Margins on producing the industrial fuel gasoil from crude in Asia look set for their worst quarter in more than two years, hit by lacklustre demand from key importing countries, even as refineries kick off maintenance plans.

Slowing growth in the region's largest importers of gasoil, such as Indonesia and Vietnam, and in major consumers, such as India and China, are swelling a surplus of the oil product, dragging down refining profits.

By March 28, the Asian gasoil derivatives crack, or profit from refining crude into gasoil, had averaged $15.21 a barrel above Dubai crude in the first quarter, its lowest since $14.24 in the last quarter of 2010, Reuters data shows.

March performance was the worst of the three months, pulling down quarterly refining profits, despite the removal that month of the bulk of the refining capacity scheduled for first-quarter maintenance, or about 1.65 million barrels per day (bpd).

"There's a lot more supply in the region than expected," said a middle distillates trader based in Singapore, who did not want to be identified as he was not authorised to speak to the media.

"The second quarter was thought to be stronger, as it's turnaround season, and we expected some tightening of supply, but all of a sudden Japanese, Korean and Chinese refiners are exporting large volumes."

Japan's March exports of diesel, for instance, have more than doubled from February, industry data show.

South Korean refiners are exporting about 600,000 to 900,000 more barrels of gasoil than in previous months, an industry source said.

Diesel exports from both countries have risen as warmer temperatures at the end of winter prompt refiners to switch back to maximising the yield of diesel over heating oil kerosene.

China and India have also been exporting larger than usual volumes of diesel as added refining capacity pumps cargoes into the market and slower economic growth cuts industrial use.

China will continue to export about 200,000 to 300,000 tonnes of diesel a month until April, industry sources say, or roughly four times the 50,000 to 70,000 tonnes exported in the corresponding period last year.

India's April exports of diesel are expected to hit more than 1.5 million barrels, up 12 percent on the year, as Reliance Industries Ltd's Jamnagar refinery, the world's largest, returned from planned maintenance in mid-March.

REGIONAL DEMAND LACKLUSTRE

Even as the market adds capacity, lower than usual demand from key importing countries, such as Indonesia and Vietnam, has weighed on prices.

State-owned Pertamina, Indonesia's largest importer of oil products, has been nominating fewer cargoes from term suppliers, traders said.

Its average monthly imports for March and April are expected to be around 2 million to 3 million barrels, down a quarter to a half from about 4 million last year.

Diesel use has been hit by slower growth, coupled with less investment in the mining and oil sectors, because of tougher rules and a weaker Indonesian currency, industry sources said.

The World Bank has cut its growth forecast this year for Indonesia to 6.2 percent, from a December estimate of 6.3 percent, as it expects moderation in domestic investment growth.

Vietnam's top importer, Petrolimex, has skipped imports of gasoil for three straight quarters due to sufficient stocks as domestic demand has weakened after the economy grew last year at its slowest pace since 1999.

Malaysia's demand has also slowed ahead of elections that must be called by the end of April, as industry awaits possible changes to energy policy by the new government.

A poor economy in Europe has been weighing on diesel use there, closing off arbitrage opportunities for traders and keeping Asian barrels in the region.

TRADERS SUFFER LOSSES

The slowdown in gasoil demand, a key barometer of economic activity in Asia, where the fuel is widely used for transport and in industry, has hit term contract holders hard.

Many who anticipated demand would pick up quickly this year, betting on a swift economic recovery and a supply crunch during the maintenance period, paid higher premiums for term barrels.

But they may be losing as much as 50 to 80 cents a barrel, or $250,000 to $400,000 for a full cargo, at current trading values for spot barrels, traders said.

Asian traders are looking to new markets to absorb the excess cargoes, such as the East African countries of Kenya and Tanzania, which have together been importing about 400,000 tonnes of gasoil a month over the past year.