China's private refiners' feedstock demand weakens amid falling margins, crackdown

The impact of shrinking refining margins, Beijing's crackdown to weed out malpractices and the long-drawn vacuum of import quotas had weakened the feedstock demand of China's independent refiners to a level not seen in the past 16 months, industry sources said, adding that the worst for feedstock inflows is yet to come.

Analysts and industry sources told S&P Global Platts that the arrival of feedstocks -- including crude oil, bitumen blend and fuel oil -- had remained subdued in July, a trend that would continue in August and September, as refiners try to minimize risk at a time when the industry is facing a series of issues.

"China's independent refiners are under pressure and their runs will be constrained by a reduction in bitumen blend stocks and measures to stem the use of illegally traded crude quotas," said Grace Lee, senior analyst for China oil market at S&P Global Platts Analytics.

Total feedstock imports for China's independent refineries fell 13.5% on the month to 12.37 million mt in July. The level was also down 37.6% from 19.81 million mt in July 2020, which was the highest volume on record.

In addition to crude oil and bitumen blend, the inflows also included fuel oil, a supplement feedstock that independent refineries have started to import amid tight quotas.

In July, eight cargoes of fuel oil, totaling 311,000 mt, were discharged into Shandong ports, in addition to two cargoes of bitumen blend totaling 270,000 mt.

Amid the ongoing investigation into malpractices, as well as tighter quotas allocated in the second batch, independent refineries have showed little interest in feedstock procurement, and the trend is likely to continue in the coming months, sources said.

"The cargo booking trend over the past weeks showed that new cargo arrivals for August and September should be even lower, given narrowing refining margins," said an analyst in Shandong, home of the majority of independent refiners in China.

August imports to remain low

Sources at major ports of Qingdao, Yantai and Rizhao expect volumes of new crude cargoes to decline.

"It looks bad as new arrivals continue to drop. It will be around 3.5 million mt in August," said a source with Qingdao port. In July, around 4.5 million mt of crudes were discharged.

The sharp drop in bitumen blend inflows was one of the reasons behind the low feedstock imports. In July, only 270,000 mt of bitumen blend was discharged since it attracted a consumption tax, as well as import taxes and value-added tax.

Bitumen blend imports totaled 10.9 million mt over the January-June period, rising from 4.04 million mt over the same period in 2020, according to customs data.

Cumulative imports

In January-July, total feedstock imports by independent refineries fell 0.02% on the year to 107.336 million mt, the lowest year on year growth ever since Platts started collecting the data in January 2016.

In July, the fall in imports was due to weaker purchases by Zhejiang Petroleum & Chemical, which imported 1.61 million mt, a 33.2% fall on the month.

This was partly due to Typhoon In-Fa in late July, which hit port operations for at least 10 days, according to port sources. ZPC still has about 2.07 million mt of crudes in eight cargoes undischarged at ports, most of which arrived in July.

ZPC imported 15.1 million mt of crude oil over the first seven months of the year, against its year-to-date quota allocation of 17 million mt. This leaves only 1.9 million mt of quotas to be used before the new allocations.

Hengli Petrochemical (Dalian) Refinery received 1.87 million mt of crude oil in July, up 5.3% from June levels.

Platts collects information covering feedstock imported by independent refineries in Shandong province, Tianjin, Zhoushan and Dalian, including 36 crude import quota holders and non-quota holders.

The 36 refiners were awarded a combined 131.31 million mt in crude quotas in the first two batches, accounting for 86% of total allocations to the independent refining sector in 2021.

Crude imports for independent refiners ('000 mt)

*State-run firms trading for independent refineries

Source: S&P Global Platts data, company sources