Outlook
The market outlook is overshadowed by uncertainties over economic development and the expectation that Europe in particular is entering what could be a short-term recession. The International Energy Agency has reduced its global oil demand growth estimates and is currently forecasting oil demand to increase by 1.2 million bbl/d in 2012. Most of this growth will take place in emerging markets. More new refining capacity is expected to come on stream during the year, leading to a somewhat looser supply and demand balance on the refining market. On the other hand, capacity closures that have been announced in Europe and the US could have a positive impact on the balance. Going forward, tensions surrounding Iran may lead to higher crude prices and a narrowing price differential between Urals and Brent.
Neste Oil expects to see good productivity and higher production volumes at its Porvoo refinery. Diesel production line 4 at the Porvoo refinery will be off-line for five weeks in the second quarter due to planned coke removal. A six-week maintenance turnaround is scheduled to take place at the Naantali refinery in the second quarter of 2012. Refining margins have recovered from the low levels seen in December due to some capacity closures. The market appears to expect that margins for complex refiners, such as Neste Oil, will remain roughly at 2011 levels; they will be sensitive to developments in economic activity, however. Diesel is projected to be the strongest part of the barrel going forward, while gasoline margins are expected to stay at 2011 levels and be subject to seasonal variations. Demand for base oil has remained healthy, but base oil margins are currently depressed. Approximately 30% of Neste Oil’s volume in 2012 is hedged at a USD 4.7 /bbl reference margin level, assuming a Urals-Brent differential of USD -1.0 /bbl. As a result of all these factors, Oil Products’ full-year comparable operating profit is expected to improve compared to 2011, assuming that Neste Oil’s reference refining margin remains at last year’s level.
The ramp-up of the renewable fuels business will continue in 2012. The practical implementation of biofuel legislation in Europe and the US will play an important role in how sales develop. Sales volumes of renewable diesel in the first quarter of 2012 are expected to be similar to those seen during the last quarter of 2011. Neste Oil will aim to achieve a clear increase in sales volumes by the end of second quarter of 2012. Although renewable diesel margins are likely to remain narrow in the first quarter, Neste Oil expects the first-quarter result of Renewable Fuels to develop positively compared to that recorded in the last quarter of 2011.
Diesel demand growth on the Finnish retail market is closely linked to industrial transportation activity and may slow down in 2012, and could also be affected by the excise tax increase implemented at the beginning of the year. Gasoline demand is expected to continue declining. Outside Finland, the Polish market is expected to remain challenging and other markets to perform as in 2011. Oil Retail’s full-year comparable operating profit is expected to be at least equal to that seen in 2011.
The Group’s fixed costs are estimated to be approx. EUR 640 million in 2012, compared to EUR 613 million in 2011, due to expansion of the business.
The Group’s investments are expected to be approx. EUR 350 million (364 million). Despite the current uncertainties in the market conditions, we expect Neste Oil’s full-year comparable operating profit to improve significantly compared to 2011, assuming that Neste Oil’s reference refining margin remains at last year’s level and that quarterly sales volumes of renewable diesel are similar or above those seen during the last quarter of 2011.