Asian refiners will see modest earnings growth fuelled by higher demand
We expect the Asian R&M industry's EBITDA to grow by around 5% through 2015, with the higher output of refined oil products to meet demand more than offsetting the impact of weak refining margins on earnings. China will continue to drive demand for refined products in Asia, albeit at a slower pace than in previous years amid softer economic trends.
Capacity additions in China and India will continue to outstrip demand growth in the region, exacerbating the industry's capacity overhang
New refining capacity exceeding 1.8 million barrels per day (bpd) coming on-stream in Asia over the next 12 months will exacerbate the industry's supply overhang and continue to outstrip slowing demand growth of around 0.7 million bpd. Refinery closures in Japan, Australia and Taiwan will provide some, albeit limited, support to refining margins as China and India -- the largest contributors to capacity additions -- increase their exports of refined oil products.
Asian refining margins remain under pressure
The industry's structural oversupply will keep Asian refining margins under pressure over the next 12-18 months, but we do not anticipate a weakening from current levels because lower effective capacity additions and refinery delays will reduce bloated supply, while the recent easing in oil prices should support prices and product demand. We expect the Singapore complex refining margin to stay flat at $6 per barrel (bbl) through 2015. Complex refiners with flexibility to adjust their product mix, such as Reliance Industries (RIL, LC: Baa2 positive; FC: Baa2 stable), China National Petroleum Corporation (CNPC, Aa3 stable) and China Petroleum and Chemical Corporation (Sinopec, Aa3 stable), will be better-positioned.
Increased competition and softer demand from China will hurt export-oriented refiners, particularly in Korea
Export-oriented refiners will face increased competition from Chinese exports and slowing demand as Asian countries become increasingly self-sufficient in their fuel needs. Weaker demand growth in China and the country's higher diesel export quota will encourage Chinese refiners to increase diesel exports. Korean refiners GS Caltex Corporation (Baa3 stable), SK Innovation (Baa2 negative) and S-OIL Corporation (Baa2 negative) would be most vulnerable in a scenario of rising Chinese exports or slowing mainland demand.
Refiners face country-specific challenges
Overcapacity in China will pressure the operating profits of state-owned CNPC and Sinopec, but we see limited impact on credit quality due to their financial strength. We expect the credit metrics of India's state-owned refiners Indian Oil Corporation (IOC, Baa3 stable) and Bharat Petroleum Corporation (BPCL, Baa3 stable) to improve as their borrowing requirements and interest costs decline in tandem with our expected decrease in fuel subsidies. In South East Asia, we expect Thailand's military government and Indonesia's incoming government to implement energy reforms which would move subsidized fuel prices closer to international market prices.
What could change our outlook
Competition, cyclicality and capacity overhang in the industry continue to pressure Asian refiners, despite our stable outlook. We would change our outlook to negative if net refining capacity additions in Asia materially outpace growth in demand, such that our projected EBITDA for the industry over the next 12-18 months declines by more than 10%. We would change our outlook to positive if regional demand overwhelms capacity additions, and if the economies of China, India and Indonesia begin surging simultaneously, leading us to raise our EBITDA growth forecast above 10%.
*A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward-looking view on conditions that factor into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.
We expect the Asian R&M industry's EBITDA to grow by around 5% through 2015, with the higher output of refined oil products to meet demand more than offsetting the impact of weak refining margins on earnings. China will continue to drive demand for refined products in Asia, albeit at a slower pace than in previous years amid softer economic trends.
Capacity additions in China and India will continue to outstrip demand growth in the region, exacerbating the industry's capacity overhang
New refining capacity exceeding 1.8 million barrels per day (bpd) coming on-stream in Asia over the next 12 months will exacerbate the industry's supply overhang and continue to outstrip slowing demand growth of around 0.7 million bpd. Refinery closures in Japan, Australia and Taiwan will provide some, albeit limited, support to refining margins as China and India -- the largest contributors to capacity additions -- increase their exports of refined oil products.
Asian refining margins remain under pressure
The industry's structural oversupply will keep Asian refining margins under pressure over the next 12-18 months, but we do not anticipate a weakening from current levels because lower effective capacity additions and refinery delays will reduce bloated supply, while the recent easing in oil prices should support prices and product demand. We expect the Singapore complex refining margin to stay flat at $6 per barrel (bbl) through 2015. Complex refiners with flexibility to adjust their product mix, such as Reliance Industries (RIL, LC: Baa2 positive; FC: Baa2 stable), China National Petroleum Corporation (CNPC, Aa3 stable) and China Petroleum and Chemical Corporation (Sinopec, Aa3 stable), will be better-positioned.
Increased competition and softer demand from China will hurt export-oriented refiners, particularly in Korea
Export-oriented refiners will face increased competition from Chinese exports and slowing demand as Asian countries become increasingly self-sufficient in their fuel needs. Weaker demand growth in China and the country's higher diesel export quota will encourage Chinese refiners to increase diesel exports. Korean refiners GS Caltex Corporation (Baa3 stable), SK Innovation (Baa2 negative) and S-OIL Corporation (Baa2 negative) would be most vulnerable in a scenario of rising Chinese exports or slowing mainland demand.
Refiners face country-specific challenges
Overcapacity in China will pressure the operating profits of state-owned CNPC and Sinopec, but we see limited impact on credit quality due to their financial strength. We expect the credit metrics of India's state-owned refiners Indian Oil Corporation (IOC, Baa3 stable) and Bharat Petroleum Corporation (BPCL, Baa3 stable) to improve as their borrowing requirements and interest costs decline in tandem with our expected decrease in fuel subsidies. In South East Asia, we expect Thailand's military government and Indonesia's incoming government to implement energy reforms which would move subsidized fuel prices closer to international market prices.
What could change our outlook
Competition, cyclicality and capacity overhang in the industry continue to pressure Asian refiners, despite our stable outlook. We would change our outlook to negative if net refining capacity additions in Asia materially outpace growth in demand, such that our projected EBITDA for the industry over the next 12-18 months declines by more than 10%. We would change our outlook to positive if regional demand overwhelms capacity additions, and if the economies of China, India and Indonesia begin surging simultaneously, leading us to raise our EBITDA growth forecast above 10%.
*A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward-looking view on conditions that factor into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.
