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Japan Oil Refiners Fear Chinese Rivals Will Squeeze Them Out

Japanese oil refiners are worrying that China’s new fuel standards that are driving higher output will ultimately result in a deadly loss of market share for the Japanese firms.

Bloomberg reports that the Japanese Trade Ministry has called in a task force including around twenty “top oil experts” to find a way out of the situation, which seems to be getting worse by the day.

Japanese refiners were having a rough ride even before oil prices started sliding in 2014, as domestic demand waned. Now their market share abroad, in the larger Asian market, is being threatened by abundant and higher-quality fuels churned out by Chinese refineries. In fact, there is fear that Japanese refiners will be entirely displaced from the Asian fuel market unless the task force comes up with a sensible strategy.

The task of the oil experts is a challenging one. To be able to compete on the regional market, local refiners would need sufficient production capacity. Yet the five biggest refiners in Japan last month announced that they will cut processing capacity by 10 percent – over 350,000 bpd – by the end of March, in response to government regulations concerning the decline in local demand for fuels.

There are 23 refineries in Japan, with a combined processing capacity of 3.92 million bpd. Demand, however, is steadily declining at a rate of 1-2 percent annually, because of an aging population and the growing popularity of hybrid vehicles.

These trends prompted the Trade Ministry to introduce new efficiency regulations for refiners back in 2009, which resulted in the shutdown of five refineries and a capacity reduction of 900,000 bpd.

Related: OPEC Favors Production Cut Extensions As Next Meeting Nears

Foreign markets have become vital for Japanese refiners and until recently, competition from Chinese peers was not a big problem: Chinese fuels had lower quality. But in January of this year, Beijing introduced new rules limiting the amount of sulfur in fuels as part of efforts to tackle pollution. The side effect of these efforts is that Chinese gasoline has become more competitive to the disadvantage of Japanese refiners.

By Irina Slav for Oilprice.com

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