Japan Industry Outlook / 38 2012 No.1
Japan Industry Outlook / 38 2012 No.1 Table of Contents
1, Comprehensive Industry - Japan 2, Iron and Steel - Japan 3, Non-ferrous Metals - Japan
15, Broadcasting (Japanese only) 16, Marine Shipping (Japanese only) 17, Logistics - Japan
4, Paper and Pulp (Japanese only) 18, Electric Power - Japan 5, Cement - Japan 19, City Gas (Japanese only) 6, Chemicals - Japan 20, Retail - Japan 7, Pharmaceuticals - Japan 21, Food and Beverage - Japan 8, Petroleum - Japan 22, Food Service Industry - Japan 9, Automobiles - Japan 23, Construction (Japanese only) 10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan 11, General Machinery (Japanese only) 25, Travel and Tourism - Japan 12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese 13, IT Services - Japan only) 14, Telecommunications - Japan 27, HR Service Industry (Japanese only)
Contact: Industry Research Division Mizuho Corporate Bank, Ltd. [email protected]
FY2012 Japan Industry Outlook (Petroleum)
Petroleum Summary ■ Domestic demand for petroleum products in FY2011 is expected to dip 0.2% from the previous fiscal year to 195.6 million kiloliters under the greater impact of structural factors, such as improved fuel efficiency and the fuel switchover, though demand for fuel oil C is likely to increase in association with the falling operating rate of nuclear power plants. In FY2012, with the overall picture of structural factors and the sluggish economy putting a damper on demand remaining intact, domestic demand for petroleum products is likely to decline a further 5.1% year on year to 185.7 million kiloliters, falling short of the 190-million-kiloliter mark for the first time since FY1986. ■ Exports of petroleum products in FY2011 are expected to turn down 9.5% to 27.4 million kiloliters due primarily to the export cutbacks immediately after the Great East Japan Earthquake. With a significant increase unlikely as competition moves into high gear in the Asia-Pacific region, exports in FY2012 are estimated to remain subdued with a meager 0.2% rise to 27.5 million kiloliters. ■ Production of petroleum products in FY2011 is expected to drop 1.8% year on year to 189.5 million kiloliters due to poor demand both at home and abroad. With exports unable to cover a decrease in domestic demand, production is likely to remain on a downtrend and decline 3.0% to 183.9 million kiloliters. ■ Operating income of the five major oil companies in FY2011 is expected to rise 20.1% over the previous fiscal year to JPY740.7 billion, primarily due to the positive impact of inventory valuation. Excluding the impact of inventory valuation, however, operating income is likely to fall 12.0% to JPY443.4 billion, with the core petroleum products sector turning down due to narrower refining margins. Operating income in FY2012 is estimated to fall steeply by 48.9% to JPY378.6 billion, as the impact of inventory valuation turns negative due to a somewhat soft crude oil market. Operating income excluding inventory valuation is also expected to drop 3.3% to 428.9 billion as the earnings situation in the petroleum sector remains severe.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
I. INDUSTRY TRENDS
[Fig. 8-1] Demand by Petroleum Product
Gasoline Naphtha Jet Fuel Kerosene Diesel Fuel Fuel Oil A Fuel Oil C Total
Summary (Unit) 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl
【Rate of Increase/Decrease】 (Year on Year) 【Actual】 10fy 11fy 12fy 10fy 11fy 12fy (Result) (Estimate) (Forecast) (Result) (Estimate) (Forecast) 58,197 56,451 54,645 + 1.3% - 3.0% - 3.2% 46,668 44,288 44,199 - 1.4% - 5.1% - 0.2% 5,154 4,515 4,510 - 2.4% - 12.4% - 0.1% 20,332 18,929 18,210 + 1.4% - 6.9% - 3.8% 32,864 32,371 31,756 + 1.5% - 1.5% - 1.9% 15,404 14,495 14,046 - 4.0% - 5.9% - 3.1% 17,330 24,590 18,350 + 5.5% + 41.9% - 25.4% 195,948 195,638 185,715 + 0.5% - 0.2% - 5.1%
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts. Fuel oil C for power-generation use was calculated under the assumption that nuclear power plants currently shut down or about to enter routine inspection would resume operations gradually from June 2012 onward, starting with nuclear power plants for which the safety was confirmed.
1. Domestic demand:
On the downtrend again in both FY2011 and FY2012
FY2011 will once again see structural factors coming to the fore, despite increased demand for fuel oil C for power generation
Domestic demand for petroleum products in FY2011 is expected to dip 0.2% from the previous fiscal year to 195.6 million kiloliters (Figure 8-1). Breaking this down by product, however, except fuel oil C, which will likely zoom up 41.9% year on year to 24.6 million kiloliters due to increased operations of oil-burning thermal power plants associated with the substantial cutback on operations of nuclear power plants, demand for all other products are expected to decline under the greater impact of structural factors, on top of the disappearance of positive weather factors stemming from the scorching summer in FY2010. By product, gasoline, the linchpin of domestic demand, is estimated to drop 3.0% from the previous fiscal year to 56.5 million kiloliters, due to improved fuel efficiency and a decrease in mileage per vehicle, as well as an unfavorable turn from the record-breaking heat wave in FY2010. Diesel fuel, despite some demand related to efforts for a recovery from the Great East Japan Earthquake, is also likely to turn down by 1.5% from the previous fiscal year to 32.4 million kiloliters. Amid the ongoing progress in the fuel switchover, kerosene is expected to fall 6.9% year on year to 18.9 million kiloliters and fuel oil A 5.9% to 14.5 million kiloliters, while naphtha is estimated to decline 5.1% from the previous year to 44.3 million kiloliters owing to a decrease in ethylene production.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
Domestic demand for fuel oils in FY2012 may drop below 190 million kiloliters for the first time since FY1986, with structural factors continuing to put a damper on demand
In FY2012, with the overall picture of structural factors and the sluggish economy putting a damper on demand remaining intact, domestic demand for petroleum products is likely to decline a further 5.1% from the previous year to 185.7 million kiloliters, falling short of the 190-million-kiloliter mark for the first time since FY1986. By product, reflecting improved fuel efficiency and shorter mileage per vehicle, demand for gasoline is expected to fall 3.2% from the previous fiscal year to 54.6 million kiloliters and diesel fuel 1.9% to 31.8 million kiloliters, both suffering a year-on-year drop for the second consecutive year. Because of further progress in the fuel switchover, demand for kerosene is also likely to continue to fall, by 3.8% to 18.2 million kiloliters, and fuel oil A is estimated to drop 3.1% to 14.0 million kiloliters. Naphtha is expected to move largely sideways as a sharp fall in production of petrochemical products is seen unlikely, edging down 0.2% to 44.2 million kiloliters. Demand for fuel oil C is likely to turn sharply down by 25.4% from the previous year to 18.4 million kiloliters, assuming that nuclear power plants will resume operations gradually from around June to brace for the peak electric power demand in summer, which should in turn reduce demand for fuel oil C for power generation.
2. Exports and Imports: A significant expansion in exports of petroleum products unlikely Exports of petroleum products seen to turn down again
After marking a year-on-year rebound in FY2010 for the first time in two years, exports of petroleum products in FY2011 are expected to turn down again by 9.5% to 27.4 million kiloliters due to the decline in the first half of the year that primarily resulted from the moves by the oil companies in Japan to cut back on sales overseas immediately after the earthquake in March 2011 (Figure 8-2). In FY2012, while continued firmness in demand in the Asia-Pacific region will likely help secure a level of export volumes, overall exports of petroleum products are expected to see only a meager rise of 0.2% over the previous fiscal year to 27.5 million kiloliters, as a significant recovery seems unlikely given an expected expansion of supply capacity in the region ascribable to plans to build more refineries mainly by China and India and fierce rivalry with highly competitive export-oriented refineries overseas.
Imports of fuel oil C for power generation and gasoline on the rise recently
Imports of petroleum products in FY2011 are expected to grow 13.5% over the previous fiscal year to 37.5 million kiloliters. Imports of fuel oil C for electric power generation increased in response to the sharp drop in operations of nuclear power plants, while imports of gasoline remain at a high level after the increase amid concerns over a possible shortage of petroleum products immediately after the earthquake (Figure 8-3). However, imports in FY2012 are likely to decline 5.6% from the previous fiscal year to 35.4 million kiloliters on the assumption that purchases of fuel oil C for power generation will turn down following the resumption of nuclear power plant operations.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-2] Export Volumes of Petroleum Products （million kl） 25
Gasoline Kerosene Diesel Fuel Fuel Oil
20
(Note) Excluding bunker oil
15 10 5 0 2003
2004
2005
2006
2007
2008
2009
2010
2010 1H 2011 1H （FY）
(Source) Compiled by MHCB Industry Research Division based on trade statistics.
[Fig. 8-3] Import Volumes of Petroleum Products （million kl) 5
4.6
【Fuel Oil C】
4.6
4
3.0
2.5
2.0
2
0.5
2.3
1H
0.8
2.3
1.2
1.4
2 3.2 2.2
2H
2.2
1H
1.4 3.2
1
【Gasoline】
2H
4.1
3
（million kl） 3
1
2.9
2.1
2.0
1.1
0.8
1.5
1.7
1.5
0.7 0.2
1.7 0.6
0 2006
2007
2008
2009
2010
2011 (FY)
2005
2006
2007
0.4
1.8
0.4 0.4 0.2
0 2005
0.9
0.8
2008
0.5 2009
0.7 2010
2011 (FY)
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan.
3. Production: Production seen likely to drop due to poor demand both at home and overseas Production is expected to drop due to poor demand both at home and abroad
Given the above, production of petroleum products in FY2011 is expected to decline 1.8% to 189.5 million kiloliters, faster than the year-on-year drop in domestic demand, amid poor demand both at home and abroad and increasing imports (Figure 8-4). In FY2012, production will likely be squeezed further to decline 3.0% from the previous fiscal year to 183.9 million kiloliters because of an anticipated drop in domestic demand, while exports will stay largely flat.
The capacity utilization rate of refineries seen dipping below 80% again
After the steady decline from 90% in FY2005, the real capacity utilization rate of refineries, which does not count the stoppage for scheduled repair, recovered to 80% in FY2010. But the utilization rate is expected to dip slightly below 80% again in both FY2011 and FY2012, though the Ogimachi plant of the Keihin refinery of Toa Oil Co., a subsidiary of Showa Shell Sekiyu, was shut down as planned in September 2011 (Figure 8-5). However, it is deemed
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
possible to bring the utilization rate back above 80% if major oil companies proceed to adequately reduce their supply capacity in accordance with the Law concerning Sophisticated Methods of Energy Supply Structures. Idemitsu Kosan in November 2011 announced a plan to shut down the Tokuyama refinery in March 2014.
[Fig. 8-4] Supply and Demand of Petroleum Products 【Actual】 Summary
10fy
（Unit）
(Result)
Domestic Demand 1,000 kl Export 1,000 kl
11fy
12fy
(Estimate) (Forecast)
11/1H
11/2H
(Result)
12/1H
12/2H
(Estimate) (Forecast) (Forecast)
195,948
195,638
185,715
88,605
107,034
86,369
99,346
30,282
27,402
27,457
14,328
13,074
14,715
12,742
Import
1,000 kl
33,067
37,529
35,429
18,378
19,151
18,218
17,210
Production
1,000 kl
192,976
189,515
183,876
87,404
102,111
87,289
96,587
Summary
10fy
11fy
12fy
（Unit）
(Result)
【Rate of Increase/Decrease】
(Estimate) (Forecast)
11/1H
11/2H
(Result)
12/1H
12/2H
(Estimate) (Forecast) (Forecast)
Domestic Demand
%
+ 0.5%
- 0.2%
- 5.1%
- 3.7%
+ 3.0%
- 2.5%
- 7.2%
Export
%
+ 1.2%
- 9.5%
+ 0.2%
- 10.7%
- 8.2%
+ 2.7%
- 2.5%
Import
%
+ 11.0%
+ 13.5%
- 5.6%
+ 16.7%
+ 10.6%
- 0.9%
- 10.1%
Production
%
- 0.7%
- 1.8%
- 3.0%
- 6.1%
+ 2.2%
- 0.1%
- 5.4%
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
（mb/d）
[Fig. 8-5] Excess Refining Capacity and Real Operating Rate at Oil Refineries in Japan
90%
2.0
86%
90%
86% 81%
1.8
80% 77%
1.6 1.4
78%
85% 77%
80% 75%
Excess Capacity
1.2
70% Real Operating Rate (Right Axis)
1.0
65%
0.8
60%
0.6
55%
0.4
50%
0.2
45%
0.0 2005
2006
2007
2008
2009
2010
2011e
2012e
40% (FY)
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts. The real operating rate refers to the operating rate excluding the effects of regular shut down maintenance.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
II. CORPORATE EARNINGS 1. Earnings in FY2011 forecast to drop in real terms despite positive impact of inventory valuation Earnings in FY2011 are expected to drop in real terms in FY2011 due to poor core businesses, despite gain on inventory valuation
Operating income of the five major listed oil companies in FY2011 is expected to soar 20.1% over the previous year to JPY740.7 billion (Figure 8-6). However, discounting the positive impact of inventory valuation, operating income excluding inventory valuation is estimated to decrease 12.0% from the previous fiscal year to JPY443.4 billion. In FY2011, Tonen General Sekiyu changed the inventory valuation method, which effectively pushes up its operating income by around JPY600 billion, and other oil companies are also benefiting from the positive impact of inventory valuation stemming from rises in crude oil prices. By sector, operating income of the exploration and production sector is estimated to surge 51.8% over the previous fiscal year to JPY164.9 billion due to crude oil prices. Operating income of the petrochemical sector is also expected to surge 93.7% to JPY65.3 billion, with expense reduction and rationalization efforts more than offsetting negative factors, including a drop in sales volume. However, operating income of the petroleum products sector, the core business, is likely to plunge 39.4% from the previous fiscal year to JPY204.0 billion (Figure 8-8) due to narrower refining margins (Figure 8-7). [Fig. 8-6] Corporate Earnings Outlook 【 Actual】 10fy
(Unit)
(Result)
11fy
12fy
(Estimate)
(Forecast)
Net Sales
(JPY 100 million)
198,694
221,619
197,369
Operating Income
(JPY 100 million)
6,168
7,407
3,786
Operating Income (Excl. Inventory Valuation)
(JPY 100 million)
5,040
4,434
4,289
(Unit)
【 Rate of Increase/Decrease】 (Year on Year) 10fy 11fy 12fy (Result)
(Estimate)
(Forecast)
Net Sales
%
+ 9.9%
+ 11.5%
- 10.9%
Operating Income
%
+ 514.0%
+ 20.1%
- 48.9%
Operating Income (Excl. Inventory Valuation)
%
(Returned to the black)
- 12.0%
- 3.3%
(Source) Compiled by MHCB Industry Research Division based on IR materials from each company. (Note) Five listed oil companies: Showa Shell Sekiyu, Cosmo Oil, Tonen General Sekiyu, Idemitsu Kosan, JX Holdings, Inc. (excluding metals sector). Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-7] Trends of Refining Margins by Product （JPY/l） Gasoline
18
Kerosene
16
Diesel Fuel
14
Fuel Oil A
12
09fy 2H
10
10fy 1H average
[Fig. 8-8] Operating Income by Sector (JPY 100 million) 8,000
10fy 2H average
Operating Income
Operating Income Excl. Inventory Valuation
7,000
11fy 1H
6,000 5,000
09fy 1H
Other
4,000
8 6
3,000
4
2,000
2
1,000
0
0
-2
-1,000
09/4 09/7 09/10 10/1 10/4 10 /7 10/10 11/1 11/4 11/7
E&P Petrochemical
Petroleum Products Inventory Valuation
（FY） 2010
2011e
2012e
(Source) Compiled by MHCB Industry Research Division based (Source) Compiled by MHCB Industry Research Division based on IR materials from each company. on data from “Sekiyu Tsushin”. (Note) Refining margins: brokered price – (crude oil CIF + tax). (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
2. Significant earnings recovery in FY2012 unlikely, with operating income excluding inventory valuation dropping Operating income excluding inventory valuation seeing a year-on-year fall in FY2012 as well
Operating income in FY2012 is expected to turn down 48.9% from the previous fiscal year to JPY378.6 billion due mainly to the disappearance of the positive impact of inventory valuation that contributed to the higher income in FY2011 as a result of a somewhat softer crude oil market. In real terms, excluding inventory valuation, operating income is also likely to dip 3.3% to JPY428.9 billion. By sector, operating income of the petroleum refining sector is expected to drop 7.9% from the previous fiscal year to JPY187.8 billion as a result of a decrease in sales volumes, while operating income of the petrochemical sector is likely to edge down 0.2% to JPY65.1 billion as a significant market recovery is unlikely. Due to drops in crude oil prices, operating income of the upstream sector is also estimated to decline 7.9% year on year to JPY152.0 billion.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
III. TOPICS: CONSIDERATION OF PROMISING BUSINESS SECTORS OVER THE MEDIUM TERM – THE PETROLEUM INDUSTRY The petroleum industry is faced with the challenge of breaking away from the diminishing equilibrium of the petroleum products business associated with the shrinking domestic demand
As discussed above, the environment surrounding the core business of the petroleum products sector is likely to become increasingly severe in light of the underlying trend toward shrinkage of domestic demand for petroleum products as well as intensifying competition in the export markets in the Asia-Pacific region. Although an expansion of excessive capacity and a decline in the capacity utilization rate may be checked to a certain extent as oil companies proceed to adequately reduce the supply capacity by the end of FY2013 in line with the Law concerning Sophisticated Methods of Energy Supply Structures, it appears that the petroleum industry continues to face the challenge of breaking away from the diminishing equilibrium of the core business, as domestic demand for petroleum products will likely continue to reduce over the medium and long term in tandem with the further progress in structural factors.
Upstream business is the key area for diversification and overseas business expansion over the medium term
Already, Japanese oil companies have been proactively pursuing diversification and advances overseas, but it requires a considerable amount of investment and time to establish sufficient revenue base to counter the shrinkage of the core business. Under these circumstances, one of the promising business areas for the Japanese petroleum industry over a medium-term time span of 10 years going forward appears to be upstream business. In other words, Japanese oil companies will be strongly urged to firmly establish the two-wheel structure of upstream and downstream business by bolstering the upstream sector, which is already contributing to them as a source of revenue, and seeking to enhance its profitability further. By building up the business structure under which the exploration and production sector can be counted on as a stable source of cash flows together with the petroleum products sector, they should become capable of working out their investment capacity and establishing a long-term operating base that can realize an aggressive growth strategy.
Significance of the expansion of upstream business for Japan’s oil companies
In the field of upstream business, in the spotlight in recent years are efforts to secure natural gas resources against the backdrop of prospects for increased demand for natural gas. On the other hand, given that (1) demand for petroleum is expected to grow globally, particularly among emerging economies, (2) petroleum continues to command a certain share in Japan’s primary energy, (3) the importance of petroleum as a distributed energy was recognized anew following the earthquake, and (4) the Japanese portfolio of upstream interests, we believe that efforts to boost initiatives in the upstream business are of significance. In order for oil companies to seek the sustained expansion of upstream business, what is called for is a strategy to acquire interests by considering costs of acquiring concessions and mining rights and business risks at each business stage as well as characteristics of investment returns when upstream projects shift to commercial production (Figure 8-9).
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-9] Image of Business Flow in Upstream Development Geophysical exploration / Test well drilling
High
Exploration stage
Development well drilling / Construction of production / shipment facilities
Development stage
Mining rights / concession acquisition costs
Shift to evaluation/development
Production stage
Start of production/sales
Sustained growth of upstream development business (Maintenance/expansion of reserves/output
Production stage Development stage
Low
Exploration
stage Common investment return on the shift to commercial production
High Low High
Business risk (Geological risk / Operational risk / Oil price fluctuation risk)
Low
(Source) Compiled by MHCB Industry Research Division Promising areas and constraints in upstream business
While room for the new entry into so-called easy oil in conventional oil fields appears rather limited, participation in the development of unconventional oil, of which production is expected to expand going forward, can also be one option. For example, shale oil (tight oil), whose production is likely to expand in the United States in the next decade, can be a promising area of petroleum resources development. However, shale oil development involves constraining factors other than business risks, such as geological risks and operational risks inherent in the development of conventional oil fields. For example, regarding price levels of crude oil, in additional to the maintenance of crude oil prices higher than production costs, the price advantage in relation to shale gas that can be produced with similar technologies is necessary. Due heed also needs to be paid to production cost rises if prices of materials and equipment and labor costs go up in association with the rapid growth of shale oil development. Furthermore, environmental risks and problems related to the development of transportation infrastructure may become constraints on developers.
Contribution to Japan’s energy security
Despite problems and constraints discussed above, stepped-up efforts in upstream business areas, including unconventional oil, should lead to a broadening of revenue sources over the medium term to Japanese oil companies. Initiatives in these business areas are also of great significance from the perspective of energy security, as they should contribute to the enhancement of the independent development ratio of petroleum resources, targeted at 40% by 2030, and to the reduction in Japan’s dependence on the Middle East through diversification of upstream business areas.
Initiatives through organic government-private sector partnership are essential
Needless to say, the acquisition of upstream interests requires self-help efforts on the part of private-sector petroleum companies. Amid intense international competition for resources, however, organic partnership between the
10 Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
government and the private sector will likely gain in importance, as exploration and development funding, such as the provision of risk money through Japan Oil, Gas and Metals National Corporation (JOGMEC) and financial support by government-affiliated financial institutions, and government support for technology/collection of information and building cooperative relations with oil-producing countries are essential. In addition, cooperation among petroleum companies in the upstream business and cooperation with other industry sectors from the perspective of the dispersion of investment burdens and business risks should make it possible for Japanese companies to get involved in larger-scale upstream projects. We sincerely hope that the Japanese petroleum industry will achieve sustainable growth by weathering out the shrinking domestic demand and intensifying export competition.
Terukuni Isokawa [email protected] HU
11 Mizuho Corporate Bank, Industry Research Division
U
1, Comprehensive Industry - Japan 2, Iron and Steel - Japan 3, Non-ferrous Metals - Japan
15, Broadcasting (Japanese only) 16, Marine Shipping (Japanese only) 17, Logistics - Japan
4, Paper and Pulp (Japanese only) 18, Electric Power - Japan 5, Cement - Japan 19, City Gas (Japanese only) 6, Chemicals - Japan 20, Retail - Japan 7, Pharmaceuticals - Japan 21, Food and Beverage - Japan 8, Petroleum - Japan 22, Food Service Industry - Japan 9, Automobiles - Japan 23, Construction (Japanese only) 10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan 11, General Machinery (Japanese only) 25, Travel and Tourism - Japan 12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese 13, IT Services - Japan only) 14, Telecommunications - Japan 27, HR Service Industry (Japanese only)
Contact: Industry Research Division Mizuho Corporate Bank, Ltd. [email protected]
FY2012 Japan Industry Outlook (Petroleum)
Petroleum Summary ■ Domestic demand for petroleum products in FY2011 is expected to dip 0.2% from the previous fiscal year to 195.6 million kiloliters under the greater impact of structural factors, such as improved fuel efficiency and the fuel switchover, though demand for fuel oil C is likely to increase in association with the falling operating rate of nuclear power plants. In FY2012, with the overall picture of structural factors and the sluggish economy putting a damper on demand remaining intact, domestic demand for petroleum products is likely to decline a further 5.1% year on year to 185.7 million kiloliters, falling short of the 190-million-kiloliter mark for the first time since FY1986. ■ Exports of petroleum products in FY2011 are expected to turn down 9.5% to 27.4 million kiloliters due primarily to the export cutbacks immediately after the Great East Japan Earthquake. With a significant increase unlikely as competition moves into high gear in the Asia-Pacific region, exports in FY2012 are estimated to remain subdued with a meager 0.2% rise to 27.5 million kiloliters. ■ Production of petroleum products in FY2011 is expected to drop 1.8% year on year to 189.5 million kiloliters due to poor demand both at home and abroad. With exports unable to cover a decrease in domestic demand, production is likely to remain on a downtrend and decline 3.0% to 183.9 million kiloliters. ■ Operating income of the five major oil companies in FY2011 is expected to rise 20.1% over the previous fiscal year to JPY740.7 billion, primarily due to the positive impact of inventory valuation. Excluding the impact of inventory valuation, however, operating income is likely to fall 12.0% to JPY443.4 billion, with the core petroleum products sector turning down due to narrower refining margins. Operating income in FY2012 is estimated to fall steeply by 48.9% to JPY378.6 billion, as the impact of inventory valuation turns negative due to a somewhat soft crude oil market. Operating income excluding inventory valuation is also expected to drop 3.3% to 428.9 billion as the earnings situation in the petroleum sector remains severe.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
I. INDUSTRY TRENDS
[Fig. 8-1] Demand by Petroleum Product
Gasoline Naphtha Jet Fuel Kerosene Diesel Fuel Fuel Oil A Fuel Oil C Total
Summary (Unit) 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl 1,000 kl
【Rate of Increase/Decrease】 (Year on Year) 【Actual】 10fy 11fy 12fy 10fy 11fy 12fy (Result) (Estimate) (Forecast) (Result) (Estimate) (Forecast) 58,197 56,451 54,645 + 1.3% - 3.0% - 3.2% 46,668 44,288 44,199 - 1.4% - 5.1% - 0.2% 5,154 4,515 4,510 - 2.4% - 12.4% - 0.1% 20,332 18,929 18,210 + 1.4% - 6.9% - 3.8% 32,864 32,371 31,756 + 1.5% - 1.5% - 1.9% 15,404 14,495 14,046 - 4.0% - 5.9% - 3.1% 17,330 24,590 18,350 + 5.5% + 41.9% - 25.4% 195,948 195,638 185,715 + 0.5% - 0.2% - 5.1%
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts. Fuel oil C for power-generation use was calculated under the assumption that nuclear power plants currently shut down or about to enter routine inspection would resume operations gradually from June 2012 onward, starting with nuclear power plants for which the safety was confirmed.
1. Domestic demand:
On the downtrend again in both FY2011 and FY2012
FY2011 will once again see structural factors coming to the fore, despite increased demand for fuel oil C for power generation
Domestic demand for petroleum products in FY2011 is expected to dip 0.2% from the previous fiscal year to 195.6 million kiloliters (Figure 8-1). Breaking this down by product, however, except fuel oil C, which will likely zoom up 41.9% year on year to 24.6 million kiloliters due to increased operations of oil-burning thermal power plants associated with the substantial cutback on operations of nuclear power plants, demand for all other products are expected to decline under the greater impact of structural factors, on top of the disappearance of positive weather factors stemming from the scorching summer in FY2010. By product, gasoline, the linchpin of domestic demand, is estimated to drop 3.0% from the previous fiscal year to 56.5 million kiloliters, due to improved fuel efficiency and a decrease in mileage per vehicle, as well as an unfavorable turn from the record-breaking heat wave in FY2010. Diesel fuel, despite some demand related to efforts for a recovery from the Great East Japan Earthquake, is also likely to turn down by 1.5% from the previous fiscal year to 32.4 million kiloliters. Amid the ongoing progress in the fuel switchover, kerosene is expected to fall 6.9% year on year to 18.9 million kiloliters and fuel oil A 5.9% to 14.5 million kiloliters, while naphtha is estimated to decline 5.1% from the previous year to 44.3 million kiloliters owing to a decrease in ethylene production.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
Domestic demand for fuel oils in FY2012 may drop below 190 million kiloliters for the first time since FY1986, with structural factors continuing to put a damper on demand
In FY2012, with the overall picture of structural factors and the sluggish economy putting a damper on demand remaining intact, domestic demand for petroleum products is likely to decline a further 5.1% from the previous year to 185.7 million kiloliters, falling short of the 190-million-kiloliter mark for the first time since FY1986. By product, reflecting improved fuel efficiency and shorter mileage per vehicle, demand for gasoline is expected to fall 3.2% from the previous fiscal year to 54.6 million kiloliters and diesel fuel 1.9% to 31.8 million kiloliters, both suffering a year-on-year drop for the second consecutive year. Because of further progress in the fuel switchover, demand for kerosene is also likely to continue to fall, by 3.8% to 18.2 million kiloliters, and fuel oil A is estimated to drop 3.1% to 14.0 million kiloliters. Naphtha is expected to move largely sideways as a sharp fall in production of petrochemical products is seen unlikely, edging down 0.2% to 44.2 million kiloliters. Demand for fuel oil C is likely to turn sharply down by 25.4% from the previous year to 18.4 million kiloliters, assuming that nuclear power plants will resume operations gradually from around June to brace for the peak electric power demand in summer, which should in turn reduce demand for fuel oil C for power generation.
2. Exports and Imports: A significant expansion in exports of petroleum products unlikely Exports of petroleum products seen to turn down again
After marking a year-on-year rebound in FY2010 for the first time in two years, exports of petroleum products in FY2011 are expected to turn down again by 9.5% to 27.4 million kiloliters due to the decline in the first half of the year that primarily resulted from the moves by the oil companies in Japan to cut back on sales overseas immediately after the earthquake in March 2011 (Figure 8-2). In FY2012, while continued firmness in demand in the Asia-Pacific region will likely help secure a level of export volumes, overall exports of petroleum products are expected to see only a meager rise of 0.2% over the previous fiscal year to 27.5 million kiloliters, as a significant recovery seems unlikely given an expected expansion of supply capacity in the region ascribable to plans to build more refineries mainly by China and India and fierce rivalry with highly competitive export-oriented refineries overseas.
Imports of fuel oil C for power generation and gasoline on the rise recently
Imports of petroleum products in FY2011 are expected to grow 13.5% over the previous fiscal year to 37.5 million kiloliters. Imports of fuel oil C for electric power generation increased in response to the sharp drop in operations of nuclear power plants, while imports of gasoline remain at a high level after the increase amid concerns over a possible shortage of petroleum products immediately after the earthquake (Figure 8-3). However, imports in FY2012 are likely to decline 5.6% from the previous fiscal year to 35.4 million kiloliters on the assumption that purchases of fuel oil C for power generation will turn down following the resumption of nuclear power plant operations.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-2] Export Volumes of Petroleum Products （million kl） 25
Gasoline Kerosene Diesel Fuel Fuel Oil
20
(Note) Excluding bunker oil
15 10 5 0 2003
2004
2005
2006
2007
2008
2009
2010
2010 1H 2011 1H （FY）
(Source) Compiled by MHCB Industry Research Division based on trade statistics.
[Fig. 8-3] Import Volumes of Petroleum Products （million kl) 5
4.6
【Fuel Oil C】
4.6
4
3.0
2.5
2.0
2
0.5
2.3
1H
0.8
2.3
1.2
1.4
2 3.2 2.2
2H
2.2
1H
1.4 3.2
1
【Gasoline】
2H
4.1
3
（million kl） 3
1
2.9
2.1
2.0
1.1
0.8
1.5
1.7
1.5
0.7 0.2
1.7 0.6
0 2006
2007
2008
2009
2010
2011 (FY)
2005
2006
2007
0.4
1.8
0.4 0.4 0.2
0 2005
0.9
0.8
2008
0.5 2009
0.7 2010
2011 (FY)
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan.
3. Production: Production seen likely to drop due to poor demand both at home and overseas Production is expected to drop due to poor demand both at home and abroad
Given the above, production of petroleum products in FY2011 is expected to decline 1.8% to 189.5 million kiloliters, faster than the year-on-year drop in domestic demand, amid poor demand both at home and abroad and increasing imports (Figure 8-4). In FY2012, production will likely be squeezed further to decline 3.0% from the previous fiscal year to 183.9 million kiloliters because of an anticipated drop in domestic demand, while exports will stay largely flat.
The capacity utilization rate of refineries seen dipping below 80% again
After the steady decline from 90% in FY2005, the real capacity utilization rate of refineries, which does not count the stoppage for scheduled repair, recovered to 80% in FY2010. But the utilization rate is expected to dip slightly below 80% again in both FY2011 and FY2012, though the Ogimachi plant of the Keihin refinery of Toa Oil Co., a subsidiary of Showa Shell Sekiyu, was shut down as planned in September 2011 (Figure 8-5). However, it is deemed
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
possible to bring the utilization rate back above 80% if major oil companies proceed to adequately reduce their supply capacity in accordance with the Law concerning Sophisticated Methods of Energy Supply Structures. Idemitsu Kosan in November 2011 announced a plan to shut down the Tokuyama refinery in March 2014.
[Fig. 8-4] Supply and Demand of Petroleum Products 【Actual】 Summary
10fy
（Unit）
(Result)
Domestic Demand 1,000 kl Export 1,000 kl
11fy
12fy
(Estimate) (Forecast)
11/1H
11/2H
(Result)
12/1H
12/2H
(Estimate) (Forecast) (Forecast)
195,948
195,638
185,715
88,605
107,034
86,369
99,346
30,282
27,402
27,457
14,328
13,074
14,715
12,742
Import
1,000 kl
33,067
37,529
35,429
18,378
19,151
18,218
17,210
Production
1,000 kl
192,976
189,515
183,876
87,404
102,111
87,289
96,587
Summary
10fy
11fy
12fy
（Unit）
(Result)
【Rate of Increase/Decrease】
(Estimate) (Forecast)
11/1H
11/2H
(Result)
12/1H
12/2H
(Estimate) (Forecast) (Forecast)
Domestic Demand
%
+ 0.5%
- 0.2%
- 5.1%
- 3.7%
+ 3.0%
- 2.5%
- 7.2%
Export
%
+ 1.2%
- 9.5%
+ 0.2%
- 10.7%
- 8.2%
+ 2.7%
- 2.5%
Import
%
+ 11.0%
+ 13.5%
- 5.6%
+ 16.7%
+ 10.6%
- 0.9%
- 10.1%
Production
%
- 0.7%
- 1.8%
- 3.0%
- 6.1%
+ 2.2%
- 0.1%
- 5.4%
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
（mb/d）
[Fig. 8-5] Excess Refining Capacity and Real Operating Rate at Oil Refineries in Japan
90%
2.0
86%
90%
86% 81%
1.8
80% 77%
1.6 1.4
78%
85% 77%
80% 75%
Excess Capacity
1.2
70% Real Operating Rate (Right Axis)
1.0
65%
0.8
60%
0.6
55%
0.4
50%
0.2
45%
0.0 2005
2006
2007
2008
2009
2010
2011e
2012e
40% (FY)
(Source) Compiled by MHCB Industry Research Division based on data from the Petroleum Association of Japan. (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts. The real operating rate refers to the operating rate excluding the effects of regular shut down maintenance.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
II. CORPORATE EARNINGS 1. Earnings in FY2011 forecast to drop in real terms despite positive impact of inventory valuation Earnings in FY2011 are expected to drop in real terms in FY2011 due to poor core businesses, despite gain on inventory valuation
Operating income of the five major listed oil companies in FY2011 is expected to soar 20.1% over the previous year to JPY740.7 billion (Figure 8-6). However, discounting the positive impact of inventory valuation, operating income excluding inventory valuation is estimated to decrease 12.0% from the previous fiscal year to JPY443.4 billion. In FY2011, Tonen General Sekiyu changed the inventory valuation method, which effectively pushes up its operating income by around JPY600 billion, and other oil companies are also benefiting from the positive impact of inventory valuation stemming from rises in crude oil prices. By sector, operating income of the exploration and production sector is estimated to surge 51.8% over the previous fiscal year to JPY164.9 billion due to crude oil prices. Operating income of the petrochemical sector is also expected to surge 93.7% to JPY65.3 billion, with expense reduction and rationalization efforts more than offsetting negative factors, including a drop in sales volume. However, operating income of the petroleum products sector, the core business, is likely to plunge 39.4% from the previous fiscal year to JPY204.0 billion (Figure 8-8) due to narrower refining margins (Figure 8-7). [Fig. 8-6] Corporate Earnings Outlook 【 Actual】 10fy
(Unit)
(Result)
11fy
12fy
(Estimate)
(Forecast)
Net Sales
(JPY 100 million)
198,694
221,619
197,369
Operating Income
(JPY 100 million)
6,168
7,407
3,786
Operating Income (Excl. Inventory Valuation)
(JPY 100 million)
5,040
4,434
4,289
(Unit)
【 Rate of Increase/Decrease】 (Year on Year) 10fy 11fy 12fy (Result)
(Estimate)
(Forecast)
Net Sales
%
+ 9.9%
+ 11.5%
- 10.9%
Operating Income
%
+ 514.0%
+ 20.1%
- 48.9%
Operating Income (Excl. Inventory Valuation)
%
(Returned to the black)
- 12.0%
- 3.3%
(Source) Compiled by MHCB Industry Research Division based on IR materials from each company. (Note) Five listed oil companies: Showa Shell Sekiyu, Cosmo Oil, Tonen General Sekiyu, Idemitsu Kosan, JX Holdings, Inc. (excluding metals sector). Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-7] Trends of Refining Margins by Product （JPY/l） Gasoline
18
Kerosene
16
Diesel Fuel
14
Fuel Oil A
12
09fy 2H
10
10fy 1H average
[Fig. 8-8] Operating Income by Sector (JPY 100 million) 8,000
10fy 2H average
Operating Income
Operating Income Excl. Inventory Valuation
7,000
11fy 1H
6,000 5,000
09fy 1H
Other
4,000
8 6
3,000
4
2,000
2
1,000
0
0
-2
-1,000
09/4 09/7 09/10 10/1 10/4 10 /7 10/10 11/1 11/4 11/7
E&P Petrochemical
Petroleum Products Inventory Valuation
（FY） 2010
2011e
2012e
(Source) Compiled by MHCB Industry Research Division based (Source) Compiled by MHCB Industry Research Division based on IR materials from each company. on data from “Sekiyu Tsushin”. (Note) Refining margins: brokered price – (crude oil CIF + tax). (Note) Figures for FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.
2. Significant earnings recovery in FY2012 unlikely, with operating income excluding inventory valuation dropping Operating income excluding inventory valuation seeing a year-on-year fall in FY2012 as well
Operating income in FY2012 is expected to turn down 48.9% from the previous fiscal year to JPY378.6 billion due mainly to the disappearance of the positive impact of inventory valuation that contributed to the higher income in FY2011 as a result of a somewhat softer crude oil market. In real terms, excluding inventory valuation, operating income is also likely to dip 3.3% to JPY428.9 billion. By sector, operating income of the petroleum refining sector is expected to drop 7.9% from the previous fiscal year to JPY187.8 billion as a result of a decrease in sales volumes, while operating income of the petrochemical sector is likely to edge down 0.2% to JPY65.1 billion as a significant market recovery is unlikely. Due to drops in crude oil prices, operating income of the upstream sector is also estimated to decline 7.9% year on year to JPY152.0 billion.
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
III. TOPICS: CONSIDERATION OF PROMISING BUSINESS SECTORS OVER THE MEDIUM TERM – THE PETROLEUM INDUSTRY The petroleum industry is faced with the challenge of breaking away from the diminishing equilibrium of the petroleum products business associated with the shrinking domestic demand
As discussed above, the environment surrounding the core business of the petroleum products sector is likely to become increasingly severe in light of the underlying trend toward shrinkage of domestic demand for petroleum products as well as intensifying competition in the export markets in the Asia-Pacific region. Although an expansion of excessive capacity and a decline in the capacity utilization rate may be checked to a certain extent as oil companies proceed to adequately reduce the supply capacity by the end of FY2013 in line with the Law concerning Sophisticated Methods of Energy Supply Structures, it appears that the petroleum industry continues to face the challenge of breaking away from the diminishing equilibrium of the core business, as domestic demand for petroleum products will likely continue to reduce over the medium and long term in tandem with the further progress in structural factors.
Upstream business is the key area for diversification and overseas business expansion over the medium term
Already, Japanese oil companies have been proactively pursuing diversification and advances overseas, but it requires a considerable amount of investment and time to establish sufficient revenue base to counter the shrinkage of the core business. Under these circumstances, one of the promising business areas for the Japanese petroleum industry over a medium-term time span of 10 years going forward appears to be upstream business. In other words, Japanese oil companies will be strongly urged to firmly establish the two-wheel structure of upstream and downstream business by bolstering the upstream sector, which is already contributing to them as a source of revenue, and seeking to enhance its profitability further. By building up the business structure under which the exploration and production sector can be counted on as a stable source of cash flows together with the petroleum products sector, they should become capable of working out their investment capacity and establishing a long-term operating base that can realize an aggressive growth strategy.
Significance of the expansion of upstream business for Japan’s oil companies
In the field of upstream business, in the spotlight in recent years are efforts to secure natural gas resources against the backdrop of prospects for increased demand for natural gas. On the other hand, given that (1) demand for petroleum is expected to grow globally, particularly among emerging economies, (2) petroleum continues to command a certain share in Japan’s primary energy, (3) the importance of petroleum as a distributed energy was recognized anew following the earthquake, and (4) the Japanese portfolio of upstream interests, we believe that efforts to boost initiatives in the upstream business are of significance. In order for oil companies to seek the sustained expansion of upstream business, what is called for is a strategy to acquire interests by considering costs of acquiring concessions and mining rights and business risks at each business stage as well as characteristics of investment returns when upstream projects shift to commercial production (Figure 8-9).
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Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
[Fig. 8-9] Image of Business Flow in Upstream Development Geophysical exploration / Test well drilling
High
Exploration stage
Development well drilling / Construction of production / shipment facilities
Development stage
Mining rights / concession acquisition costs
Shift to evaluation/development
Production stage
Start of production/sales
Sustained growth of upstream development business (Maintenance/expansion of reserves/output
Production stage Development stage
Low
Exploration
stage Common investment return on the shift to commercial production
High Low High
Business risk (Geological risk / Operational risk / Oil price fluctuation risk)
Low
(Source) Compiled by MHCB Industry Research Division Promising areas and constraints in upstream business
While room for the new entry into so-called easy oil in conventional oil fields appears rather limited, participation in the development of unconventional oil, of which production is expected to expand going forward, can also be one option. For example, shale oil (tight oil), whose production is likely to expand in the United States in the next decade, can be a promising area of petroleum resources development. However, shale oil development involves constraining factors other than business risks, such as geological risks and operational risks inherent in the development of conventional oil fields. For example, regarding price levels of crude oil, in additional to the maintenance of crude oil prices higher than production costs, the price advantage in relation to shale gas that can be produced with similar technologies is necessary. Due heed also needs to be paid to production cost rises if prices of materials and equipment and labor costs go up in association with the rapid growth of shale oil development. Furthermore, environmental risks and problems related to the development of transportation infrastructure may become constraints on developers.
Contribution to Japan’s energy security
Despite problems and constraints discussed above, stepped-up efforts in upstream business areas, including unconventional oil, should lead to a broadening of revenue sources over the medium term to Japanese oil companies. Initiatives in these business areas are also of great significance from the perspective of energy security, as they should contribute to the enhancement of the independent development ratio of petroleum resources, targeted at 40% by 2030, and to the reduction in Japan’s dependence on the Middle East through diversification of upstream business areas.
Initiatives through organic government-private sector partnership are essential
Needless to say, the acquisition of upstream interests requires self-help efforts on the part of private-sector petroleum companies. Amid intense international competition for resources, however, organic partnership between the
10 Mizuho Corporate Bank, Industry Research Division
FY2012 Japan Industry Outlook (Petroleum)
government and the private sector will likely gain in importance, as exploration and development funding, such as the provision of risk money through Japan Oil, Gas and Metals National Corporation (JOGMEC) and financial support by government-affiliated financial institutions, and government support for technology/collection of information and building cooperative relations with oil-producing countries are essential. In addition, cooperation among petroleum companies in the upstream business and cooperation with other industry sectors from the perspective of the dispersion of investment burdens and business risks should make it possible for Japanese companies to get involved in larger-scale upstream projects. We sincerely hope that the Japanese petroleum industry will achieve sustainable growth by weathering out the shrinking domestic demand and intensifying export competition.
Terukuni Isokawa [email protected] HU
11 Mizuho Corporate Bank, Industry Research Division
U
