Source: Reuters Author: Felicia Loo, Eveline Danubrata 06/03/2009
Subject Concerned: Aviation Fuel
China Aviation Oil (Singapore) Corp Ltd (CAO) plans to add two traders to prepare for double-digit growth in jet fuel demand in 2010 after this year's contraction and to expand its trade across Asia, its CEO said on June 2.
CAO aims to enlarge its team to eight traders -- one more each for jet fuel and petrochemicals -- and plans to invest in refineries and storages, Chief Executive Officer Meng Fanqiu said at the Reuters Energy Summit.
He expects better performance for April-June to ride on the return to growth in the first quarter, after the losses in the fourth quarter, as it widens its trading activities outside China and after clearing costly jet fuel inventories.
"We will hinge on China's domestic market for our business growth, but will not rely on the country entirely. Jet fuel will remain our core business and we aim to strengthen our leading position in Asia-Pacific," Meng said.
He said CAO, which supplies 40 percent of China's jet fuel demand, aims to import 5.0 million tonnes of jet fuel this year, down from the record of 5.2 million tonnes in 2008, due to the economic downturn.
China's jet fuel demand has risen by an annual 14 percent for the last four years, hitting 12.7 million tonnes in 2008, but the slowing global economy has forced down this year's demand and import target, said Meng.
"Jet fuel imports will ease because of the global economy," Meng said.
However, imports are likely to accelerate again next year in line with the anticipated recovery in the world economy and aviation fuel demand in China, which is projected to grow 10-14 percent, he added.
"Going forward in 2010, we expect to see double-digit growth in China's jet fuel consumption," Meng added.
The World Expo 2010 in Shanghai will help to boost aviation fuel usage, while an increase in the number of airports in China to 244 by 2020 will help to absorb the higher production from the increased refining capacities in the country.
China National Offshore Oil Corporation's (CNOOC) new 240,000 barrels per day (bpd) Huizhou refinery is expected to supply a part of its jet fuel within China sometime in August.
"Although refineries have increased in capacity, the ability to produce jet fuel will depend on prices. The country's demand for diesel is huge. So refineries may increase diesel output at the expense of jet fuel," Meng said. Jet fuel and diesel (gas oil) form the middle distillates pool of refining.
CAO's jet fuel imports hit an all-time high in 2008 thanks to the Beijing Olympics. In 2007, CAO supplied 4.2 million tonnes of jet fuel to China and 4.7 million tonnes in 2006.
The lower 2007 imports were due to Chinese refineries running at full tilt to plug a severe diesel shortage, which in effect triggered a surplus of jet fuel stocks.
Better Q2 Performance Seen
After a weak first quarter due to losses incurred by unit Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA), Meng expects an improved second quarter as it is no longer saddled by costly stocks.
"The main reasons for SPIA incurring losses in 4Q of 2008 and 1Q of 2009 are because the company acquired high-cost inventory during the period of high oil prices in 2008, as a result the revenue was lower than the cost of sales," Meng said.
"But we expect SPIA to fully consume the high-cost inventory by Q1. We expect Q2 performance to be better than Q1."
U.S. crude futures rose to a seven-month high on June 1 above US$68 a barrel, more than double late-December levels, but still below records above US$147 last July.
CAO posted a 54.6 percent slide in first-quarter net profit to US$4.1 million versus a year ago. But its January-March results showed a rebound from the net loss of US$3.5 million in fourth-quarter 2008, underpinned by an expansion in trading.
The company resumed spot jet fuel trading activities outside China early this year, the first time since 2004 after it suffered US$550 million in trading losses. It supplied spot jet fuel to South Korea and Australia during the first three months.
Having gone through restructuring, CAO has strengthened internal controls and management practices, said Meng, who was appointed CEO in May 2008, after former CEO Chen Jiulin was jailed in 2006 due to the trading scandal.
"Limiting risk is very important," said the 41 year-old law graduate from Renmin University of China.
The company also aims to expand its trading of fuel oil and other products next year, to supply wholesalers in China, and is looking into other investments.
"We are financially sound and we have sufficient cash reserves," said Meng, who declined to elaborate on the projects.
It plans to fund these investments by cash -- as of March 31 the firm has more than US$100 million in reserves -- via bank loans or new share issues.