TOKYO: Japanese refiners saw their refining margins widen in fiscal 2014-15 (April-March) following government-led capacity cuts at the end of March 2014, but refiners collectively reported billions of dollars in inventory losses as crude oil prices plunged by around 40% in the second half of the fiscal year.
Looking ahead, Japanese refiners’ refining margins will continue improving from a year ago in fiscal 2015-16 if crude oil prices stay in the range of around $60-$70/barrel, said Hidetoshi Shioda, senior analyst at Japan’s SMBC Nikko Securities.
The refiners’ estimated margins for gasoline and gasoil, which together account for roughly half of domestic oil demand, hit multi-year highs in 2014-15 — a four-year high for gasoline and a three-year high for gasoil.
Besides capacity cuts, the rise in refining margins was also driven by a change in the way refiners calculate their wholesale product prices.
Japanese refiners trimmed their overall refining capacity by 520,000 b/d to 3.95 million b/d as of March 31, 2014, in line with government regulations that required refiners to raise their residue cracking ratios either by cutting CDU capacity or by raising cracking capacity. Most opted for the former.
Separately, over April-June 2014, several Japanese refiners adopted for a new cost-based pricing system under which weekly changes in their wholesale product prices are linked to movements in international crude benchmarks such as Dubai, rather than being indexed to domestic oil product benchmarks.
Margins for gasoline, kerosene, gasoil and A-fuel oil (a blend of gasoil and fuel oil in a 90:10 ratio) for the largest Japanese refiner, JX Nippon Oil & Energy, averaged Yen 8.5/liter (7 cents/liter or $10.77/b) in fiscal 2014-15, up about Yen 2/l or 31% year on year, according to Isao Matsushita, outgoing JX Holdings president.
Gasoline and gasoil margins were volatile in the fiscal year ended March 31, with refiners enjoying relatively stable margins in the first half of the fiscal year due to heavy turnarounds, but coming under pressure from sharp drops in crude and products prices in the second half of the year.
Japan’s gasoline margin was estimated at Yen 17.1/liter (14 cents/liter or $21.67/b) in the fiscal year ended March 31, according to an industry calculation.
The estimated gasoline margin in fiscal 2014-15 was up from Yen 13.7/l the previous fiscal year and is the highest since Yen 16.6/l in 2010-11.
Widening the gasoline refining margin by around Yen 3/l year on year would increase revenue by more $1 billion on total domestic gasoline sales, when gasoline demand is at least 920,000 b/d, according to industry sources. The estimated gasoil margin was Yen 15.7/l in fiscal 2014-15.
That is up from Yen 13.2/l the previous fiscal year and the highest since Yen 15.9/l in fiscal 2011-12, according to the industry calculation.
The industry calculates the refining margin as a difference between the pre-tax wholesale price of the product and the pre-tax CIF crude import price.
While margins improved, Japanese refiners reported year-on-year decreases in their domestic sales mainly due to sluggish demand for gasoline and fuel oil during Japan’s summer oil demand season over July-September, when the country was hit by stormy weather.
JX Holdings sold 53.23 million kiloliters, or 917,277 b/d, of oil products in the domestic market in fiscal 2014-15 (April-March), down 10.3% year-on-year in kl terms.
In the fiscal year ended March 31, downstream arm JX Nippon Oil & Energy’s gasoline sales slid 6.5% year on year to 17.67 million kl while its sales of fuel for power generation dropped 20.1% from a year ago to 5.01 million kl, the company said.
Idemitsu Kosan sold 24.84 million kiloliters, or 428,051 b/d, of oil products in the domestic market in fiscal 2014-15, down 4.2% year on year in kl terms, marking the second consecutive year-on-year drop.
The annual decline was attributable to sluggish gasoline sales, which showed a 3.5% year-on-year fall to 8.199 million kiloliters or 141,288 b/d, resulting from stormy weather during Japan’s peak summer driving season.
Idemitsu’s 2014-15 domestic oil products sales were also dented by reduced demand for kerosene, which showed a 6.5% drop to 2.95 million kl, as a result of warmer-than-usual temperatures during the winter heating oil demand season, the company said.
The summer and winter weather also played a role in trimming Idemitsu’s fuel oil demand for power generation by 21.2% year on year to 2.72 million kl in the fiscal year ended March 31.
Strong transport demand for trucks, meanwhile, raised Idemitsu’s gasoil demand in 2014-15 by 2.9% from a year ago to 6.153 million kl, it added. As a result of improved margins, Japanese refiners reported profits in their refining business for 2014-15 after stripping out inventory losses.
For instance, JX Holdings posted an ordinary profit of Yen 72.2 billion in its energy segment in fiscal 2014-15, compared with Yen 7.9 billion ordinary loss a year ago as a result of improved margins for oil products.
Stripping out inventory losses, Idemitsu Kosan also posted an operating profit of Yen 18 billion in its oil products segment in fiscal 2014-15, compared with a Yen 24.2 billion operating loss a year earlier.
But after taking inventory losses into account, JX Holdings posted a net loss of Yen 277.21 billion ($2.3 billion) in fiscal 2014-15 — its first annual loss since its formation in April 2010 following the merger between Nippon Oil and Nippon Mining Holdings.
It posted a Yen 107.04 billion net profit in fiscal 2013-14. The company suffered inventory losses due to the sharp drop in crude oil prices in the second half of the fiscal year. Idemitsu also posted a net loss of Yen 137.96 billion in the fiscal year ended March 31, its first annual net loss since going public in fiscal 2006-07.
Idemitsu last reported an annual net loss (Yen 5.9 billion) in fiscal 2004-05. The sharp drop in crude prices led to inventory losses as Japanese refiners are obliged to hold the equivalent of around 70 days’ worth of domestic crude and oil product imports as part of Japan’s privately held strategic petroleum reserves.
