China on course to reduce light ends output amid weak petrochemical demand

China is on course to increase middle and residual distillate yields further in coming months as slumping petrochemical sales reduce demand for light end products like naphtha, refining sources and analysts told S&P Global Commodity Insights Aug. 25.

The country's jet/kerosene, gasoil and fuel oil yields comprised 39.7% of oil product output in July, up from 34.9% a year earlier and 38.5% in June, latest National Bureau of Statistics data showed.

"The yields [of middle and residual distillates] will rise further due to their better demand than the light ends, especially the feedstocks for petrochemicals like naphtha," a Beijing-based analyst said.

"Petrochemical product demand is very bad in China, with product prices staying at levels equal to crude priced in the $40s/b," he added.

The product output mix was being impacted by the domestic property sector slowdown, a Southeast Asia-based source said.

"There are a lot of property buyers and developers who have been defaulting on their loans, so the properties are not completed, and this has led to a big fall in demand for plastics," the source added.

Chemical products are widely used in property renovation and construction, and demand from the sector has slumped amid a cash flow crisis.

China's naphtha production fell 4.2% month on month to 4.17 million mt (1.21 million b/d) in July, despite rising 6.3% from a year earlier, the NBS data showed.

However naphtha imports fell 23.9% year on year to 544,029 mt in July, General Administration of Customs data showed. China's naphtha imports are mainly used as feedstock for steam crackers.

Amid poor olefin production margins, China's steam crackers have cut operating rates to reduce losses and were running at around 75%-80% of capacity in August, down from above 80% in July, according to data tracked by S&P Global.

Heavy in favor

Crude traders in Singapore said there were receiving an increase in inquiries from China for September-onward loading heavy crude cargoes, suggesting the country's refiners intend to increase middle and heavy ends output.

"We target to increase low sulfur fuel oil output for bonded bunkering and cut petrochemical production," a source with a Sinopec refinery in eastern China said.

China's fuel oil production hit a record high 4.7 million mt (963,000 b/d) in July, up 1% from the previous high of 4.65 million mt in June, NBS data showed. Year on year, the output surged 21.5%.

LSFO led the increase, with production rising 15% month to 1.51 million mt in July, the highest since the IMO 2020 mandate came into force and up from the previous high of 1.31 million mt, according to local information provider JLC.

"Margins for LSFO were super good in end June, early July, encouraging PetroChina to boost its production when Sinopec's key LSFO producer Shanghai Petrochemical was shut," an analyst with JLC said.

PetroChina produced 643,000 mt of LSFO in July, up 15% month on month, JLC's data showed.

The state-owned oil giant holds 4.09 million mt of the 12.25 million mt of LSFO export quotas issued by the government, allowing holders to refill bunker at China's bonded ports. Its bunker supplier subsidiary PetroChina SIPG Energy Co. Ltd was allocated the first bonded bunkering license issued by Shanghai local government.

Jet/kerosene recovery

Meanwhile, jet fuel/kerosene output continued with its recovery, rising 20.6% month on month to a four-month high 2.55 million mt (650,000 b/d) from July, despite remaining 26.4% below the volume in July 2021, NBS data showed.

The numbers mirrored domestic demand recovery from the aviation sector amid the domestic summer holiday season, although a COVID-19 resurgence in tourism hotspots Hainan province and the Xinjiang Uygur Autonomous Region in August may cap further recovery, analysts said.

Gasoil production fell 3.6% month on month in July, in the line with a 3.1% reduction in crude throughput, keeping its percentage of total product yield stable at 26.1%. The volume was up 6.3% from a year earlier when the yield was 22.4%.

China produced 291.61 million mt of LPG, naphtha, gasoline, jet/kerosene, gasoil and fuel oil over January-July, up 3.9% year on year, despite crude throughput falling 6.3% over the same period, NBS data showed.

The yields of the six key products comprised 76.7% of total products output in the seven-month period, up from 69.2% in a year earlier, as Chinese refineries produced more oil products due to narrowing margins for petrochemical products.

China's petroleum output

(million mt):

*2022 figures differ from volumes reported earlier due to NBS revisions

Source: China's National Bureau of Statistics