Japan's refining industry 'oversupplied,' executive says

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Dec. 12 -- Oversupply will persist in Japan's refining industry, and further consolidations will be necessary if demand continues to decline, according to Kenichi Matsui, managing director, finance, at Idemitsu Kosan Co.

Moreover, Matsui told the Nikkei Business Daily that the planned merger of top refiner Nippon Oil Corp. and Nippon Mining Holdings, which controls sixth-ranked Japan Energy Corp., will not solve the problem of oversupply.

Matsui said Japanese gasoline demand peaked 3 years ago, and the decline accelerated this year.

With the adoption of alternative energies now in full swing, Matsui said, gasoline demand likely will fall by about 5%/year in the near future.

"The merged entity is scheduled to reduce crude oil processing by 400,000 b/d (about 8% of domestic capacity)," Matsui said. "This will ease the supply-demand imbalance, but will not solve the issue of oversupply. The industry as a whole needs to proceed with structural reform."

Regarding the needed reforms, Matsui said with demand declining at an increasing pace, refiners are stepping up their output cuts and that Idemitsu Kosan plans to cut production by 15% year-on-year in 2008's last quarter.

"However," he said, "such temporary cuts will soon not be sufficient. In 2003, our company closed two of our domestic refineries. If demand keeps falling, then players other than Nippon Oil and Nippon Mining will also be forced to close down refineries."
Matsui said oil prices have been fluctuating "drastically" because of speculation that was not tied to actual demand, and because of the financial crisis. It is possible that oil prices will now better reflect actual demand.

Financial burden to ease
"Idemitsu Kosan's domestic operations will be in the black should crude stay at about $40/bbl," he said. "However, our profits will deteriorate if crude prices increase while domestic demand remains stagnant. To keep our refinery operations profitable, we will export to wherever prices are high."

Asked about the impact of the 70% drop in crude prices since July, Matsui said that in October his firm changed its method of determining wholesale product prices from one based on accumulated costs to one linked to the market price of crude.

"This change coincided with the recent sharp drop," he said. "We have reduced wholesale gasoline prices by ¥50/l. since October, and have been able to stay profitable."

"Our debt exceeded ¥1 trillion as of the end of September, mainly due to an increase in working capital amid the rise in crude prices," Matsui said, adding that working capital has since declined along with the drop in crude prices.

"Our financial burden is likely to continue to ease moving forward," Matsui said.

Contact Eric Watkins at hippalus@yahoo.com.

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