China's independent refineries raise Oct run rates as margins hit record highs

A more than doubling of refining margins and a fresh batch of crude quota allocations spurred China's independent refiners to raise crude throughput to a four-month high in October, pulling down feedstock inventories at ports from record highs.

Throughput was expected to continue rising until year end if margins remain elevated as refiners would not want to miss the opportunity after two years of constrained profits, analysts and industry sources said.

"[The higher throughput in October was] mostly driven by a tight gasoil market, given these players often have higher yields and a general edge selling into the wholesale market," said Grace Lee, Senior Analyst with S&P Global Platts Analytics.

State-owned oil refiners have also raised their gasoil output in the recent months, she added, which was mostly done to help fill domestic shortages, as instructed by Beijing. There has been a structural reduction in their gasoil-gasoline output ratio, and around half their gasoil sales are sold directly through the wholesale market.

Feedstock consumption at China's independent refineries in eastern Shandong province rose 6.5% month on month to a four-month high of 10.12 million mt in October from 9.5 million mt in September, data from local information provider JLC showed Nov. 12.

It was the first month since July that throughput at Shandong's independent refineries was higher than 10 million mt.

JLC's calculations showed that refining margins for cracking imported crudes more than doubled to a record high Yuan 1,185 ($182)/mt in October, surging 123.6% from the month before.

A sharp rise in oil product prices in the month, especially gasoil, whetted the appetite of independent refiners to raise throughput. China has faced severe product shortages in certain regions since September due to the spike in international crude prices and peak demand in autumn.

As crude prices rose, some refineries initially slashed output, while a new hefty consumption tax on imported light cycle oil, a blending material of gasoil, shut access to inflows.

As a result, the average price of zero-vapor gasoil in China rose 18.4% month on month to Yuan 7,789/mt in October, while the price of 92 RON gasoline jumped 10.5% over the same period to Yuan 8,456/mt.

However the supply tightness was expected to ease as state-owned refineries start to increase gasoil production, which could temper the increase in refining margins, according to JLC.

Throughput boost

In addition to the strong refining margins, the release of the last batch of 2021 crude import quotas for independent refineries on Oct. 15 made it possible for refiners to lift throughput, as they could finally take cargoes from ports to their facilities.

Feedstock consumption of 10.12 million mt in October could translate to an average run rate of 71.5% against the Shandong independent refiners' combined refining capacity, about two percentage points higher than in September, S&P Global Platts calculations showed.

In addition, the integrated Hengli Petrochemical (Dalian) refinery in northeastern Liaoning province raised throughput 3.8% month on month to 1.65 million mt in October from 1.59 million mt in September, according to JLC.

A new quota of 12 million mt for Zhejiang Petroleum & Chemical also helped the refining complex to process more crude in October, rising 2.4% to 1.72 million mt, from 1.68 million mt in September, JLC data showed.

ZPC's crude throughput is expected to continue rising as the refinery starts up its four crude distillation units with a total capacity of 10 million mt/year from mid-November.

Other feedstocks

Independent refineries also processed more fuel oil and bitumen blend in October as margins remained robust.

Straight-run fuel oil consumption rose 12% to 280,000 mt in October from 250,000 mt in September, while bitumen blend consumption rose to 840,000 mt from 820,000 mt over the same period.

Domestic crudes also contributed. Independent refineries increased Shengli crude consumption by 12% month on month to 167,000 mt in October, while offshore crudes processed rose 4.6% to 1.198 million mt, JLC data showed.

Shandong independent refineries rely mainly on crude as feedstock, but also process bitumen blend and fuel oil as supplements.

JLC's survey covers 43 independent refineries in Shandong with a combined capacity of 166.7 million mt/year, which accounts for around 18% of China's total refining capacity.

Following the higher consumption at refineries, feedstock inventories at major ports in Shandong fell 8.7% month on month to 7.03 million mt as of Oct. 28, easing from a record high of 7.7 million mt at end September, the JLC data showed.

Shandong independent refineries' crude feedstock:

(Unit: '000 mt)

Top imported crudes cracked by Shandong independent refineries:

(Unit: '000 mt)

Oil product output, sales:

(Unit: '000 mt）

Source: JLC