Caltex’s jet fuel woes worsen as virus hits global aviation

Demand for Australian jet fuel is likely to fall even further in "coming weeks" as airlines suspend more flights and passengers cancel their travel plans due to the widening coronavirus pandemic, fuel giant Caltex has warned.

Caltex said profits from producing jet fuel are plummeting, with its already battered fuel-refining margins collapsing by nearly 30 per cent in the past month.

Qantas has cut capacity in light of the coronavirus crisis.

Its losses are on course to deepen after Qantas this week slashed almost a quarter of its international capacity due to the softening travel demand from the coronavirus, saying the cuts would remain in place until at least September.

"We have been seeing demand reduction of jet fuel of 5-10 per cent for the Australian industry," Caltex said on Thursday.

"Recent reports by airlines, including announcements from Qantas about reduced capacity and services, indicate that demand may drop further in coming weeks."

The World Health Organisation on Thursday declared the worldwide outbreak of the new coronavirus a pandemic, with more than 118,000 cases in 114 countries and 4291 deaths. Thousands of flights have been cancelled globally as airlines struggle to cope with collapsing demand. Restrictions on flights to China, parts of Asia and Italy have meant some services have stopped completely.

In a statement on Thursday, Caltex revealed its refining margin had fallen 20 per cent from $US7.34 a barrel in February 2019 to $US5.78 in January 2020, before falling another 28 per cent to as low as $US4.14 last month.

Analysts on Thursday said the February margin was "predictably weak" due to plunging demand and the risk of further economic impact as the coronavirus outbreak continued, but noted the reiteration of guidance for sales from its production in 2020 was pleasing.

It comes as the ASX-listed fuel giant navigates a potential $8.8 billion takeover by Canadian convenience giant Alimentation Couche-Tarde.

Ben Wilson, an analyst at RBC Capital Markets, said shrinking refining margins and the shock 30 per cent crash in the global oil price this week would not necessarily derail Couche-Tard's takeover bid. Although Caltex's stock price had shed 17 per cent of its value this week, Caltex should be viewed as "relatively insulated" from the oil and broader market sell-off, he said.

"We think Caltex should be reviewed as relatively insulated from the oil and broader market sell-off," he said. "We think the divergence in Caltex's share price at $27.50 a share versus an effective Alimentation Couche-Tard bid price of $34.74 a share is overdone given the likelihood, in our view, of the deal proceeding."

The group's shares lost nearly 4 per cent in early trade to $26.46 by midday.

Caltex said it was monitoring the impacts from market responses to coronavirus on regional refining margins, crude and product demand "both globally and in Caltex's markets".

The company said it had not yet seen any clear impact on demand in the Australian petrol and diesel markets from the virus because of its broad range of customers and the different influences on demand. Caltex's convenience retail has benefited from stronger industry margin conditions, which offset the earnings impact from lower volumes due to the combination of bushfires, floods and weaker economic activity, the company said.

"It is too early to tell how oil price falls and COVID-19 will impact this market," Caltex said.

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