Jet fuel suppliers miss out on Japan's tourism boom amid logistical woes

Despite the yen's likely continued weakness fueling a tourism boom in Japan, jet fuel suppliers and traders may struggle to fully benefit from the surge in passenger flight traffic and aviation fuel demand due to various logistical challenges in meeting higher airport distribution requirements, industry sources said June 20-27.

Holiday seekers, especially from South Korea, China, Taiwan, Hong Kong and Singapore find yen's fall to a multi-decade low boosting their purchasing power. The Japanese currency briefly traded at Yen 160.86/$1 on June 26, marking the lowest intraday level since December 1986.

Tokyo's Narita Airport said non-Japanese or foreigner traffic in April more than doubled year on year to 1.896 million, while Tokyo International Air Terminal Corporation said the number of foreign passenger arrivals at the capital city's Haneda Airport jumped 132.7% from a year earlier to 546,888.

Japan's jet fuel sales in April rose 30.3% on the year to 75,700 b/d, latest data from the Ministry of Economy, Trade and Industry showed. Over January-April, jet fuel sales rose 8.5% year on year to 72,813 b/d.

However, distribution constraints and limited logistical capacity will likely hinder local refiners, as well as wholesale traders to transfer higher volumes of jet fuel to regional airports and Japan's overall jet fuel sales may struggle to reach 2019 pre-COVID level of around 85,000-90,000 b/d, according to officials, traders and middle distillate distribution and sales managers at major Japanese refiners including Cosmo Oil, ENEOS and Taiyo Oil.

Although local refineries are producing adequate volume of jet fuel, Japan's surge in jet fuel demand will not fully translate into robust sales due to these challenges, industry and market sources said.

In the first three weeks of June, refiners produced around 192,000 b/d of aviation fuel, S&P Global Commodity Insights data showed.

"A shortage of domestic vessels and tank trucks [for distribution] is the reason this problem has occurred," an official at one of the major refiners said. "There are instances where suppliers weren't able to transport jet fuel to regional airports near tourist destinations such as Hokkaido and Hiroshima."

Distribution issues related to logistical constraints will not be resolved in the near term as many small ships of 500 kiloliters or less are being scrapped, while some oil product transportation ship operators are going out of business.

In addition, a parliamentary legislation which took effect in April to control workers' overtime hours has reduced the turnover rate of domestic ships and tank trucks, reducing the amount of oil products delivery and distribution, officials at major Japanese refiners told Commodity Insights.

Fuel distribution distances have also been increasing due to the industry consolidation and closure of refineries unfolded over the past several years, the refinery officials added.

"It is true that we have had to turn down new and additional supplies to some airports and airlines as our supply system has not been able to keep up with the increasing demand for jet fuel," ENEOS said June 26 in its email to Commodity Insights.

"It's a real shame that producers cannot take full advantage of the tourism boom and the surge in jet fuel requirement due to these logistical issues ... refiners should be posting much bigger jet fuel sales figures," a sales and distribution manager at ENEOS said.

Supply, logistics partnership

To boost efficiency in jet fuel delivery and distribution, Japanese refiners are looking to exchange and share each of their fuel production and logistical resources, while South Korean refiners are willing to boost jet fuel exports to Japan.

Japan's top refiner ENEOS regularly supplies oil products to Hiroshima from its Mizushima refinery. The country's second biggest refiner Idemitsu had made a barter arrangement with ENEOS and is also supplying fuels to Hiroshima from the same refinery.

Barter transactions and agreements allow ENEOS to reduce freight expenses and lower its overall costs by facilitating coverage of supply imbalances in gasoline and other refined petroleum products arising from temporal and geographic differences in demand, the refiner said in a statement.

Meanwhile, Asia's biggest middle distillate exporter South Korea has recently been increasing jet fuel exports to Japan -- rising 72% on the year to 1.185 million barrels in May, according to latest data from state-run Korea National Oil Corp. But officials and distribution managers at Japanese refiners indicated a limit to how many cargoes from South Korean suppliers they can handle as the logistical constraints would prevent them from delivering it to regional airports.

"I've heard about the distribution challenges within the Japanese domestic market and that's probably going to limit shipments to our Japanese trading partners," a trading manager at a major South Korean refiner said.