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It’s problem of plenty for China independents as crude stocks swell

The appetite for near-term crude cargoes among China’s independent refiners is likely to take a backseat as they struggle to first clear stocks that have piled up at the ports before signing on the dotted line for fresh feedstock inflows, casting a shadow on one of the few pockets of robust demand.

Trade sources said May and June crude buying volumes may remain subdued, clouding the buying outlook even more at a time when a government investigation on the China’s private refining sector has already rung alarm bells among global oil suppliers that independent refiners would be moving cautiously in sealing deals in the near future.

“The port stocks problem should be largely temporary, until some of the refiners emerge from maintenance in June,” said Grace Lee, senior China oil analyst at S&P Global Platts Analytics.

“But I think independent refineries will mostly lie low at the moment given ongoing government investigations — whether this subdued buying will be a persistent trend will depend much on the outcome of these investigations,” she added.

Refinery and trade sources told S&P Global Platts that crude inventories at major ports in eastern Shandong province have remained high, which is already impacting the buying interest for crude cargoes.

“We see the market relatively quiet for both May and June arrival cargoes,” said a source with a state-owned trading company.

Combined inventories hovered around 5.48 million mt as of April 15, mainly due to high stocks at Dongjiakou port of Qingdao. It was about 7.9% higher from the same time a year earlier. These ports include Dongjiakou, Qingdao, Rizhao, Yantai, Dongying, Laizhou and Longkou, according to data from JLC, a local energy information provider.

Crude inventories were marginally lower than 5.5 million mt as of end-March, easing from a record high of 5.9 million mt in mid-March.
Unsold cargoes

According to a source with Qingdao port, there were still quite a few crude cargoes unsold and sitting in bonded tankers. Most of those crude stocks were held by trading companies.

Stocks have surged due to the flooding of relatively cheap Iranian crudes that have been offered at quite competitive prices to importers in China. As a result, they snapped up all the volumes that came their way, irrespective of whether there was an immediate need for those cargoes to be refined.

This has resulted in slower depletion of those volumes, resulting in plentiful stocks at ports, one source added.

“The demand situation is getting slightly better to sell off those crudes stored in the tanks, but buying interest for seaborne cargoes to arrive in the coming months is still at a low ebb,” said a trade source.

And for independent refiners, it’s not just high stocks at the ports. Even volumes at their refining facilities have remained high due to relatively weak processing speed, thanks to the demand outlook.

This has squeezed their ability to bring in some of those volumes from the ports to their refineries, reducing the scope to make space for new feedstock inflows into ports from overseas.

“Refineries not only have stocks in Dongjiakou but also at other ports in Shandong,” said the port source.

As independent refiners are aware that multiple traders were holding a lot of stocks, they were adopting a go-slow attitude and were preferring to wait and watch instead of rushing into fresh deals, trade sources said.
Limited scope to clear stocks

In addition to the high crude stocks, some refineries also have plans to shut for maintenance in April, after running for about one to two years.

Those independent refineries, which usually shut every one or two years for maintenance, are much more flexible compared with their state-owned peers in terms of maintenance.

In April, a total of 21.2 million mt/year refining capacity has been planned to shut at seven Shandong independent refineries.

With the planned maintenance ahead, crude delivery from ports to refining facilities is likely to remain slow, making it less urgent for refineries to book new cargoes.

According to a notice released by Shandong Provincial government dated April 9, the China’s National Development and Reform Commission team will spend three-to-five days from April 13 to investigate 55 independent refineries across the country.

The investigation kicked off after government-backed media reports surfaced about the plight of the country’s refining sector, which is still plagued by massive overcapacity.

Although the government has implemented several new mega refining projects and wants to phase out the old refineries, the small and aging refineries not only linger on but also aim to expand, prompting corrective action by the central government.
Source: Platts

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