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Commodities 2021: Chinese refiners expect more freedom in fuel exports as Beijing eases quotas

Highlights

Beijing grants more export quotas despite tepid 2020 overseas sales

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Singapore — Chinese refiners may no longer stress over meeting their oil product export targets in 2021 as Beijing has granted fuel producers more flexibility and freedom to manage their output and sales after increasing the companies' export quotas for 2021 despite lackluster overseas sales performance in 2020.

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It has been a difficult 2020 for refiners across northeast Asia trying to sell their products overseas as global consumer and industrial fuel demand faltered due to the coronavirus pandemic.

Chinese refineries with fuel export permits have been under pressure to fulfill their export goals regardless of the changing international market conditions. The companies fretted over not being able to renew their export permits or secure enough export quota volume for the next rounds, if their overseas sales underperformed.

Against that backdrop, the Chinese Ministry of Commerce, or MOFCOM, recently adopted a lenient approach, increasing the first round export quota allocations for 2021 by 5.4% year on year to a total of 29.5 million mt for gasoline, gasoil and jet fuel.

CHINA'S FIRST ROUND EXPORT QUOTAS: GASOLINE, GASOIL, JET FUEL (million mt)

1st round 2021
1st round 2020
Change
CNPC
9,810
9,200
6.60%
Sinopec
12,070
13,360
-9.70%
CNOOC
2,840*
2,590
9.70%
Sinochem
2,600**
2,790
-6.80%
CNAF
30
60
-50%
ZPC
2,000
0
NA
Norinco
150
0
NA
Total
29,500
28,000
5.40%

Note: Quotas for both general and processing trade routes

* Include 2,500 mt of natural gas quotas

** Include 2,000 mt of natural gas quotas

Source: S&P Global Platts

The increased export quotas for 2021 raised a few eyebrows in the domestic refining industry. Many Chinese fuel exporters would breathe a sigh of relief as they were falling short of meeting their oil product export targets for 2020.

"This [increased 2021 export quota] suggests the government became more lenient with its export quota management, allowing more flexibility for oil firms to fix [most profitable] sales outlets, while deregulation in fuel exports is the trend for the coming years," a Beijing-based trader with a state-owned refiner said.

Oil companies typically strive to utilize all their export quota allocations by the year end in a bid to increase the chances of securing permits and receiving adequate quota volumes from the government for the following year.

In 2019, 99% of quotas were fulfilled, with the year's total fuel export volumes up 20% from 2018 at 55.37 million mt, S&P Platts data showed.

This year though, China's gasoline, gasoil and jet fuel exports dropped 15.4% on the year at 42.37 million mt in the first 11 months, according to data from the country's General Administration of Customs.

As a result, analysts estimated that oil companies would only be able to utilize about 80% of the total 59.03 million export quota allocated for 2020.

The export quotas have previously acted as the government's strict overseas sales target for the refiners to meet. That sentiment has changed in the aftermath of the pandemic, and the quotas may not necessarily have to be fulfilled, a Beijing-based analyst with an international trading firm said.

Flexible use of quotas

Beijing has stepped up efforts in recent years to develop a more market-oriented oil industry by delegating more decision-making powers to refiners and oil companies while inviting more competitors to join the market.

The authorities have also been streamlining administrative hurdles, allowing refiners to better manage their oil product exports in accordance with changing market fundamentals and refining margins.

In the first batch of 2020 export quota, MOFCOM removed a breakdown of export quotas set for each specific oil product -- gasoline, gasoil and jet fuel -- under the general trade route, which has enhanced export planning flexibility.

The ministry in July also decided to award an oil product export license to Zhejiang Petroleum & Chemical, or ZPC -- the first license granted to a private sector refiner.

Later in November, MOFCOM granted export quotas to ZPC and state-run China North Industries Group Corp. Ltd., or Norinco, adding them to the list of fuel exporting companies, which had been restricted to only five state-owned companies for several years.

Most state-run oil companies' fuel exports have seen increased correlation with Asian product cracks as the refiners focused on maximizing exports when international margins were profitable, said Sun Jianan, an analyst with S&P Global Platts Analytics.

ZPC might choose a different strategy. The company would be less sensitive to international benchmark crack changes as it pays more attention to domestic petrochemical margins, Sun said.

ZPC may primarily use its export permit and quota to better manage oil product stocks, offloading any surplus oil products to the overseas market, Sun added.

2021 export outlook

China's exports of gasoline, gasoil and jet fuel in 2021 are expected to be more or less steady from 2020, according to Platts Analytics.

Analysts and trading sources said the quota allocations for the full year 2021 are set to be more than sufficient, and would be similar from 2020 at about 59 million mt.

Exports in the first half next year are likely to see a year-on-year decline due to high basis in the same period of 2020, while growth in overseas sales is expected in H2, thanks to improving product cracks in Asia and a possible demand recovery if COVID-19 vaccines are widely deployed.

Relatively high fuel stockpiles across Asia, coupled with surplus refining capacity in traditional Chinese fuel sales destinations, could cap the upside in China's oil product outflows, Sun said.

A Beijing-based senior analyst with an international consulting firm expected more room for China to sell its oil products overseas in 2021.

"Jet fuel exports may see a relatively strong growth when successful vaccine immunization occurs across many countries in the second half 2021," the analyst said.