Moody's: Asian refining and marketing industry to benefit from modest EBITDA growth

Moody's Investors Service says that the outlook for the Asian refining and marketing industry is stable. It expects that the Asian refiners will see modest EBITDA growth of 1%-3% in 2016, with healthy demand for refined oil products driving an increase in output and supporting refining margins.

The industry outlook indicates Moody's forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of the sector over the next 12-18 months.

"Capacity rationalization in the region will ease the industry's supply overhang, but economic slowdown in China means that demand growth will likely only match or marginally exceed capacity additions in 2016," says Rachel Chua, a Moody's Analyst. "Chinese refiners have been ramping up capacity to reduce the country's import need and increase export volumes, further pressuring oversupplied markets in the region."

"We expect recent gains in margins will likely ease as a result of softened demand growth amid headwinds from China, with the Asian benchmark Singapore complex refining margin averaging a healthy $7.0-$7.5 per barrel in 2016," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

This follows Moody's expectation of a $1.5 per barrel year-on-year improvement in the Asia benchmark in 2015, as the sharp decline in oil prices and petroleum product prices pushed buyers to build refined product inventory.

The lower crude price environment will reduce refiners' feedstock costs and working capital requirements in 2016, based on Moody's Brent crude price projection of $53 per barrel. Lower working capital consumption and healthy earnings will in turn boost cash flow from operations, which can be used to reduce borrowings, says Moody's.

Despite the stable outlook, the economic slowdown in China, industry cyclicality and capacity overhang continues to pressure Asian refiners. Moody's could change the outlook to negative if net refining capacity additions in Asia materially outpace demand growth, or if demand from China (Aa3 stable) and India (Baa3 positive) contracts, such that Moody's projected EBITDA for the industry declines by more than 10%.

Conversely, the outlook could change to positive if regional demand overwhelms capacity additions such that refining margins exceed $8 per barrel on a sustained basis, or if Iranian sanctions are lifted such that low Brent crude prices in the $50 per barrel range become the new norm, leading Moody's to raise its EBITDA growth forecast above 10%.

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