Equity analysts have cut their earnings forecasts for Asia’s oil refiners as a surge in oil tanker freight rates and crude premiums offset an expected boost in refining margins.
With an outlook for slumping profits amid squeezed margins, shares of top Asians refiners such as China Petroleum and Chemical Corp (Sinopec), Japan’s JXTG Holdings and South Korea’s SK Innovation may come under pressure in the coming months.
Spot market freight rates for crude cargoes from the Middle East to Asia recently surged to a record following US sanctions on Chinese tanker companies on September 25.
The rising costs could offset an expected boost in refining margins in the fourth quarter from strong gasoil and very low-sulphur fuel oil (VLSFO) demand as ships switch to cleaner fuels to comply with the International Maritime Organisation’s (IMO) mandate for low-sulphur shipping fuel from 2020.
Sinopec, Asia’s largest refiner, is the most vulnerable to the higher freight costs as 70% to 80% of its shipping costs are based on spot rates, Citi’s refining equity analysts said, adding the company’s 2020 earnings could drop by 5% if margins fall by $3 barrel for a quarter.
The cost of a supertanker carrying 2mn barrels of crude from the Middle East to China stabilised this week at about $5 a barrel, off from as much as $9 a barrel early last week, said a trader who tracks the rates closely.
That is still more than the about $1.70 a barrel before the US sanctions, the trader said.
“The sharp increase in freight rate will negatively impact the refining margin for Sinopec,” Citi Analyst Toby Shek said, adding that the impact was likely to be felt in December because of a time lag from when crude is purchased to when the oil is processed for sale.
Refiners such as S-Oil Corp, SK Energy, a unit of SK Innovation, and Thai Oil Corp are mostly protected from the freight rate surge as 70% to 75% of their crude are shipped on tankers with long-term freight deals, while Formosa Petrochemical ships about 50% of its supply on long-term deals, another Citi Analyst Oscar Yee said.
Share prices for Sinopec, JXTG Holdings, and SK Innovation, the biggest refiners in China, Japan and South Korea respectively, are all down between 23% and 35% from a year ago, Refinitiv data showed. Japanese refining companies may lower their full-year profit forecasts when they announce results for the July to September period as crude prices were below their expectations, Reiji Ogino, senior analyst at Mitsubishi UFJ Morgan Stanley said in a report issued on October 11.
Brent crude futures fell 8.7% in third quarter as a prolonged US-China trade dispute slowed global economic growth.
South Korean refiners are expected to book oil inventory losses and weaker petrochemical margins in the third quarter, offsetting an improvement in refining margins since July, said Rho Woo-ho, an analyst at Meritz Securities in Seoul.
Caltex Australia, one of four refineries in the country, reported third-quarter refining margins rose 41% from the previous quarter.
However, the country’s dependence on long-haul crude is expected to minimize the gains from the higher margins, Citibank said.
For example, a $6 a barrel rise in freight from Africa to Australia would reduce the company’s fourth-quarter refining margins by $2 a barrel, they said.
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