Limited refining expansion, high prices cloud China's 2021 crude import outlook

Singaore — China will witness a positive growth in crude oil imports in 2021, albeit at a slower pace compared with 2020, as a sharp rebound in global oil prices and limited capacity expansion plans at home will limit the appetite of Asia's biggest oil consumer to buy and maintain plentiful inventories.

Analysts told S&P Global Platts that China may not be able to repeat last year's stellar year-on-year import growth of 7% when the COVID-19 pandemic destroyed demand across the globe and pulled down prices to record lows, giving top oil importers like China an opportunity to snap up as many cargoes as possible and store it for future use.

In absolute terms, the country imported 10.86 million b/d of crude oil in 2020, with inflows hitting a monthly historical high of 12.99 million b/d in June, according to customs data.

Despite crude import volume to stay at high levels in 2021, S&P Global Platts Analytics expects the country's inflows to rise only by 81,000 b/d year on year in 2021, sharply down from a growth of 707,457 b/d recorded in 2020.

Some global oil analysts have said that it is even possible to see zero year-on-year increase in crude imports, even though they expect an average of about 600,000 b/d of throughput increase in 2021 from last year's level due to capacity expansion and refiners' plan to boost product supplies to meet recovering domestic demand.

They added that limited crude storage availability amid relatively low pace of destocking activity last year following a surge in crude inflows has squeezed the bandwidth of the country to keep buying at the same pace as last year.

China's crude inventories hit an all-time high of 944.31 million barrels in September, accounting for 70% of the country's crude storage availability, according to data from intelligence firm Kpler.

Storage sources said 70% is normally the maximum level filled in an average crude tank. Crude inventory fell to 890.84 million barrels in January 2021, still accounting for 65% of storage capacity.

In 2021, Platts Analytics expected about 70 million barrels of new commercial tanks to come on stream, compared to around 100 million barrels of known capacity that came online last year.

PACE OF DESTOCKING

"As crude prices are already above $50/b with a slight backwardation structure, it is not attractive for building stocks anymore," said a Beijing-based analyst with an international investment bank.

But analysts added that the hefty margins the country's refiners earned in 2020 are now a thing of the past given the progress made to control the pandemic across the globe, with COVID-19 vaccines expected to be widely deployed in the second half of this year.

S&P Global Analytics projects Brent to average $56/b in 2021, while WTI to be around $54/b. Meanwhile, the March/April time spread for benchmark ICE Brent futures was at 30 cents/b on Feb. 2, reflecting a backwardation structure.

"It is very likely to see continuous destocking activity this year, specially from the state-owned sector, which holds abundant commercial crude stocks," said a Beijing-based senior analyst.

She added that the sector's limited capacity expansion plans in 2021 has also capped the country's interest in shipping in incremental volumes.

Sinopec Luoyang Petrochemical's additional 40,000 b/d primary capacity is one of the few expansion plans in the state-owned sector in 2021. But the project is unlikely to be online until the second half of 2021. It has applied for government approval and waiting for the start of a new pipeline to transport sufficient feedstock.

In comparison, the refining sector in 2020 added at least 200,000 b/d new capacity at Sinopec's greenfield Zhongke Petrochemical, and 60,000 b/d in Sinochem Quanzhou Petrochemical.

INDEPENDENT SECTOR

Analysts said that some incremental crude import growth will come due to capacity expansion in the independent sector, with Zhejiang Petroleum & Chemical's 400,000 b/d phase 2 project being expected to be entirely online in 2021. The project will contribute 20 million mt of additional demand for imported crude oil this year, market sources said.

Data collected by S&P Global Platts showed that crude imports for the independent sector in 2020 were above 189 million mt. At least 179.4 million mt of these barrels were imported with crude quotas, while some of the rest went into bonded storage.

Analysts added that the dismantling project in Shandong province's private refining sector is likely to have limited impact on their crude oil appetite. Because majority of the dismantling plants have already received their crude oil import quotas, allowing them to continue bringing in imports this year.

Four independent refineries -- Fuyu, Kelida, Haike and Shouguang Lianmeng - are scheduled to dismantle crude distillation units in 2021 and eventually hand over capacity and crude oil import quota for the 20 million mt/year Yulong refining and petrochemical project which is still under construction.

Three of them are crude oil import quota holders, which have been awarded 2.87 million mt of quotas for 2021, accounting for 70% of their annual quota ceiling.

In addition, Zhonghai Fine Chemical, which was dismantled in August 2020, was also granted 1.3 million mt of quotas for 2021, accounting for 70% of its annual quota ceiling.

Only Yuhuang Petrochemical, which was also dismantled in August, dropped out of the quota allocation list for 2021. The plant in 2020 had won 1.44 million mt of import quotas.