Refiners optimistic on China’s economy, demand recovery
China’s refiners are optimistic about the likelihood of economic recovery in Asia’s top consuming country in the fourth quarter and into 2023 as pandemic control measures ease, helping to boost domestic oil product demand, according to the China-focused panel discussion at the S&P Global Commodity Insights Asia Pacific Petroleum Conference in Singapore Sept. 28.
The optimism comes even as China faces near-term headwinds such as slow travel demand for the upcoming week-long National Day holiday, property debt issues, foreign companies shifting supply chains from the country, slowing goods exports and rising unemployment after a series of city-wide lockdowns over April-May.
“The toughest moment has passed. Restoring consumers’ confidence is what the government needs to do and is doing,” said Sun Xin, a director with Shenghong Petrochemical International, a trading desk of the greenfield Shenghong Petrochemical refinery complex in Jiangsu province.
“We have seen some green shoots already in China’s economy. Especially in September, we see more congestion in terms of transportation. We see a better run rate at the refineries,” said Chen Hongbin, deputy GM of Rongsheng Petrochemical (Singapore).
Rongsheng is a trading arm of the privately-held refining complex Zhejiang Petroleum & Chemical, which restarted its 200,000 b/d No.4 CDU in last week after operations were suspended for seven months, and lifted run rates to around 95% of its nameplate capacity of 800,000 b/d from 83% in August, S&P Global data showed.
Unlike the lockdowns in Q2, Chen said supply chain disruptions in the manufacturing sector were seldom seen under the current zero-COVID measures. He added that opening up was the ultimate aim of China’s COVID policies, but the process was gradual and would take time.
As a result, the panelists said that while manufacturing and infrastructure construction were supporting robust gasoil demand, gasoline and jet fuel consumption would pick up only when the COVID measures eased further and international travel resumed. Oil demand in Q4 was expected to increase from Q3, while growth would be seen in 2023 due to low bases in 2022, they added.
Global oil demand
S&P Global estimates China’s gasoil demand to edge down 0.3% year on year to 4 million b/d in 2022, gasoline to fall 7.7% to 3.3 million b/d and jet fuel to slump 28.3% to 506,000 b/d.
Wu Qiunan, the chief economist of the state-owned PetroChina International, said on the panel that China’s strong EV sales in 2022 also posed a threat to gasoline demand recovery. The PetroChina Planning & Engineering Institute has forecast the EV uptake will result in China’s gasoline demand peaking in 2026.
Export for profit
The panelists said their oil product exports will be economic-driven despite a potential final batch of quota allocations being released for 2022 with a volume of up to 15 million mt or 119 million barrels.
China has been the leading contributor to global refining capacity expansion, “so we have seen that the world market is unbalanced if China stops exports or [reduces] to very small volumes during this summer,” Chen said.
He added that ZPC always takes economics as the most important factor in deciding when and which product to export. The refinery holds 2.36 million mt of gasoline, gasoil and jet fuel export quotas, and was expected to gain a further 600,000 mt in the potential new allocation.
Wu said sufficient crude and oil product inventories allow refineries to choose the right time to maximize export profits, or alternatively to keep the barrels at home to wait for domestic demand recovery.
Recent market talk indicates that Beijing is poised to adopt a more lenient stance and provide companies with more flexibility to control their export volumes in line with market fundamentals and sales margins.
Petrochemical-oriented refineries with integrated value chains and economies of scale are expected to survive the intensive competition amid capacity surplus, the panelists said.
“We believe in the economy of scale, the cost of the lowest is better,” Chen said, adding that inefficient producers would be squeezed out of the market by economic means or administrative measures.
Wu said China’s new refineries were integrated with high yields of petrochemical products to replace imports when oil product demand growth slows, ruling out the small and simple refineries.
Beijing has set a target of capping China’s refining capacity at 20 million b/d in 2025. PetroChina’s 400,000 b/d Guangdong Petrochemical and the 320,000 b/d Shenghong Petrochemical refineries are scheduled to commission in 2022, while around 149,000 b/d of independent refining capacity was set to be phased out, S&P Global data showed.
Sun noted that refining and petrochemical bases help to lower transaction and logistics costs and maximize scale, while expanding the business chain to renewable energy, CCUS projects and new materials will help the company to compete in the future.