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Japan oil refiners eye recovery in product margins in 2014
May 9, 2014 / 9:07 AM / 4 years ago

Japan oil refiners eye recovery in product margins in 2014

* Refiners post loss in main downstream refining business

* Refiners see margins rising for 1st time in four years

* Refiners see swing to profit in the year to March

By Osamu Tsukimori

TOKYO, May 9 (Reuters) - Japanese oil refiners are projecting increases in petroleum refining margins this year for the first time in four years, as the shutdown of four crude distillation units (CDUs) in March helps reduce excess capacity.

The rebound may be short-lived unless Japan pushes through further capacity cutbacks in a second round of reforms planned for 2017, as a falling population is expected to cut annual demand for gasoline and other products by nearly 2 percent.

Japan’s biggest refiner, JX Holdings Inc, posted on Friday a recurring loss of 77.5 billion yen ($763 million) in its petroleum products business for the year through March, as a decline in the yen pushed up the cost of imported crude. It was the first loss in the segment since JX was formed in 2010.

“With a flexible approach that maximizes utilization rates, expands exports and petrochemicals output, while sometimes buying products from the market, industry should be able to rebuild margins,” JX Senior Vice President Akira Omachi told an earnings briefing.

The loss in JX’s products business helped push net profit down by a third, to 107.04 billion yen.

JX expects refining margins, equivalent to spot domestic prices minus crude import costs including freight and insurance, to recover by about half to around 9 yen per litre (34 U.S. cents per gallon).

A weakening of 17 percent in the yen against the dollar in the business year that ended in March drove up crude import costs, despite the slight decrease in oil prices, squeezing earnings.

Idemitsu Kosan, Japan’s second-biggest refiner by revenue, also reported an operating loss of 22.1 billion yen in refining business, excluding the impact of inventory gains.

“For the previous three years, oil spearheaded overall profits, so it was the harshest oil earnings in four years,” Idemitsu Director Shunichi Kito told reporters at an earnings briefing on May 2.

“We expect refining business to return to profit of 44 billion yen in the current business year, and most of that is due to a recovery in margins we have taken into account.”

Concerns about supply shortages may help raise margins further as more than 30 percent of Japan’s 3.95 million barrels per day (bpd) refining capacity is shut in early June for maintenance, forcing refiners to turn to overseas markets.

Japan’s demand for oil products began falling in 2006 as consumers and businesses shifted to smaller-engined cars and more energy-efficient equipment amid high oil prices and shrinking population.

Japan cut crude refining capacity by 19.2 percent to 3.95 million barrels per day (bpd) on April 1 from 4.89 million bpd in 2008 after the government in 2010 pushed through mandatory measures to boost refinery efficiency forced refiners to cut capacity in line with shrinking demand at home.

The government in February began reviewing options for a new round of reforms to boost efficiency.

Despite some opposition from refiners, industry officials say they agree that further capacity cuts are inevitable as surplus capacity saps domestic oil margins.

The next round of reforms may reduce the nation’s refining capacity by 10 percent to around 3.6 million bpd, Fuji Oil President Fumio Sekiya said on Thursday at an earnings briefing.

Sekiya said he would consider joint operations of Fuji’s sole refinery in Chiba, east of Tokyo, with nearby rival refineries, which include those operated by Idemitsu and Kyokuto Petroleum Industries (KPI), to cut costs and boost efficiency.

“If there’s more merit in operating our refining units jointly with units owned by another company, then we would be happy to discuss it,” he told Reuters after the earnings briefing. He declined to identify candidates.

The government projects demand for oil in the world’s fourth-biggest oil user - excluding fuel oil used for power generation - to fall 1.7 percent per year on average through March 2016. ($1=101.6050 Japanese yen)

Reporting by Osamu Tsukimori; Editing by Aaron Sheldrick and Clarence Fernandez

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