The downturn in the refining sector will be more painful for global refiners than the last trough in 2002 and could force them to shut down smaller, less complex and less efficient refineries if the current weak crack spreads and lower utilisation rates persist, Fitch Ratings said in a report.
For refining companies, 2009 is the first challenging year after several years of strong cash flows. The agency expects that Asian refiners may be exposed to aparticular cash flow pressure as new large capacity is commissioned in 2009 and 2010, targeting not only domestic markets but also export, while regional demand for refined products decreases despite the expected gross domestic product (GDP) growth in China and India.
Fitch said the near-to-medium term picture for the refining industry is negative and forecast a substantial weakening in funds from operations and credit metrics of refining companies in 2009 and 2010 compared with the solid results reported in the last refining upturn between 2005 and 2008. This is based on agency's expectations of a combination of lower refining margins and reduced refinery utilisation rates for 2009 and 2010, versus the favourable environment and tight supply/demand balance of 2005-08.
Fitch anticipates that credit metrics will weaken across the sector, erosion in metrics at a low point in the cycle are not necessarily a de facto cause for downgrades, as the agency bases its ratings on mid-cycle expectations.
Out of 13 refining companies, rated by Fitch on the international scale, eight have a stable rating outlook and five have a negative outlook. The latter mostly reflect high financial leverage for the current rating category, and substantial capital expenditure programme over the next few years in a weaker cash flow environment.
Fitch ruled out immediate rating downgrades as it rates refining companies are going "through the cycle" – and hence the agency's cash flow and leverage forecasts are based on mid-cycle assumptions. Fitch said global refinery utilisation would be close to the decade low of 82 per cent.
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