Auto sales underpin demand for Asia refiners; China tax break expiry may change that

Strong Petrochemical Holdings

13/01/2016 22:00

(Repeats article first published late on Wednesday; no changes 
to text.) 
    * Crude oil drop means cheaper feedstock prices for refiners 
Rising car sales in China, India prop up gasoline demand 
    * Petrochemical plastic makers also enjoy strong profits 
    * SK Innovation, Reliance, Formosa, Thai Oil among top picks 
    * Yet analysts warn that China's slowdown could impact 
refiners 
 
    By Florence Tan and Khettiya Jittapong 
    SINGAPORE/BANGKOK, Jan 13 (Reuters) - 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  LCOc1  fell to their lowest in over a 
decade this week, trading close to $30 a barrel, and are down 70 
percent 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  IRPC.BK , 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.  urn:newsml:reuters.com:*:nL3N14W4LS 
    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 
 096770.KS  and Thai Oil  TOP.BK  - 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 percent, averaging well over 2 million 
new private vehicles a month.  urn:newsml:reuters.com:*:nB9N14P054 Growth this year is 
forecast at 6 percent.  urn:newsml:reuters.com:*:nB9N14P058 
    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.  urn:newsml:reuters.com:*:nL5N11204A 
    In India, passenger car sales have been growing at an even 
faster pace, and are forecast to increase by more than 10 
percent in the year to March, providing another strong pillar of 
fuel demand.  urn:newsml:reuters.com:*:nWNBS01W0I 
    Reliance Industries  RELI.NS  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 percent 
growth for diesel. 
     
   CHERRY PICKING: SWEET OR SOUR? 
   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  CVX.N  or 
China's CNOOC  0883.HK . Taiwan's Formosa Petrochemical 
 6505.TW  has also been among the winners from the crude slump.  
(http://tmsnrt.rs/1ZXD2Yf) 
    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.  urn:newsml:reuters.com:*:nB9N14V00I 
    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  600688.SS  and Sinopec  600028.SS , 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  011170.KS  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. 
 urn:newsml:reuters.com:*:nL3N11Z28L 
    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. (http://reut.rs/1Q4Muq1) 
    "The last time China lowered the tax on small cars was in 
2009 ... (after) the global financial crisis. Car sales surged 
53 percent that year and 33 percent 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."     
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Share price performance of mainly oil refiners vs mainly 
producers    http://tmsnrt.rs/1ZXD2Yf 
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 (Reporting by Rebecca Jang in SEOUL, Khettiya Jittapong in 
BANGKOK, Florence Tan and Jessica Jaganathan in SINGAPORE; 
Editing by Henning Gloystein and Ian Geoghegan) 
 ((Florence.Tan@thomsonreuters.com; +65 6870 3497; Reuters 
Messaging: florence.tan.thomsonreuters.com@reuters.net)) 
 
Keywords: ASIA REFINERIES/OUTLOOK