China's independent refiners cautious on procuring Russian crude due to payment challenges

China's independent refineries have turned cautious of procuring Russian crudes following the escalation of the Russia-Ukraine military conflict, while difficulties faced in the issuance of letters of credit dampen buying interest, forcing them to seek alternatives, industry sources told S&P Global Commodity Insights March 2.

"Although only two state banks suspended opening L/Cs for trading of Russian-related commodities currently, more and more banks are expected to follow suit," a Shandong-based trader said.

"Some banks have turned down the request to open L/Cs," a source with an independent refinery said.

Independent refineries usually open L/Cs a week ahead of the arrival of the purchased cargo at port, according to trading and refining sources.

Given the increasing difficulty in issuing L/Cs, some independent refineries are switching to pay via Telegraphic Transfer, or T/T, for their March onward cargoes, which will increase their financial costs significantly.

Financial costs rise

According to industry sources, when opening an L/C, the requirement is for a deposit amounting to 20% of the full payment for the cargo. With a bank's guarantee, buyers are allowed to settle the payment 30-90 days after they have received the cargo.

However, T/T is akin to paying cash nowadays, according to sources. It will squeeze buyers' cash flow as they are required to pay 110%-115% of the value of the cargo prior to its arrival. The additional 10%-15% over and above the current value of the cargo is a deposit compensating the seller should oil prices surge before the completion of the deal, the sources added.

"This adds further burden to independent refineries, which have been struggling to pay back taxes," a Shandong-based source said.

Falling prices

As buyers shy away from Russian crudes amid payment issues, prices of these grades remain on a downtrend.

For end-April delivery of Russian ESPO crude cargoes, BP's offers are at around $5.80/b against ICE Brent crude futures on a DES Shandong basis, according to refinery sources.

This was lower than deals concluded early last week at around $6.20-$6.50/b, on a similar basis.

"But no one is interested at this level, the price is more likely to fall further," a Shandong-based refiner said.

Platts assessed front month ESPO crude at $5.50/b above Platts Dubai on March 1, basis FOB Kozmino, data by S&P Global Commodity Insights showed.

Russian ESPO crude is traded on a FOB basis against Platts Dubai assessments, but independent refineries take the cargoes on a DES Shandong basis, pricing against ICE Brent Futures.

International trading companies, or those with state-owned oil majors, are the middle men loading these barrels from Russian Kozmino and delivering to Shandong markets.

Russia was the second largest crude supplier to China's independent refineries in 2021, having shipped 26.89 million mt of crude equivalent to 15% of market share, according to S&P Global data.

Around 87% of those arrivals, or 23.51 million mt, were ESPO, which had risen 0.9% year on year, the data showed.

Alternatives

Given the uncertainties surrounding payment and logistics for Russian crudes, some independent refineries have been looking for alternatives.

"Those Western African grades, as well as Forties or Johan Sverdrop from the North Sea, are probably the [best] options," a refinery source said.

An independent refinery has purchased another alternative crude cargo as a backup late last week, with details yet to be confirmed, according to sources.

But other refineries have suggested trimming throughput should it not be a smooth delivery or payment process for the procurement of March-April Russian crude cargoes.

"The profit is not that good due to the recent surge in crude prices," another source said.