Moody’s Investors Service says that slow but steady demand growth from China (Aa3 negative) and India (Baa3 positive) underpins its stable outlook for the Asian refining and marketing (R&M) industry, despite a likely modest earnings contraction through 2017.
“Increased refinery run rates in China, capacity additions and high stockpiles in the region continue to weigh on refiners’ profitability, and we expect EBITDA for the industry will decline by 1%-3% through 2017,” says Rachel Chua, a Moody’s Analyst.
“However, we expect China’s refined-product demand will grow at 3% in 2017-18 and Indian petroleum consumption by 6% per annum over the same period,” adds Chua. “These two countries together account for 80% of Asia’s refined-product demand growth.”
Moody’s conclusions are contained in its just-released report “Refining and Marketing — Asia: Demand Growth in China, India Supports Stable Outlook Despite Supply Glut.”
Despite the modest growth in China and India, Moody’s does not expect a material improvement in demand-supply dynamics over the next 12-18 month as demand growth will only match or marginally exceed total supply additions.
Against bloated supply and the lagged effect of crude-price fluctuations on petroleum product prices, refining margins will be volatile through 2017. Still, Moody’s expects a modest recovery in the Asian refining margin to $5.00-$5.50 per barrel over the next 12-18 months, which is broadly in line with long-term average levels.
In Moody’s view, low profitability levels will force small-scale, low-complexity refiners with a higher cost of production to cut back on output.
At the same time, Moody’s expects the healthy integrated downstream petrochemical operations of most Asian refiners — accounting for 20%-40% of earnings — will somewhat cushion the impact of lower refining profits through 2017. For the aromatics players in particular, product spreads will likely be supported by strong demand. Lower naphtha feedstock prices will also maintain the improved profitability of naphtha-based petrochemical producers.
Moody’s could change the industry outlook to negative if net refining capacity additions and increasing refinery output in Asia materially outpace growth in demand, such that projected EBITDA for the industry declines by more than 10%; or if demand from China and India contracts.
Conversely, Moody’s would consider a positive outlook if regional demand overwhelms capacity additions such that refining margins exceed $8 per barrel on a sustained basis, leading Moody’s to raise its EBITDA growth forecast to above 10%.
Source: Moody’s