APAC Gasoil Margin Rebound May Face Oversupply
Recovering demand for transportation fuels in APAC, increased use of gasoil as a feedstock for power generation, and gasoil export quota cuts from China have been driving the rebound in APAC benchmark gasoil refining margins since September 2021, which may provide upside to our near-term refining margin assumptions for Indian refiners, Fitch Ratings says.
However, margins remain vulnerable to potential pandemic setbacks and the medium-term demand-supply balance as planned capacity additions in the region increase output. Singapore gasoil refining margins over Dubai improved to USD10–12 per barrel in September, after staying within a narrow range of USD3–6 for most of 2021. We believe this was driven by the gradual demand recovery in APAC as lockdown measures were relaxed and vaccinations administered across countries at a varied pace, along with a higher-than-normal use for power generation.
We think near-term margins are likely to be supported by limited regional supplies as the second export quota of refined products from China released in August fell by about 73% YoY and 34% year to date (YTD). The Chinese Government has been redirecting refined-product supplies towards domestic consumption rather than exports to control emissions.
The domestic supply of refined products has tightened on a reduction in the crude import quota, imposition of consumption tax on imports for key blending components among private independent refiners since 2H21, and increased environmental and tax evasion checks, which have affected private refiners’ utilisation.
Keeping Chinese exports lower may not be sustainable in the medium term as suppliers continue to expand capacity. We estimate 2.34 million barrels per day will come on stream over the next 24 months. Supply also remains subject to the pace of consolidation among the less-efficient smaller, private Chinese refiners. The APAC gasoil margin recovery also remains vulnerable to pressure from further waves of the pandemic, the reintroduction of lockdown measures and a rebound in transport and industrial demand that is slower than our expectations.
We thus expect the margin recovery to be uneven. The short-term financial performance of Indian Oil Corporation Ltd (BBB-/Negative), Bharat Petroleum Corporation Limited (BBB-/Negative) and Hindustan Petroleum Corporation Limited (BBB-/Negative), which usually generate 20%-40% of their gross profit from refining, would benefit from the recovery. HPCL-Mittal Energy Limited’s (BB/Negative) profitability may get a bigger boost due to its concentrated earnings from a single refinery. Reliance Industries Ltd’s (BBB/Negative) refining profit will also benefit.
China Petroleum and Chemical Corporation (Sinopec) (A+/Stable) has limited exposure to the export market and its downstream margin will be supported by firm domestic demand recovery and inventory gains in 2021, in addition to its partial upstream integration benefits. CPC Corporation, Taiwan (AA/Stable) has been benefitting from strong refining margins YTD, but is likely to face a margin squeeze for the rest of the year. Under Taiwan’s Oil Price Stability Mechanism, CPC is required to absorb some price increases when the 95 octane retail gasoline price, which is referenced to the lowest retail price among neighbouring countries, exceeds TWD30/litre.