Moody's: Stable outlook for Asian refining & marketing on continued demand growth

Moody's Investors Service's outlook for the Asian refining and marketing industry is stable, reflecting modest EBITDA growth fuelled by continued, albeit slowing demand from China.

"Chinese demand, will continue to fuel modest earnings growth for Asian refiners, despite softening economic trends," says Vikas Halan, a Moody's Vice President and Senior Credit Officer. "We expect EBITDA growth of around 5% through 2015, with higher refined oil product output offsetting the impact of weak refining margins on earnings."

Moody's expects China's demand for refined oil products will increase by 3%-5% per annum through 2015, compared to 5%-10% in 2010-2012.

"But Chinese demand won't fully offset the new refining capacity coming on-stream in Asia in the next 12 months," says Rachel Chua, a Moody's Associate Analyst and co-author of the report. "The new capacity expected to exceed 1.8 million barrels per day (bpd) will outstrip the slowing demand growth of around 0.7 million bpd."

This structural oversupply and increased exports from China will pressure Asian refining margins over the next 12-18 months, with export-oriented refiners particularly vulnerable as Asian countries increase their fuel self-sufficiency.

But Moody's does not expect the benchmark Singapore complex refining margin to weaken substantially below the level of $6 per barrel because lower effective capacity additions and refinery delays will reduce supply, while the recent easing in oil prices should support product demand.

Moody's notes that Korean refinersGS Caltex Corporation (Baa3 stable), SK Innovation (Baa2 negative) and S-OIL Corporation (Baa2 negative)will see additional pressure on their already narrowing margins as they are highly reliant on Asian markets for exports and have considerable exposure to China. Still, refinery closures in Japan, Australia and Taiwan will provide some, albeit limited, support to refining margins.

Asian refiners face country-specific effects, with state-owned Chinese refiners China National Petroleum Corporation ( Aa3 stable) and China Petroleum and Chemical Corporation (Aa3 stable) best positioned to handle overcapacity.

Indian state-owned refiners Indian Oil Corporation (Baa3 stable) and Bharat Petroleum Corporation (Baa3 stable) will benefit from recent diesel price deregulation and Indonesia's fuel-price hikes in November are credit positive for its national oil company Pertamina (Baa3 stable).

Moody's expects Thailand's government to follow suit, although fuel-price hikes would have a limited rating impact.

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