Port congestion in China set to put brakes on Shandong refineries' rising crude throughput, run rates

Singapore — The recent surge in China's crude procurement activity on the back of low oil prices has led to severe port congestion in Shandong province in recent weeks, causing logistical constraints that could put brakes on the upward momentum in independent refiners' run rates and crude throughput levels.

China's crude oil imports jumped 19.2% on the year to an all-time high at 11.34 million b/d, or 47.97 million mt, in May as refiners took full advantage of ultra low crude prices and ample storage capacity.

However, the recent flurry of tankers arriving in Chinese waters could not be handled in a prompt manner due to limited port capacity, as crude futures participants and more physical traders other than the independent refiners join the queue to bring in crude barrels compared with the last few months.

As of June 24, at least 41 ships carrying a combined total of around 51.07 million barrels of crude are waiting to be discharged at Shandong ports for more than a week, trade flow tracker Kpler showed.

Making matters worse, there were at least seven cargoes of crude oil jumping the queue to deliver into storage facilities designated by the Shanghai International Energy Exchange, or INE, since late May. These cargoes have occupied the logistics resources that used to cater only for independent refineries.

The congestion in Shandong ports will likely last until end of August, and many of the country's independent refineries based in the country's eastern province may have little choice but to cut down their operating rates as feedstock deliveries to processing units and storage tanks are delayed, a Beijing-based analyst said.

Crude throughputs stall

Most Chinese refineries have been aggressively raising crude throughputs to take full advantage of healthy domestic refining margins since late March.

Crude throughputs at Shandong-based independent refineries have lifted to an average of 10.9 million mt/month over April-May, up 41.6% from a 7.69 million mt/month average over the January-March period. It was also 18.3% higher than the average of 9.2 million mt/month during the same period a year earlier, according to data from local information provider JLC.

The congestion has already taken its toll on several independent refineries in Shandong province.

Daily crude throughput at an 8 million mt/year Weifang-based refinery was briefly cut by half to around 10,000 mt for about two to three weeks earlier this month because of the congestion and subsequent delay in crude feedstock delivery.

The refinery typically relied on the Huangdao-Weifang crude pipeline to deliver crude oil from a Shandong port to its plant, but the pipeline is currently used to transmit crude barrels designated for INE storage tanks for physical delivery settlement on Shanghai crude futures trades.

As a result, the refinery started to find other ways to transport crude oil from oil terminals to its facilities, including by trucks and trains.

However, recent shortage of available trucks to deliver crude oil has drastically slowed the delivery process, a refinery official said.

Feedstock replenishment

The prolonged congestion could seriously affect operations and fuel output at many more refineries as they struggle to replenish their feedstock inventory on time, industry and market sources said.

"Refineries have been running at low stocks at their facilities now, to last for about 10 days only," said a source at another Shandong-based refinery.

If the congestion continues and they cannot get enough deliveries from ports, some refineries will start to worry about their feedstock supply, sources added.

It takes at least two to three weeks for a crude cargo to be discharged these days in Yantai, and even longer time, of around 20-30 days in Rizhao and Qingdao, port officials with knowledge of the matter told S&P Global Platts.

"It will probably take until end of August to completely clear all those congested cargoes," said an official at Yantai port.

Apart from the delay in feedstock replenishment, a slip in domestic refining margins have also prompted some refineries to trim crude throughput levels.

Lanqiao Petrochemical, for one, cut its run rate slightly to around 70% in the week started June 21 from 75% earlier this month due to falling profit margins, according to a refinery source.

An analyst from JLC said the independent sector's run rates are likely to come off slightly in the week started June 21 from the recent peak, as domestic refining margins slipped to around Yuan 200-300/mt recently from Yuan 454/mt seen in May and Yuan 683/mt in April.