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Analysis: China's crude imports by independent refineries to rise on year in January

Highlights


Around 8.15 million mt expected to arrive in January

Weakening refining margins could discourage more imports

Singapore — After rebounding 8% month on month in December, China's crude imports by independent refineries are likely to pick up further in January, thanks to the high allocation of quotas.

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However, the volume may not rise much due to weakening refining margins and backwardation structure, which could prevent the refiners from taking delivery in advance, sources told S&P Global Platts. Around 8.15 million mt, or 1.93 million b/d, of crude is expected to be discharged at Shandong ports in January, up from about 7.49 million mt discharged last month.

This contrasted to a low start of around 6.98 million mt registered in January 2017, which was mainly because the refiners were not allowed to bring in the barrels until they gained import quotas in mid-January.

In late December, Beijing allocated 114.59 million mt to 34 refiners in the first round of crude import quotas, allowing the independent refineries to bring in their January feedstock on time for better efficiency in their crude buying activity.

The quota allocation to 15 independent refiners hit 100% of their annual quota ceiling, while another 17 have crossed 90% of their ceiling -- providing the refiners with more flexibility in managing their crude stock in line with their throughput plan.

In the first round of 2017, independent refiners were allocated an average 67% of their annual quota ceiling.

"Refineries won't worry about the quota issues as all is in place, but there is no new buying interest after the allocation either, since January cargoes have already been booked at around October," a trader said.



WEAKENING MARGINS


Even though more arrivals are expected, the weakening refining margins in recent weeks have discouraged the run rates at independent refineries, which in turn could prompt some refineries to take crude import cargoes later than the schedule. In line with their throughput plans, the imports in January are likely to cross 8 million mt.

"The refining margins have become narrower in recent weeks, mainly due to the continuous drop in gasoil prices," a source with Tianhong Petrochemical said.

Gasoil prices have dropped by around Yuan 500/mt ($77/mt)in the last two weeks in December, when demand started to back off.

But the production cost has remained high following the rising international prices.

"In this case, refineries will be busy clearing stocks of oil products, while cut throughputs at refineries," a refinery source in Shandong said.

With the refining margins getting weaker, a few refineries have planned to shut units for maintenance, while others are cutting their throughputs a little bit.

China Overseas Holding, Kelida Petrochemical and Qingyishan Petrochemical have shut some of their units for maintenance in recent weeks, while Fuhai Group has lowered their throughputs at their facilities.


RUN RATES


The average run rates at 41 independent refineries surveyed by JLC has dropped 68.5% over December 27-January 3, down by about 1% week on week, according to JLC data.

The lower throughputs would prompt independent refineries to take fewer deliveries for crude imports, which in return could postpone deliveries of their imports, according to sources.

The current backwardated market structure is also making it uneconomical for refiners to take delivery earlier than needed.

"The market is in deep backwardation and the price is not likely to go up much but [it may] fall soon," a source with Lijin Petrochemical said.

It would be wise for refineries to postpone deliveries of their crude imports, the source added.

At the same time, the relatively high levels of stock at ports could also support the refineries to run for a few weeks even if their imported cargoes arrive later than scheduled.

Feedstocks inventories at major ports in Shandong stood at 4.26 million mt as of December 28, slightly down by 2% from the end of November, data from energy information provider JLC showed.

--Analysis by Daisy Xu, newsdesk@spglobal.com

--Edited by Pankti Mehta, pankti.mehta@spglobal.com