Tough oil market forces trading firms in Asia to cut jobs, reshape

Tue May 21, 2013 1:35am EDT

* At least 15 trade staff have left since late last year

* Low European demand, China exports hit middle distillates

* Trade firms seek revenue from LNG, agriculture, assets

By Florence Tan and Jessica Jaganathan

SINGAPORE, May 21 (Reuters) - Grappling with weak demand, rising costs and heightened competition in their oil business, trading companies in Asia are cutting staff and seeking new revenue sources from areas such as drilling for gas and generating power.

In a sign of this pressure, at least 15 traders and staff in operations dealing with crude and products such as jet fuel, gasoil and fuel oil at eight firms have quit or lost their jobs since late last year and had not been replaced, trading sources said.

And at least three Japanese trading conglomerates, or shoshas as they are commonly known, have trimmed their operations in Singapore, Asia's oil hub.

Arcadia Energy's Singapore managing director Taihe Anze will be departing after the European firm replaced its long-serving CEO in a recent shake-up, while Noble Group, Trafigura , Lukoil, Gunvor and Hess Corp's trading arm Hetco are among firms that are yet to replace traders who have departed, the sources said.

Trafigura and Hetco declined to comment. Noble, Lukoil, Arcadia and Gunvor did not respond to requests for comment.

Traders dealing with middle distillates are the hardest hit as a key revenue spinner - the arbitrage window to send Asian diesel and jet fuel to Europe - has been closed for most of this year due to the euro zone crisis dampening demand.

Moreover, China's switch to being a net diesel exporter last year has added to the surplus in the region.

"Unfortunately, Europe is the only place in the world where there's a shortage of diesel. But it's too far for Asia and it's in a recession at the moment," said a Singapore-based trader with a European firm.

Itochu Corp, once one of the most active Japanese trading houses in the middle distillates markets, has terminated one of its biggest term gasoil purchase contracts with Saudi Aramco this year, trade sources said. It had announced in March the trimming of its trade desk in Singapore.

The company also gave up fuel oil storage tanks in Singapore which it had held for years, together with Petrosummit, the oil trading unit of Sumitomo Corp, and Marubeni Corp's Marubeni International Petroleum Co (MIPCO).

"Oil consumption in Japan is dropping, so trading houses have been reducing their oil trading, and with the emphasis drifting to upstream activities," said Koji Takayanagi, a senior managing executive officer at Itochu.

"The volatility in trading makes it an expensive business and the trend, which I think is the same at other trading houses, is to move to something with more certainty."

Higher oil prices, which have tripled over the last decade, have pushed up trade costs, while a backwardated market - where prompt prices are higher than future months - has made storage uneconomical.

Traders have tried to compensate for losses on physical barrels by betting in the paper market but recent sharp price changes have made price calls tough.

SHRINKING MIDDLEMAN'S ROLE

The role of middlemen in the oil supply chain is also shrinking as producers of crude and refined oil products are preferring to sell directly to consumers.

Some examples are India's largest private refiner Reliance Industries, which is shipping diesel directly to Europe, and Japanese and South Korean refiners, which are selling their fuel to Latin America.

Expansions by Chinese state-owned oil firms Sinopec Corp and PetroChina in their global trading networks to complement their upstream and refining businesses, modeled after Royal Dutch Shell and BP Plc , left little room for independents to supply the world's second-largest oil consumer.

And these oil companies are increasingly encroaching upon trading firms' turf.

"Over more than 10 years the two big Chinese oil firms have really squeezed the growth spaces of the trading houses," said a senior trader with a U.S. hedge fund, adding that they were now supplying refined fuel to Vietnam and Indonesia while PetroChina has become a top fuel oil trader in Asia.

The refiners are still looking for new markets to ship their surplus supply. For example, PetroChina secured a term contract to sell diesel to Sri Lanka in a rare move last year.

Independent traders Vitol, Trafigura and Gunvor are responding to changing markets by snapping up power, refining and fuel distribution assets from international oil firms, while Singapore's Hin Leong Group is pursuing several projects to build a refinery and oil storage terminals in various parts of Asia.

Trading firms are also exploring other commodities such as metals and agricultural products.

"The trading business is becoming very much a niche type of business such that the only way you can really have any sustainable competitive advantage is to have relationships or assets," said a veteran trader (Additional reporting by Luke Pachymuthu and Seng Li Peng in SINGAPORE, Chen Aizhu in BEIJING and James Topham in TOKYO; Editing by Muralikumar Anantharaman)