Margin recovery fuels Asian refining stocks

SINGAPORE/SEOUL: A big recovery in the long-stagnant Asian oil refining profit margins — driven by demand from China and Japan — has fuelled a bull-run in shares of the region’s refineries. The party seems far from over.

Shares of refiners and oil firms with refining operations in countries from South Korea to India have soared 40-160 percent in the past six months. Star performers included China’s Sinopec Corp, Asia’s largest refiner, South Korea’s SK Corp and S-Oil, as well as Thailand’s PTT PCL.

The run has lost some steam lately on fears current profit margins for refining crude into lighter products, or complex margins, may have peaked. Complex margins averaged $6.43 per barrel in Singapore last month, the highest since 1996, versus $4.23 in 2003 and $2.10 in 2002.

But analysts and fund managers say some refining shares have more upside as oil demand is quickly soaking up extra capacity, and no major new refineries will be built in the near future.

“I don’t see huge capacity being built right now. I don’t see a new refinery coming on stream. And we see demand increasing,” said Kenneth Quinn, head of Asia Pacific oil and gas banking for JP Morgan. “I can’t see the reason for being bearish.”

Solid economic growth across the region — forecast at between four and eight percent this year, excluding Japan — is boosting oil consumption. But some said margins were driven by seasonable demand and might ease in the second quarter, especially in Japan. Demand was driven by the temporary shutdown of some nuclear power plants in Japan. Some of these nuclear plants are resuming production.

“It seems current (margin) improvement is just short-lived because it is not driven by demand,” said Masanori Maruo, oil and utilities analyst at Deutsche Securities Ltd. “Growth in immediate demand in the local market is almost flat.”

Recovery sustainable? After five years of ultra-thin margins, or even losses, and chronic oversupply, profits have surged and many plants are pumping oil at near to full capacity in Asia, which accounts for a quarter of the world’s total.

The International Energy Agency predicts Asian oil demand to grow 2.6 percent to 22.5 million barrels per day this year. Banks such as Morgan Stanley said incremental demand would outstrip supply in 2004-2005, while CLSA believed that refining margins would stay high for at least two years.

Some analysts said Asian oil demand was mainly spurred by China’s state infrastructure spending and its acute power shortage, not by steady private consumption.

“Lots of good news on oil prices and refining margins have been factored in stock prices,” said Flavia Cheong at Aberdeen International Fund Managers Ltd in Singapore. Richard Wong, chief portfolio manager for HSBC Asset Management’s $2 billion China fund, said he still liked Sinopec Corp, which is involved in crude oil and petrochemical production, and its unit Zhenhai Refining.

Upside desired: In India, Asia’s third-largest economy, stronger sales and higher margins have sparked a rally in shares of Bharat Petroleum Corp Ltd, and Indian Oil Corp Ltd

“There is still scope for upside. We do not believe that refiners have participated fully in the broader market rally, so there is still value in the sector,” said Gul Teckchandani, chief investment officer at Bombay-based fund house Sun F&C.

They are trading at an average 7.2 times their prospective earnings for financial year 2005, a 30 percent discount to their global peers, Morgan Stanley said.

South Korean refiners SK Corp and S-Oil have strongly emerged from years of poor margins as the opening of the oil market to foreign competition in 1997 coincided with the Asian crisis. —Reuters

Home | Business