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Auto sales underpin demand for Asia refiners
[SINGAPORE] As oil producers agonize over tumbling crude prices, strong car sales in India and China are underpinning demand for gasoline, giving makers of refined products and petrochemicals healthy margins.
While that means share prices of refiners with little or no crude production are outperforming primarily crude producers, much could hinge on China's economy and Beijing's policy of tax breaks for small car buyers.
Crude oil prices fell to their lowest in over a decade this week, trading close to $30 a barrel, and are down 70 per cent since mid-2014. This has been painful for oil producers and exporters, but has boosted refinery margins as feedstock costs have tumbled.
"If (the annual average) oil price is $40-$50 a barrel, we're quite confident margins will be higher than last year,"Sukrit Surabotsopon, CEO of Thai refiner IRPC, told Reuters. The average price for Brent last year was close to $54 a barrel, and most banks have cut their oil price forecasts for this year to $37-$50 a barrel.
Cheap and plentiful feedstock for refineries has been supported by strong retail demand, especially for gasoline and plastics, though demand for diesel is stalling largely because of China's slowing heavy industry.
HSBC says 2016 demand for refined products will be between 1 million and 1.2 million barrels per day (bpd), while refining capacity is seen growing at 540,000 bpd. "Demand growth in 2016 ... should easily outpace capacity growth, barring a serious macroeconomic downturn," the bank said in a Jan. 8 note that recommended stocks of SK Innovation and Thai Oil - the leading refineries in South Korea and Thailand, respectively.
After a slow start last year, China's car sales picked up pace to increase by 4.7 per cent, averaging well over 2 million new private vehicles a month. Growth this year is forecast at 6 per cent.
Most Chinese passenger cars run on gasoline, boosting demand for refiners, though analysts note that much of the recent growth in sales has been pegged to generous tax breaks for car buyers.
In India, passenger car sales have been growing at an even faster pace, and are forecast to increase by more than 10 per cent in the year to March, providing another strong pillar of fuel demand.
Reliance Industries saw its gross refining margin hit a 5-year high of $10.50 last year, and is expected to hold at $9.70-$9.80 a barrel in 2016, refining sources said, as it meets double-digit demand growth for gasoline and 7-8 per cent growth for diesel.
Refiners are also benefiting from action they took when crude supplies were tight, as many invested in refinery upgrades to allow them to process whatever crude was available.
Now, amid oversupply and a discount war between exporters that sees anywhere between half a million and 2 million barrels of crude produced every day in excess of demand, refiners can cherry-pick the grades that best suit their facilities - heavy or light, sweet or sour.
The healthy refining conditions are visible in stock market performance. Refiners that do not have large crude production, such as SK Innovation and India's Reliance Industries, far outperform refining-lite producers such as Chevron or China's CNOOC. Taiwan's Formosa Petrochemical has also been among the winners from the crude slump. In another support move for refiners, Chinese authorities on Wednesday set a floor for domestic retail gasoline and diesel prices, saying these would not be trimmed again while global oil prices are below $40 a barrel.
Last month, China said it plans further reforms to retail fuel pricing as part of moves to make prices more market-driven. For the first time, China has allowed independent companies to import crude oil and export refined fuel, breaking the long dominance by the major state refiners. "We believe refining companies such as Shanghai Petrochemical and Sinopec, and also the teapot (small independent) refineries could be big beneficiaries of this policy," Nomura analyst Gordon Kwan said.
Refiners' margins in South Korea, a major fuel and petrochemical exporter, could hit $11.40 a barrel in the first half of this year, said Son Young-Joo, analyst at Kyobo Securities in Seoul, topping last year's average of $10.30 a barrel.
Petrochemical producers like Formosa, Shanghai Petrochemical and Lotte Chemical could also see healthy ethylene margins as supply of the key raw material for plastics is expected to tighten this year, said KGI analyst Aaron Liu.
Ultimately, the party-pooper for refiners could be Beijing closing the tap on new car subsidies, with current tax breaks due to expire on Jan. 1, 2017.
"The last time China lowered the tax on small cars was in 2009 ... (after) the global financial crisis. Car sales surged 53 per cent that year and 33 per cent in 2010, but (growth) slowed to single digits after the 2-year policy expired," Barclays said in a client note. "This time, our auto equity analysts expect the boost in sales to fade over this year."