China’s October crude imports at 39-month low, likely to rebound on demand from new refineries
China’s crude imports fell to 39-month low, reflecting stock draws, weak refinery demand and a likely delay in the reporting of discharged cargoes over the National Day holidays.
Deliveries to the independents were also poor as their operating environment has become more difficult with more regulatory scrutiny, in line with government efforts to reduce emissions.
The low crude import volumes could be short-lived on the back of increased inflows from new refineries, in part for line and tank fill, some inventory build, particularly should oil prices moderate with softer fundamentals and pressure from the independents to use their quotas.
We expect 205-207 million mt of crude quotas to be issued in 2022, though there are downside risks to these volumes as Beijing will ramp up efforts to consolidate the refining sector.
China’s crude imports came in at just 8.93 million b/d in October. This was a 39-month low and was down by over 1 million b/d on the month and on the year. The sequential decline reflected sizable stock draws, weak demand from refineries, and a likely delay in the reporting/booking of discharged cargoes over the National Day holidays.
According to URSA, crude stocks at 41 major sites in China fell by 22.6 million barrels, or 730,000 b/d month on month, in October as refineries drew down on cheaper crudes bought from before to lift margins as prices rise. It is also worthwhile to point out that by the end of October, inventories in these locations were at levels seen in early April 2020, right before the massive build in stocks caused by lower oil prices and a floor on product prices.
The year-on-year fall is in line with a reduction in imports, predominantly (around 80%) by the independent players and to a smaller extent by the National Oil Companies (NOCs). Deliveries to the former have fallen for a seventh-consecutive month as their operating environment has become more difficult with increased regulatory scrutiny. For instance, the ability of these refineries to raise runs and by extension import more crude was affected by the clampdown on quota-free sales by PetroChina, hefty taxes on the importation of bitumen blend, light cycle oil and mixed aromatics.
Beijing’s growing commitment to its carbon emissions plans has also resulted in fewer quotas and the delay in the issuance of quotas to certain refineries. A total of five refineries, excluding closures, were awarded fewer quotas this year compared to 2020. ZPC was also only issued sufficient crude allowances to commence operations of its phase 2 CDU unit in October.
The refinery’s expanded CDU was shut since July due to feedstock shortages. However, even without the 12 million mt of new allocation to ZPC in October, over quota utilizations would have only been in the low 70% during the month. This suggests that the overall crude allowances remain ample though there is also a wide discrepancy in usage levels among refineries.
The low volume of imports seen in October could be short-lived. Much of the higher crude prices was driven by shortages of gas, coal, and other commodities. This could moderate in line with weaker fundamentals in the coming months, which could provide renewed impetus to rebuild stocks after persistent declines. After all, there is usually a minimum volume of inventories that the NOCs hold (around 20 day of crude processing volumes) and these need to be restocked after a period of drawdowns. A Sinopec refiner also said recently that it did not have enough inventory to hike runs while crude prices are also high, Platts reported earlier. Additionally, new refineries such as ZPC, Shenghong and Sinopec’s Zhenhai’s unit will also be looking to commence operations in the coming months, and these will require more imported feedstock for line and tank fills.
ZPC has so far bought 10 million barrels of crude, including 2 million from floating storage in Zhejiang province immediately after it was awarded quotas, while Shenghong would have received three crude cargoes that encompassed Russia’s ESPO and Saudi Arabia’s Arab Heavy, Medium, and Light crudes by mid November. Premiums for December-loading cargoes of ESPO, the most preferred grade of these players, had also traded at around $6/b, a high not seen since January 2020, suggesting much higher inflows ahead. Despite a weaker outlook, Platts suspects that many independent refineries will still be under pressure to fully utilize their crude quotas to be awarded their full volumes the following year.
The Ministry of Commerce continued to put up ample volumes of these allowances of 243 million mt for grabs in 2022. However, this probably exceeds the maximum of around 205 to 207 million mt that all refineries can obtain, as per their NDRC allocations, offset by closures that are required to take place for Yulong Petrochemical.
There are also further downside risks to actual volumes eventually granted as the government will likely continue to ramp up efforts to consolidate the sector in 2022. This will limit crude imports, which we expect to be mainly driven by requirements to meet local demand growth and the start up of new refineries during the year.