Processing margins worldwide were hammered late last year as crude prices rose on expectations of further OPEC production cuts, followed by another short-term boost after the US and Iran traded shots in January.
New low-sulphur fuel requirements for shipping effective last month had already slashed demand and prices for heavier fuel and oil grades, while simultaneously raising tanker costs by taking vessels out of the global fleet for engine and exhaust upgrades.
Not all investors share outgoing chief executive Mike Fuge's enthusiasm for the $37 million solar farm Refining NZ has committed to, but Climate Change Minister James Shaw's surprise review of industrial emission allocations – which the refinery will depend on when it joins the emissions trading scheme in 2023 – seemed particularly ungrateful.
And just when the mid-January trade rapprochement between the US and China looked poised to free up global tanker traffic, along came coronavirus.
The final death toll is anyone's guess, but airlines have already stopped or reduced services into many regional Chinese centres. British Airways was still flying into Hong Kong last week but has suspended Beijing and Shanghai services until the end of February. Air New Zealand on Friday reduced Shanghai services only to suspend them for seven weeks the next day.
As economist Tony Alexander noted last week, the transport impact from 2019-nCoV will likely reach far beyond China as people and firms limit travel anywhere to avoid congested airports in coming weeks and potentially months.
At the peak of the SARS panic in April 2003, air passenger demand in the Pacific dropped 45 per cent, Reuters reported.
Today we are only guessing at the virus's overall impact on global travel and the broader economy.
But it will be negative for consumption at a time when fuel demand in China and India was already looking soft due to slowing growth in the world's two most populous nations.
That opens the door for further petrol, diesel and jet fuel exports by both and, all other things being equal, will put downward pressure on the Singapore margins that Refining NZ's processing charges are based on.
Low margins are not new. The company's measure of the margin a complex Singapore refiner makes from processing Dubai crude was below US$3 a barrel for most of 2018 and averaged just 20 cents in the first half of 2019. It was back above US$3 July-October, but then went negative for the final two months of the year.
People wear face masks and walk at a shopping mall in Taipei, Taiwan. Photo / AP
But things never do remain equal. And while that sort of margin volatility is not new, it tends not to last in a market where changes in demand, oil and product pricing and tanker rates are constant. Unplanned shutdowns, new builds and politics also contribute.
In September, the US imposed sanctions on Chinese shipping operators for trading in Iranian crude, raising tanker rates. Four months later, the January trade deal is expected to require China to buy more of the light, low-sulphur crudes the US produces, raising prices for those grades but also trimming demand for some of the heavier grades more typically landed at Marsden Point.
The 55-year-old refinery has survived on its ability to manage those risks and keep offering products that are competitive with those its customers – Z Energy, BP and Mobil - also import direct from places like Singapore and Korea.
Even when regional margins went negative late last year, Refining NZ delivered a "healthy" US$4.16 a barrel uplift over its Singapore benchmark despite losing 50 cents a barrel to a one-day power cut and about a dollar to higher tanker rates.
It also tested four new crude grades last year so that it could tap a wider pool of lower-cost feedstock in a clearly problematic 2020.
Eighteen months ago, former chief executive Sjoerd Post said the macro outlook for regional margins looked good, with demand strong relative to new refining capacity planned in Asia.
But that came with two important caveats: China's potential to increase exports and possible disruption late 2019-2020 from the International Maritime Organisation's new Marpol fuel standards.
Both risks have come to pass, with analysts picking double-digit growth in China's fuel exports this year – including a 20 per cent lift in jet fuel volumes.
In shipping, demand for high-sulphur fuel oil – and margins on its production – fell sharply as expected. But the reciprocal lift in regional diesel demand and prices that Refining NZ and investors had been counting on is still missing in action.
Coronavirus may make that a longer wait, but it has also dragged oil prices back below US$60 a barrel and tanker rates have also fallen.
Santos exec Naomi James will have her hands full when she takes over in April.
