Japan's refiners fret over lower runs, export slump on coronavirus

Tokyo — The latest Japanese refinery outage has more than doubled the proportion of capacity offline to 11% from 5% in January, with crude runs expected to remain low in March on slowing jet fuel and gasoil demand as a result of the coronavirus outbreak.

The sharp reduction in run rates and capacity online so far in February is largely down to heating demand for kerosene falling to the lowest in 50 years.

In addition, Japanese refiners are already reviewing their production plans beyond March as major airlines make further cuts in the number of flights to China in response to the coronavirus outbreak, which would cause exports of gasoline, jet fuel and gasoil to fall on the year.

A number of Japanese refiners said they were all concerned about slowing demand for jet fuel and gasoil beyond March because of the growing number of flights suspended, coupled with slowing gasoil demand for trucks.

"We are extremely concerned about decreasing gasoil demand beyond March because of expected slowdowns in demand for transporting containers by trucks because the number of container ships from China are decreasing significantly," Petroleum Association of Japan President Takashi Tsukioka told a press conference on February 20.

In tandem with a drop in crude throughput in recent weeks, Japan's exports of key products such as gasoline, gasoil and jet fuel have shrunk by 45%, 32% and 5% respectively on the year to 1.85 million barrels, 3.54 million barrels and 4.86 million barrels in the four weeks ended February 22, according to S&P Global Platts calculations based on PAJ data.

Sluggish kerosene demand

Japan's largest refiner, JXTG Nippon Oil & Energy, said Thursday it had shut its 180,000 b/d Mizushima-B plant in western Japan until further notice, declining to provide the reason for the shutdown over two phases in February.

The unplanned shutdown of Mizushima-B took the amount of Japanese refinery capacity offline to 11% of the 3.52 million b/d total.

JXTG is also carrying out a scheduled maintenance program at its sole 120,000 b/d crude distillation unit at the Marifu refinery in western Japan. Idemitsu Kosan's 70,000 b/d Keihin refinery in Tokyo Bay being shut after a fire incident in late December.

JXTG also plans to shut in mid-March its 65,000 b/d No. 3 crude distillation unit at its 235,000 b/d Kawasaki refinery in Tokyo Bay for scheduled maintenance until late June.

The shutdown of Mizushima-B came as Japan's kerosene demand dropped to its lowest for a February in 50 years as a result of warmer-than-usual weather.

Kerosene demand is estimated at 2.01 million kiloliters or 12.64 million barrels in February, down 10% year on year, JXTG Nippon Oil & Energy said Thursday. That would be the lowest since 1970's 1.81 million kl, according to the Ministry of Economy, Trade and Industry data.

Japan's domestic kerosene rack prices in Chiba, East of Tokyo Bay, Yen 58,700/kl ($84.91/b), down Yen 300/kl from Wednesday and have fallen Yen 3,200/kl since beginning of February, according to Platts data. The prices rebounded from February 14 after a 23 consecutive trading days of falls.

Bearish jet

The dearth of demand was reflected in Singapore jet fuel prices, which have averaged $63.78/b so far in February, down 15.4% from January's average, Platts data showed.

The bearishness was also evident in the derivatives market as the front-month March/April contango steepened to minus 27 cents/b at the Asian close Wednesday, 13 cents wider day on day and 9 cents wider since the beginning of February.

The Q2/Q3 contango hitting its widest in 39 months of $1.27/b Wednesday is indicative of bearish market expectations for the kerosene/aviation sector.

"The outlook for jet [fuel] is not optimistic to be honest, and it will remain this way until China finds a way to contain the coronavirus. Look at what's happening in ... [South] Korea and Japan -- cracking margins for jet are so weak now that refiners will look to maximize output of gasoil and minimize jet output," an Asian refiner said.

Flights to China by Japan's top two airlines -- All Nippon Airways and Japan Airlines -- are now expected to be down 76% to 80 and 65% to 34 respectively in early March due to massive cancellations following the coronavirus outbreak.