated by a slow recovery in refined product demand, and high inventories," says Renee Lam, a Moody's Vice President and Senior Analyst.
"We expect regional refining margins in Asia to remain pressured over the next 12 months due to the industry's capacity overhang," says Lam, adding, "It will take a long time to restore the supply-demand equilibrium that was disrupted by the sizeable capacity expansion fueled by the record high refining margins seen in the last up-cycle, and the severe global demand shrinkage in this current down-cycle."
Despite cancellations and delays in certain refining capacity expansions, numerous projects now in development will add capacity to the global refining system. Including capacity that came on stream last year, Asia will experience new supply of over 3.4 mbpd by 2011, compared to an expected demand growth of 1.3-1.4 mbpd over that period.
Growth in China and India will be the key to the sector's fortunes over the next 12-18 months. Strong demand from these two countries has countered the structural decline of Japanese oil demand due to very slow economic growth and increased energy efficiency. The result is a more positive sector environment in Asia than the rest of the world. Capacity utilization rates in Asia have held up relatively better at over 85%, compared to about 80% in the U.S.
"We believe that continued demand growth in China and India will outpace the global trend in the medium term, and this will be positive for players in the region serving the intra-Asia markets. But any unexpected major retreat in demand from these two countries will significantly impact the R&M sector in the region," says Lam, adding, "Any weakening of the global recovery, which has shown green shoots, will also inevitably dampen the sector in the region."
On a more positive note, the market saw widening light/heavy differential during 1Q2010. However, there could be limits to this improvement in the near term, with both the IEA and OPEC projecting faster growth in light sweet crude production over the next several years. Likewise, sustainability of strengthened refining margins seen in 1Q2010 is uncertain, as these could have been driven by seasonal factors such as unexpected cold weather.
As the refining industry fundamentals remain weak, larger, better integrated companies, with higher complexity and which command national strategic importance and serve regional markets, are more likely to preserve their credit strength.
Maintaining a strong liquidity profile and flexibility in outlays for capex and dividends will continue to be important for companies if they are to preserve their credit profile under the current environment.
Within Moody's-rated portfolio of R&M companies in the region, many have downstream petrochemical operations, including SK Energy Ltd (Baa3/Negative), GS Caltex Corporation (Baa2/Stable), Reliance Industries Ltd (Baa2/Stable), Indian Oil Corporation Ltd (Baa3/Stable), Thai Oil Public Company Ltd (Baa1/Stable), and PTT Aromatics and Refining Public Company Ltd (Baa2/Negative). Strong petrochemical margins have helped offset weak refining margins during 2009. Nonetheless, this may not be repeated in 2010, as petrochemical margins would be squeezed by new capacity completion, especially in the Middle East and China.
Several R&M issuers, including SK Energy and GS Caltex, have deferred further capacity upgrading plans to help them to preserve cash flow.
Others, such as S-OIL Ltd (Baa2/Stable), IRPC Public Company Ltd (Baa3/Negative), and Indian Oil Corp, are investing in CDU expansions or new production facilities. Continued capex in a period of weak refining cash flow generation will pressurize their free cash flow.
Asian R&M companies' liquidity profiles have generally improved; many have added more committed banking facilities to serve as liquidity back-up, though the degree of buffer is generally lower than their counterparts in the US. Rising crude oil prices are heightening working capital needs and pressuring operating cash flows.
Regulatory support or changes are affecting the credit profiles of many R&M issuers in Asia. Systemic support from the Korean and Japanese governments is likely to continue to support the ratings of SK Energy, GS Caltex, S-OIL, Nippon Oil.
In India, the government's control over retail pricing of certain oil products continues to place substantial subsidy burdens on Indian Oil Corp. The Indian government is considering establishing a system of pricing petroleum products to reflect international crude prices; regulatory changes in this direction would be positive for Indian R&M companies.
For further details on the sector's 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 Jan 2010, entitled "Oil and natural gas outlook: Supply and demand pressures persist".
In determining corporate ratings, Moody's uses its rating methodology on the global independent refining and marketing industry, published in December 2009.
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