Diesel Profit Dropping as Indonesia Ban Shutters Mines: Energy

May 30, 2014 6:55 am ET

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May 30 (Bloomberg) -- The ripples from Indonesia’s ban on mineral-ore exports are reaching energy markets, as shuttered mines and idle trucks crimp demand for diesel.

Profit from making the fuel in Singapore this year will be the lowest since 2011, Wood Mackenzie Ltd. says. Indonesia, Asia’s biggest importer of the fuel, will buy 20 percent less amid the contraction in mining following the ban in January, according to the Edinburgh-based consultant.

The forecasts show how Indonesia’s ban, designed to stimulate the domestic ore-processing industry, is having unintended consequences across the region. Weakening demand for diesel is coming at a time when China is exporting more fuel as its economy expands at the slowest pace in a quarter century.

“Less miners, less work going on, less trucks, so the diesel consumption would also be less,” Gavin Wendt, the founding director of MineLife Pty, a commodities researcher in Sydney, said by phone on May 23. “Mining accounts for a considerable portion of diesel consumption.”

Diesel in Singapore, the benchmark for Asian refiners, will average $17.40 a barrel more than Dubai crude this year, compared with $17.90 last year, said Suresh Sivanandam, a Singapore-based senior downstream analyst at Wood Mackenzie. The difference, known as the crack spread, fell to $14.60 today, the lowest level in more than a year, according to PVM Oil Associates Ltd. That’s a 25 percent drop from the four-month high of $19.36 reached in November.

Indonesia Halt

Diesel swaps are trading at about $120.50 a barrel in Singapore, Asia’s biggest oil-trading center, compared with last year’s average of $122.54, according to PVM data. Refiners in the region typically use Dubai crude as a benchmark for measuring profits from making fuels.

Indonesia banned exports of all mineral ores including nickel, iron and bauxite from Jan. 12 as part of a policy to boost revenue by turning the country into a manufacturer of higher-value products. The economy last quarter expanded at the slowest pace since 2009 as mining and quarrying contracted about 3.6 percent from the previous three months.

The curb halted shipments from companies such as Freeport- McMoRan Copper & Gold Inc. and Newmont Mining Corp. Nickel futures advanced 37 percent this year on the London Metal Exchange, compared with a 3.5 percent gain in the Standard & Poor’s GSCI Spot Index of 24 commodities.

Indonesia will cut overseas purchases of diesel to 92,000 barrels a day this year from 115,000 in 2013, according to Wood Mackenzie. The 23,000-barrel decline is equal to about 5 percent of the country’s consumption last year.

Oil Processing

Diesel producers such as Mumbai-based Reliance Industries Ltd., China Petroleum & Chemical Corp. and South Korea’s SK Innovation Co. may find more demand in Australia, where the shuttering of domestic oil processing is boosting imports.

“All of a sudden, all the diesel that would otherwise have gone into Indonesia would be looking for a home,” said MineLife’s Wendt. “We’ve refineries in Sydney and Melbourne that are in the process of closing because they can’t turn crude into fuel as cheaply as they can buy it.”

BP Plc will halt its Bulwer Island refinery in Queensland by mid-2015 and may convert it into a fuel-import terminal amid “insurmountable” competition, the company said April 2. Caltex plans to halt its Kurnell plant in the second half of this year while Royal Dutch Shell Plc has ceased processing at its Clyde facility in Sydney.

Diesel Importer

Australia, the Asia-Pacific region’s largest diesel importer, “could be a winner” if prices for the fuel decline, according to Wendt. The nation bought about 220,000 barrels a day last year, data from the Australian Bureau of Resources and Energy Economics show.

China is shipping more fuel overseas as it builds new refineries and industrial expansion cools. Exports of gasoil, or diesel, rose to 371,350 metric tons in January, the highest level in 10 months, according to government trade data.

The world’s second-biggest economy will increase refining capacity by about 6.5 percent this year to reach a total of 668 million tons, China National Petroleum Corp. estimated in January. That’s about 13.4 million barrels a day. The government is targeting 7.5 percent economic growth this year, which would be the lowest rate since 1990.

“In the last few months we’ve seen a huge amount of diesel coming from China and that’s kind of keeping the market jittery,” Wood Mackenzie’s Sivanandam said.

--With assistance from Ben Sharples in Melbourne and Jing Yang in Shanghai.