Asia refining: tough times ahead

By Malini Hariharan

The going has been good for the refining industry this year but analysts are predicting a weaker 2012 and 2013.

UBS for instance, expects complex refining margin in Asia to fall 20% in 2012 from the average $8/bbl forecast for 2011. And it expects 2013 to be even weaker with average margin of $6/bbl. The key reasons for the downtrend in margins are:

* Addition of new capacities mainly in China and India. UBS expects nearly 1.1m bbls/day of capacity to be brought onstream in 2012-13

* Full recovery in operating rates in Japan after the March earthquake and tsunami. UBS estimates that around 470,000 bbls/day of refining capacity was lost in Japan in 2011 which is around 10% of the country’s total refining capacity. Most of the affected refineries have restarted but two (Cosmo Oil in Chiba and JX Nippon at Sendai) are expected to resume operations only in the first quarter of 2012.

* Depressed demand growth as a result of a weaker global economy. UBS projects that Asian demand is likely to increase only by 900 000 bbls/day during 2012-13.

The average operating rate in this region is projected to decline yo 85.9% in 2012 and 85.3% in 2013 from 86.6% in 2011.

The last quarter was an unexpectedly strong period with complex refining margins at $9.2/bbl as firm demand from China and Japan coincided with unplanned shutdowns like the one by Formosa Petrochemical in Taiwan. The company was forced to shut its refinery in early August after an accident. It has since restarted production but operating rate is still below 100%.

The good times for Asian refiners are not expected to last very long. But the only consolation is that margins are not expected to fall to the bottom of the refining cycle experienced in 2009. This was the year when the average industry operating rate dropped below 82% and complex margins touched a low of $3.7/bbl.

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