Singapore — Commodity trading house Trafigura is working towards offering a $1 billion credit line to China's independent refiner Qingyuan Group, according to district government and refinery sources.
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The move could mean that China's Shandong-based independent refiners are becoming attractive for traders and oil majors again, after they incurred losses in 2018 on the back of a government crackdown that saw independent refining profits sink and crude purchases plunge.
Trafigura has signed a strategic cooperation agreement with Qingyuan Group, the local district authority said in a news bulletin on March 14.
After "friendly discussions," Trafigura's next step would be to offer $1 billion credit support to Qingyuan in order to boost cooperation in crude oil supply, finished product repurchase, pipeline investment and advanced payment financing, according to the bulletin.
"The signing of the strategic corporation will push the business development of both parties to a new level," the district authority said in the bulletin.
Qingyuan's cooperation agreement with Trafigura was confirmed by multiple independent refinery sources, who also said that operations at the company's plants have returned to normal after being lowered due to slim margins in 2018.
Trafigura declined to comment on the agreement. Qingyuan did not respond to emailed queries.
The credit line to be offered by Trafigura is not subject to specific usage conditions, which is quite attractive for the borrower, according to another source at a refinery in neighboring Dongying district, who has also discussed financial cooperation with Trafigura recently.
"Also, the cost is much lower compared with those [loans] offered by local banks," the source said, adding that independent refineries need to balance out banking requirements as local governments typically encourage them to use local banks.
The source said the Dongying refinery was not keen on the agreement with Trafigura as the economics were not in its favor.
The trading house had offered Forties crude in return for off taking refined products like gasoline from the refinery, but Forties crude is light sweet with a large gasoline yield resulting in heavy consumption taxes, the source said.
"It will cost a lot for paying the consumption tax if the yield is only gasoline," the person said. China's consumption tax is imposed on companies that import, process or sell taxable products.
Chinese independent refineries have been struggling with tight credit issues, which affected their refinery operations including discharging of crude cargoes. Capital flows among them can take a long time due to the informal guarantee networks among local firms.
Trade finance accounts for around 90% of the total working capital of an independent refinery, traders said.
INDEPENDENTS ON THE REBOUND
State-owned majors will only account for one-third of China's new refining capacity and the marginal independent players are bearing the brunt of the expansion, notably in the coastal provinces, Jean-Francois Lambert, head of Lambert Commodities, said.
"Under this backdrop, it is therefore not surprising to see major trading houses seeking to position themselves as the strategic partners of the Chinese independent refineries, both for longs and shorts and granting financing is a classic tool to differentiate vis a vis their competitors," he said.
Lambert said this may involve additional risk taking, but the ventures are probably worth the risk considering the long-term business potential that is also remunerative in the short term. "This probably justifies Trafigura's stance: identifying the right partner and showing necessary commitment," he said.
Qingyuan Group operates two refineries with a combined capacity of 8.2 million mt/year -- 5.2 million mt/year at Qingyuan Petrochemical and 3 million mt/year at Qingyishan.
It used to import large volumes of crude oil to resell to other independents. This trading strategy hit a wall in March 2018, when stricter tax regulations on Shandong-based refineries forced them to lower run rates as refining margins declined sharply.
In July-August 2018, Qingyuan was saddled with four unsold crude cargoes at the ports of Rizhao and Qingdao for nearly 90 days that resulted in demurrage costs and high port charges, while cash flows shrank as utilization rates fell, Platts reported previously.
This resulted in credit issues that impacted commodity traders backing the company, as they incurred losses due to open credit lines to Qingyuan but had no refined products to sell in return, a Singapore-based commodity trader said.
"It seems that the hardest time has passed for Qingyuan Group," a trader at a state-owned refinery said.
Qingyuan has been allocated a total crude import quota of around 4.04 million mt/year for 2019, with the first batch at around 2.02 million mt. It processed 140,000-150,000 mt/month of crudes over January-February, and received around 700,000 mt of crudes over the same period, Platts data showed.
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