Quota vacuum will keep China dependent on costly bitumen imports for now: sources

Bitumen blend imports by China's independent refineries fell to a 13-month low in July as a new consumption tax took a toll on inflows, but trade sources told S&P Global Platts that refiners will be forced to keep bringing in those volumes due to limited crude import quotas.

Shandong-based refiners are left with little option but to bring in the volumes despite having to pay a new consumption tax, on top of import tax and value-added tax, they added.

In July, two cargoes of bitumen blend totaling 270,000 mt were discharged into tanks after paying all three taxes. Overall inflows of bitumen blend fell 86.8% on the month to 270,000 mt in July, compared with 2.04 million mt in June, and 2.64 million mt in May, according to Platts data.

The sharp drop in bitumen blend imports contributed to the overall drop in feedstock imports last month. Independent refineries imported 12.37 million mt of feedstocks in July -- a 16-month low. This was 13.5% lower month on month and down 37.6% year on year.

But neither of those two cargoes, brought in by trading companies, were heard to have been sold to end-users, as there are still plenty of stocks floating around in the market.

Trade sources said there were at least five cargoes totaling 611,000 mt waiting outside port limits in early August, with some of them having arrived as far back as early June.

"There are still stocks of bitumen blend brought in earlier and which did not attract any consumption tax, sitting in tanks unsold," said an analyst.

Prior to June 12, Shandong independent refineries and trading houses had rushed to import bitumen blend, in order to avoid the consumption tax, pushing up total imports to 10.9 million mt in the first half of the year, up 169.8% from the same period a year earlier.

Bitumen blend is typically crude cargoes blended off Malaysian waters with heavy crude grades, mostly Venezuelan Merey in recent years.

Robust fuel oil imports

Last month, eight cargoes of fuel oil totaling 311,000 mt were discharged into Shandong ports, up 135.6% from June. This adds to three cargoes totaling 138,000 mt scheduled to be discharged in August.

Shandong's independent refineries first started to import fuel oil in June, after a gap of four years, since most of them have largely relied on imported crudes as feedstock.

"There has been continued buying interest for fuel oil in July, with at least three cargoes from Russia sold out, and a few more scheduled to come in during August," said a trader who sold one cargo last month.

He added that prices for August cargoes could be higher due to tight supplies. July cargo deals were concluded at close to a $80/mt premium to the Mean of Platts Singapore assessment.

Although refiners can pass on the consumption tax levied on imports while selling oil products, refiners were still reluctant to bring in plentiful volumes as procurement costs had increased.

Independent refineries -- mainly the ones that have expanded capacities -- will most likely continue to import bitumen blend and fuel oil in order to keep their throughput stable, according to refinery sources.

Third batch of quotas

As well as the smaller-scale Shandong-based independent refineries, the bigger private refining and petrochemical complexes have been struggling with tight crude quotas.

Zhejiang Petroleum & Chemical in late July shut down the third 10 million mt/year crude distillation unit at its complex, which came online at the end of last year, due to the quota shortage. As a result, it is having to manage with the 17 million mt quotas allocated for the other two CDUs at the complex, which have combined capacity of 20 million mt/year.

Refinery sources said that the third batch of crude import quotas are likely to be allocated in September.

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.

These refiners have imported a total of 107.34 million mt of feedstocks over the first seven months of the year, almost on par with 107.36 million mt in the same period last year.

This leaves about 35.6 million mt of quotas available for imports over August-December, before the allocations in the third round.

The 36 refiners have been 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.

Top crude suppliers for China's independent refiners ('000 mt)

Top crude grades for China's independent refiners ('000 mt)

*Including other crude imports

Source: S&P Global Platts data, company sources