TOKYO/SHANGHAI/JAKARTA/SINGAPORE -- As economic activity across the world ground to a halt this month due to the coronavirus pandemic, Asia's oil companies are facing their strongest challenge yet after being forced to revise down expectations.
JXTG Holdings, a key Japanese refiner and miner, and Japanese trading house Marubeni are both now expecting deficits for the year ended in March, as opposed to a rosier outlook earlier. Across the globe, the picture is the same for commodities companies.
"What is happening now in the commodity market is different from the times of the global financial crisis in 2008," said Tomomichi Akuta, chief researcher at Mitsubishi UFJ Research and Consulting. In 2008, commodity prices tumbled as investors cashed out.
Akuta said, "Unlike the financial crisis, pandemic freezes 100% of companies' activities in some areas" and he warned that it "causes a more significant impact on a wider range of industries."
Oil prices have plunged nearly 60% since the Organization of the Petroleum Exporting Countries and Russia failed to agree to extend an existing pact on oil output cuts earlier in March. Since then, as the pandemic worsened, countries have extended travel bans and locked down cities, further hitting oil demand.
U.S. benchmark West Texas Intermediate, or WTI, at one point on Monday fell to below $20 a barrel, close to its lowest level in 18 years.
JXTG Holdings announced last week that its consolidated profit will fall into the red in fiscal 2020 that ended in March.
Marubeni announced last week that the result will be a 190-billion-yen deficit, after making a downward revision from a 200-billion-yen surplus. Its competitor Mitsui & Co. also said that it is expecting to record an impairment loss of 50 billion to 70 billion yen on its investments in U.S. shale gas assets.
According to International Energy Agency, global oil demand this year is expected to fall by 90,000 barrels per day year-on-year, for the first time since 2009. Some Asian companies have already started to think about reviewing their investment plans.
Indonesia's state-owned oil company Pertamina is one of those companies, a spokesperson said. Pertamina's initial plan for 2020 was to increase investment by 84% to $7.8 billion, with nearly half being earmarked for developing the upstream sector. The plan was unveiled early March, a few days after Indonesia reported its first confirmed coronavirus case.
Since then, the number of COVID-19 cases in the archipelago has surpassed 1,000.
"Pertamina continues to monitor developments in world oil prices and has undertaken several things to respond to them, including studies and simulations of their impacts," the spokesperson said. "Until now, we have continued to operate according to the original work plan... But surely a review will be carried out in the future on how effective it is."
Other commodity companies are also looking into how to deal with the situation. Singapore-based agri products trader Olam International said it was still executing its six-year strategic plan started in 2019, but it was also "closely monitoring market and regulatory developments across our global operations and supply chains" to decide whether or not it will make adjustments to the plans, a spokesperson said.
Olam's supply chain spans over 60 countries, including Europe, the Americas and Africa. Border controls imposed by many countries to limit the spread of coronavirus could affect its trade activities.
In China, some state oil companies have signaled willingness to cut capital spending and production targets.
China National Offshore Oil Corp. said on March 25 cuts will likely involve projects abroad but did not disclose details. "Without a doubt, we will reduce this year's production levels and capital expenditure by a certain degree," Xu Keqiang, CNOOC CEO, told reporters.
Thanks to higher production and cost control, the major offshore energy producer logged a net profit jump of 15.9% on the year to 61 billion yuan ($8.6 billion) on revenue of 197 billion yuan in 2019. In January, the group set a production target of between 520 million and 530 million barrels of oil equivalent for 2020, higher than last year's net production of 506.5 million BOE.
PetroChina, the listed subsidiary of China National Petroleum Corp., said on March 26 that it would make adjustments in line with weaker oil prices. "We will focus more on efficiency and will balance among profit, long-term versus short-term development, and the effort to secure the nation's energy supply to plan our upstream production," said Vice President Li Luguang.
Such measures to adjust its capital expenditure in the short term will preserve cash flow and subsequently support the ratings of its parent company, the country's top oil and gas producer by assets, S&P Global Ratings said on March 27.
Some experts warn that the reviews and suspensions taken by companies now will raise concerns about supply shortages.
"Companies' decision to postpone investment will lead to a huge deficit in commodity supply in the future and this will result in a surge in commodity prices in the end," said Akio Shibata, head of Japan's Natural Resource Research Institute.
Goldman Sachs said that production shut-ins will push "the global oil market into deficit once demand gradually recovers" and could "further delay any producer response, reinforcing the risk that prices rally sharply in coming months," in a report published on Wednesday.
Yet, a small number of companies are taking a more bullish view.
Hong Kong and Shanghai-listed Sinopec Oilfield Service Corp, a unit of China Petrochemical Corp., planned to hike capital spending in 2020 by 18% to 3.4 billion yuan, in expectation that the "basic trend" of growth in energy demand remained unchanged. The surplus will be mainly used to boost rig infrastructures and construction equipment in high-end markets including Saudi Arabia and Kuwait, the group said on March 25.
Indonesia's coal mining companies Adaro Energy and state-owned Bukit Asam have said their plans for 2020 remained unchanged. "We will monitor further development of coal price," said a spokesperson for Bukit Asam, "but there are [demand] in the domestic market."
Copper prices slipped 24% to $4,763 in late March from $6,300 in January while platinum dipped 30% over the same period.
Additional reporting by Kentaro Iwamoto in Singapore.
