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Japanese refiners face up to falling products exports

By Takeo Kumagai

July 3 - Japan's domestic oil demand has continued down a slippery slope this year, forcing refiners in the country to drop their collective capacity utilization to a mere 64% by mid-June, unusually low even for the traditional peak maintenance season.

The sharp cut from rates of 72-73% in May is attributed to refiners wanting to cut losses in the face of worsening refining margins and lackluster export markets for their products.

Although the country's peak maintenance season is scheduled to end in early July, several refiners are said to be considering keeping crude throughput rates low through the third quarter, as they see no hope of a demand recovery either at home or abroad.

Sources now estimate Japan's average refining rate is likely to remain around 70% over the July-September quarter, compared with 80% in the same period last year, slowing oil products exports further. (See related chart: Japan's export and import of oil products: January - March 2009.)

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Japan's oil products exports in the first four months of 2009 were down nearly 2% on the year as volumes fell away sharply in April, and now double-digit falls are expected in the second quarter amid deteriorating profit margins for exports, industry sources told Platts.

The country's refined products exports typically slow in the April-June period, when its refinery maintenance season peaks, but the falls are expected to be deeper this year as refiners cut runs by more than normal in the face of less attractive export prices and depressed domestic demand, sources said.

Refinery run rates were initially forecast to hover around 72-73% and are expected to remain at such levels until early July at least.

However, run rates may remain lower beyond mid-July unless domestic and global demand for oil products picks up significantly, said sources, citing high oil products inventories around the world.

In other words, Japan's average refining rate of more than 80% cannot be sustained in the absence of steady demand for exports, which would leave surplus capacity and could force some refiners to consolidate assets, sources said.

January - April stats

Japan's oil products exports volume in the January-April period slid 1.6% from a year ago to 497,099 b/d, dragged down by large drops in middle distillates exports in April, according to data compiled by the Ministry of Economy, Trade and Industry (METI).

In April, oil product exports dropped 12.9% year on year to 467,588 b/d, with middle distillate exports down 93.7% year on year to 565 b/d.

Gasoil exports plunged 28.8% from a year ago to 137,956 b/d, while jet fuel exports slid 8.8% to 149,033 b/d. (See related chart: Platts Singapore 0.5% sulfur gasoil assessments FOB Singapore ($/bbl): January 2 - June 30 2009.)

Over the first quarter ended on March 31, Japan's refined products exports averaged 512,459 b/d, up 3.6% from a year ago but down 16.2% from the previous quarter ended December 31, 2008, METI data showed.

The year-on-year increase in exports in the first quarter was led by gasoil and fuel oil, which jumped 23.1% and 19.9% respectively to 219,191 b/d and 169,526 b/d, according to METI data.

Fuel oil exports jumped in the January-March period this year despite it being the peak winter demand season because of diminished demand from the power sector, particularly the industrial sector amid the economic slowdown.

Gasoil was the most exported middle distillate in the period as Japan does not normally export kerosene and jet fuel, which has similar specifications to kerosene, in the January-March period. Kerosene is used as heating oil in the country. (See related chart: Platts Singapore jet kerosene assessments FOB Singapore ($/bbl): January 2 - June 30 2009.)

In the wake of colder than usual temperatures in Japan in early January, local refiners had hiked their kerosene or jet fuel imports for February because it was more economical to import than increase crude runs.

Kerosene imports were up 473.8% year on year at 19,465 b/d in the January-March period, while the country also imported 1,049 b/d of jet fuel in the period. There were no middle distillate imports in the period last year, according to METI data.

However, Japan's total refined products imports volume was down 21.3% from a year earlier and 17.7% from the previous quarter in the January-March quarter at 408,903 b/d, METI data showed.

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