Spotlight: China’s non-state oil quotas facilitate higher imports amid weak demand

This Spotlight by S&P Global Platts Analytics was first published April 22, 2020.

China's Ministry of Commerce (MOFCOM) has issued 53.88 million metric tons of non-state crude import quotas in the second batch for 2020, taking total allocations so far this year to 157.71 million mt.

This is up 61.46 million mt, or 64%, from 96.25 million mt issued in the first four months of 2019 – and 4.61 million mt more than in the first two batches of quotas in 2019. Of the total quotas issued during the second round, independent refineries received 52.99 million mt, and licensed trading companies 890,000 mt.

Compared with 2019, we see more crude import quotas this year due to greater feedstock requirements from the new refineries – Hengli and Zhejiang Petrochemical.

Despite the impact of the coronavirus outbreak, the overall pace of crude purchases by the country's independent refineries has picked up considerably since March due to improving refining economics for these producers. This is due to a combination of low crude costs, better demand expectations than in the first quarter, and a state-mandated price floor on oil products at $40/b for crude.

Although refiners are required to pay additional earnings from the latter into the government's Price Adjustment Risk Fund, some private players were known to have sold their gasoline and gasoil as chemical products to avoid making these contributions, according to S&P Global Platts news sources, allowing them to pocket supernormal profits in a weak demand environment. In fact, the crude quota utilizations of 39 comparable independent refineries were estimated to be higher at 46% by March this year than 32% during a same period of 2019, based on data from JLC.

It is worth noting that the recent batch of quotas was also released rather early, as a second round of allocation is typically issued in June or July each year. Although commercial decisions (margins, demand) likely prompted refiners to apply for more quotas, we are of view that by approving these quotas earlier, the government may have had intentions for independent players to bring in more crude at a time when flat prices are low, given this effectively contributes to the nation's wider crude stockpiling efforts.

As such, although we expect domestic demand (down around 560 thousand barrels per day or MB/D in 2020 vs growth of over 640 MB/D in 2019) and subsequently crude requirements by refineries to remain weaker overall this year, we still anticipate heavier crude arrivals by independent refineries in the coming months due to the above reasons and this should, in part, underpin our current positive crude import growth estimate this year.

To facilitate more crude buying by private players, we also anticipate MOFCOM will issue up to two more rounds of non-state crude import quotas this year and this should take total allocations to around 188 million mt in 2020, 22 million mt higher than in 2019.