Hong Kong, May 10, 2010 -- 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
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
In determining corporate ratings, Moody's uses its rating
methodology on the global independent refining and marketing industry,
published in December 2009.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
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Moody's says Asian oil refining & marketing outlook still negative
Senior Vice President
Corporate Finance Group
Moody's Investors Service Pty Ltd
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