Japan Disaster 2 – Refining, Petchems Update

By John Richardson

OUR sympathies again go to the people of Japan. The main focus should be on providing as much support as possible to the rescue efforts and let’s hope that petrochemical companies globally step forward.

But as we said yesterday, life goes on. The Japanese stock market was down around 5% this morning in early trading, suggesting fears about serious damage to the economy. There is anxiety that another earthquake could occur over the next few days.

Here is a research note from UBS, which as you can see, estimates that 20% of Japan’s refining capacity and 27% of its ethylene capacity and 30% of its aromatics production is shut down.

As we said in our post on Sunday, Japan is a major importer of naphtha and so some refiners will struggle to place their volumes. However, UBS sees an upside for Asian refining margins.

In the immediate term Formosa Plastics Corp, Formosa Chemicals & Fibre and LG Chem are expected to benefit the most from the outages as a result of their product mix, adds UBS. They should be able to gain market share in China.

The lost production might also help to rebalance what has been a weak polyolefins market in China.

The supply disruptions, which seem very likely indeed to be long-term .In the confused situation at the moment seems possible that major structural damage has been caused to refineries and petrochemical plants.

This is the UBS note in full:


Impact on Japan refining industry

The devastating earthquake and tsunami in Japan that took place on 11 March has resulted in 20% of refining capacity loss in Japan (900-950K bpd) or 3.5% and 1%of Asia and global refining capacity respectively. While some refineries are shut for safety concerns, Cosmo Oil has shut its 220K bpd refinery in Chiba due to fire


Implications for Asia refining market

Singapore complex refining margin jumped from US$7-8/bbl to US$15/bbl after

Hurricane Katrina hit the US Gulf coast in late Aug 2005, which resulted in 1.4mn bpd refining capacity loss. We believe Asia refining margin should see more upside in the near-term and major refiners in the region such as GS Holdings, SOi and Thai Oil are best-positioned in Asia.


Impact on Japan petrochemical industry

Around 2mn tpa ethylene capacity in Japan have been affected by the earthquake,

which translates to 27% of total ethylene capacity in Japan or 4% and 1.4% of Asia

and world ethylene capacity respectively. It has been reported that total aromatics

capacity being affected should be around 5.7mn tpa, or 30% of Japan production.


Implications for Asia petrochemical market

We believe any supply disruption in Japan could potentially impact South Korea and

Taiwan as these two are the main competition in China petrochemical market.

Looking at Japan’s major export products, we believe FPC and FCFC in Taiwan and

LG Chem in South Korea are best-positioned to gain market share in Asia.

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