China's independent refiners' August feedstock imports hit 18-month low on quota scarcity

Feedstock imports by China's independent refiners fell to a 18-month low in August on subdued buying interest due to quota shortages and weaker margins, trade sources told S&P Global Platts Sept. 3, adding that volumes are expected to largely remain unchanged in September.

Combined feedstock imports dropped for the third straight month to 12.18 million mt in August, down 1.5% from July levels of 12.37 million mt. It was also down 31.8% from July 2020, the fourth year-on-year drop since May.

The fall in inflows in August pulled down imports for China's independent refineries by 5% year on year to 119.52 million mt over the cumulative January-August period. The fall in imports in the eight-month period was the first negative growth in that period since January 2016, when Platts started to track crude imports by China's independent refineries. The independent refiners were granted access to imported crudes in late 2015.

The feedstock inflows include crude, bitumen blend and fuel oil—a supplement feedstock that China's Shandong independent refineries are shipping in due to tighter availability of crude import quotas.

Sources from major ports in Qingdao, Dongjiakou, Yantai and Rizhao said they expect feedstock arrivals in September are likely to remain largely unchanged from August levels.

According to a source with Qingdao, new arrivals are expected to be slightly over 3 million mt in September, around 500,000 mt lower, compared with August inflows.

But expected arrivals into Yantai and Rizhao will be slightly higher month on month following the completion of refinery maintenance at Dongming Petrochemical and a few others.

On the other hand, buying interest for November cargoes has gradually re-emerged with refinery maintenance completed over the past few weeks.

"Buying interest for late October or early November arrivals have increased over the past weeks, which could mean more cargoes would arrive in the fourth quarter," said a Shandong-based analyst.

With demand recovering, premiums for crudes have increased slightly over this week, according to sources. The premiums for Tupi has increased to around $1-$1.2/b on a DES Shandong basis against the ICE Brent futures, up from around $0.8-$1/b a week earlier. Some deals were heard to have been closed over the week.

The reduction of August imports was mainly contributed by the Shandong independent refineries.

The combined imports by those Shandong-based independent refineries slipped to a 17-month low of 8.38 million mt in August, the lowest since April 2020. The volume was 237,000 mt lower from July levels.

"Compared with those new refining complexes, Shandong refineries are more eager to have quotas, which also explains their continued appetite on bitumen blend and fuel oil," said the analyst.

In August, bitumen blend imports rebounded by 257% month on month to 963,000 mt, from a 13-month low of 270,000 mt in July, while fuel oil imports were also higher 58.8% month on month to 494,000 mt in August.

Most bitumen blend were imported by trading companies, while fuel oil by independent refineries.

Combined imports by Zhejiang Petroleum & Chemical and Hengli Petrochemical (Dalian) Refinery were around 3.5 million mt, largely stable from July levels.

It is widely expected that the last batch of crude quotas will likely be released at the end of September or early October, which could support the buying appetite for Q4 cargoes arrivals to some extent.

It is expected that at least 19.8 million mt of quotas would likely be allocated in the last round in the worst scenario, as at least 18 independent refineries are expected to get their remaining quotas of 13.3 million mt.

On top of this, around 6.5 million mt quotas are expected for ZPC's Phase 2 project and for the 16 million mt/year of Shenghong Petrochemical, which will be 4.5 million mt and 2 million mt, respectively.

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

These 36 refiners have been awarded a combined 135.73 million mt in crude quotas in the first three batches, accounting for 86.5% of total allocations to the independent refining sector so far in 2021.

Over January-August, these refiners have imported a total of 119.52 million mt of feedstocks over the first eight months of the year, down by 5% on the year.

Therefore, it leaves about 29.3 million mt of quotas—deducting the imports of bitumen blend and fuel oil which doesn't need crude quotas—available for imports over September-December, even before the allocations of the last round.