Asian products market changing

Nov 04 2016

Refineries in China have steadily increased their crude oil intake in recent years, aided in part by the granting of import licenses to teapot refiners and the creation of the ‘China Petroleum Purchase Federation of Independent Refiners’, according to a shipbroker’s report.

Data for January to August, 2016 showed that refinery crude throughput increased by about 600,000 barrels per day over the same period in 2015 (source: JODI).

These developments are not only impacting on the crude tanker market but also changing the dynamics of the Asia/Pacific refined products market, Gibson Research said.

Traditionally China has been seen as one of the main regional importers of diesel; however, the market has seen a fundamental change with the country recently becoming a net diesel exporter and increasingly an exporter of gasoline.

Chinese internal product demand has changed drastically over recent years, as the economy has attempted to gradually shift away from one of heavy manufacturing and labour intensive to commercial services, resulting in softer diesel demand used mainly in heavy industries. At the same time, demand for gasoline and jet fuel remained strong.

Reforms to the refining sector allowing independent teapot refineries to compete against larger state-owed refineries have increased competition to sell internally and has resulted in refineries looking abroad to place barrels. 

It is important to note that in general most Chinese refineries are geared up to maximise diesel production, Gibson said. In order to meet internal demand for gasoline and jet fuel, diesel production will naturally increase, resulting in a surplus supply and more barrels for export. However, with more refineries running at high levels, supply of all products will improve, with increasing export volumes. 

When looking at the export figures thus far this year, the impact of changes to China’s product demand paints an interesting picture. Diesel exports for Jan-Sept, 2016 on average are closer to 180,000 barrels per day higher than 2015 levels, with gasoline exports also faring well with an increase of roughly 80,000 barrels per day.

September proved to be a record month for exports of diesel. Somewhat bizarrely, however, diesel and gasoline imports have increased throughout 2016 despite the large export volumes. 

Sadly, the increase in Chinese exports has not resulted in any significant upturn in tanker rates. With the majority of barrels being sold to traders, it would appear most have been heading south to Singapore, with further exports required to really push freight rates higher.

What has emerged is a growing base trade of barrels out of China, which has not just provided an incremental stream of cargoes but also offered owners additional opportunities to achieve higher than 50% utilisation during the voyage.

The Chinese economy is facing significant challenges moving forward, and the refining sector is not immune to these challenges. Along with other major industries, such as steel and coal struggling with overcapacity, data suggests that Chinese refining capacity stands at around 14 mill barrels per day, with an estimated 3 mill barrels per day in excess capacity at current intake levels.

It would appear that the government is beginning to crack down on any grey areas of taxation in gasoline production and sales, which could hit smaller refiners already hampered by higher logistical costs when exporting. 

Despite this, slowing industrial output and struggling internal demand will most likely lead to refiners being left with few options but to look further afield to place product. This should result in sustained export demand from Chinese refineries and a steady flow of cargoes for product tanker owners at least in the short term, Gibson concluded. 

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