Japanese Refiners Extend Output Cut on Falling Demand

By Yuji Okada

Dec. 3 (Bloomberg) -- Refiners in Japan, the world’s third- largest oil consumer, are cutting output in December and probably in January to cope with bigger declines in fuel demand at home and abroad as the global economic slowdown worsens.

Nippon Oil Corp. plans to cut processing this month by 18 percent from a year ago after slashing the run rate by 25 percent in November, Japan’s largest refiner announced on Nov. 27. The company has operated at reduced rates since June. Idemitsu Kosan Co. and Showa Shell Sekiyu K.K. will also cut December production.

Consumers and industrial users are delaying fuel purchases because they expect prices will drop in line with the declining trend of crude oil futures. Demand, already weak in Japan, has been damped further by the recession as many factories slash operating rates and shipping lines cut container services.

“It is not just gasoline,” Nippon Oil’s Director Masahito Nakamura told reporters on Nov. 27. “Sales of industrial fuels such as fuel oil and gasoil are on the wane because of lower operating rates at plants and factories. We can’t expect demand for industrial fuel to recover any time soon.”

Factory output fell 3.1 percent in October compared with the previous month, Japan’s Trade Ministry said on Nov. 28. Production will decline another 6.4 percent in November, the biggest drop since the survey began in 1973, and 2.9 percent in December, the ministry forecast.

Sluggish Demand

Nippon Oil’s fuel oil sales to power utilities fell about 10 percent in November from a year earlier, Nakamura said. Gasoline sales for the month were down about 7 percent. The sluggish demand forced the refiner to shut a 110,000 barrels-a-day crude distillation unit at its Mizushima refinery in western Japan in November. Nakamura expects the unit to remain shut indefinitely.

“We will have to consider another output cut for January if slow demand persists,” he said.

The possibility of another cut was echoed by Idemitsu president Akihiko Tembo, who said Japan’s second-biggest refiner is likely to reduce crude oil throughput in January. In the three months ending Dec. 31, Idemitsu will cut processing by 15 percent from a year earlier, down 1 percentage point from the original plan made in early September.

“Japanese refiners are making additional cuts to output because exports are not making as much money as before,” Tembo, who also heads the Petroleum Association of Japan, told reporters at its monthly press conference on Nov. 27.

Oil product exports, especially gasoil, had been a savior for Japanese refiners as robust demand from other countries such as China offset the decline in domestic sales.

Surplus Capacity

“Now that fuel demand is falling, both at home and overseas, Japanese refiners are required to reduce supply,” said Tetsu Emori, a fund manager in Tokyo with Astmax Ltd., Japan’s biggest commodities asset manager. “The options left for Japanese refiners are to reduce supply by cutting processing or scrapping refineries.”

Japan’s total refining capacity is 4.89 million barrels a day, according to the Petroleum Association of Japan. The trade ministry’s statistics show Japan processed 4.02 million barrels of crude oil a day in the year ended March, a 22 percent surplus capacity when industry expects oil product demand to fall further.

So far, only Nippon Oil has announced plans to scrap a refinery. The 60,000 barrels-a-day Toyama plant in central Japan will be closed by March 2009 to tackle shrinking demand, the company said in April.

Profit Margins

The profit margin for processing a barrel of Dubai Crude oil into Singapore 0.5 percent sulfur gasoil, the Asian benchmark, averaged $16.59 between Oct. 1 and Dec. 2, down from $37.56 for the quarter ended June 30 and $25.82 for the quarter ended Sept. 30, according to data compiled by Bloomberg. The margin, known as the crack spread, reflects gasoil demand in Asia.

“Gasoil is becoming more like an import product for Japanese refiners in December, rather than an export product,” said Daisuke Kawashima, a Tokyo-based gasoil trader at Hanwa Co. “The cut in production by Japanese refiners is helping to create room for imports.”

Nippon Oil’s output of middle distillates, which include gasoil and kerosene, fell 16 percent to 2.04 million kiloliters in November compared with the previous year because of slow domestic sales and fewer exports. The company plans to refine 14 percent less middle distillates from a year ago in December.

“The grade of crude oil we process now is heavier than usual for this time of year because of sluggish demand for light products,” Nippon Oil’s Nakamura said, declining to elaborate.

In the lead up to winter, Japanese refiners typically process more expensive lighter grades of crude, which yield lighter products including kerosene, when demand for the heating oil peaks.

The trend toward heavier crude has affected the price spread between Saudi Arabian Extra Light crude oil and Heavy grade. The differential dropped to $6.20 a barrel for November loading from $14.05 a barrel for July loading cargoes.

To contact the reporter on this story: Yuji Okada in Tokyo at yokada6@bloomberg.net.