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China's independent refineries lift bitumen blend imports in June amid tight crude quota

Highlights

Shandong refiners import 1.17 million mt bitumen blend in June

China delays crude import quota allocation from June

Singapore — An increasing number of bitumen blend cargoes made their way into China's Shandong province in June as independent refineries there seek alternative feedstocks due to a shortage of crude import quotas for some refineries. Demand for asphalt also has improved as a slew of road upgrades and pavement works kick off in summer, refining sources told S&P Global Platts on July 7.

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There were 10 cargoes of bitumen blend that arrived in Shandong in June, totaling around 1.17 million mt, Platts data showed.

The volume surged 255% from 330,000 mt of bitumen blend that arrived in Shandong in May.

Market sources said declining availability of heavy crude, and the difficulty of finding a tanker to carry amid the US sanctions on Venezuelan crudes, pose the main challenge for bitumen blend volumes to rise higher in the coming months.

Bitumen blend is a mixture of heavy crudes, like Venezuela's Merey grade, blended with various materials off Sungai Linggi in Malaysia.

Industry sources said the crude oil was essentially from typical suppliers like Venezuela but imported with a Certificate of Origin (Form E) from ASEAN countries to take advantage of 8% import tax exemptions under free trade agreement rules between the region and China.

It used to be a good feedstock alternative before mid-2015, when Beijing started to issue crude import quota to independent refineries.

In addition, authorities had clamped down and caught errant importers, resulting in heightened caution among most potential bitumen blend buyers and significant drops in their volume.

CRUDE QUOTA SHORTAGE

"Some of the bitumen blend arrivals in June were more like crude, and even lacked asphalt content, to meet prompt feedstock demand amid crude import quotas shortage," a trader source said July 6.

Moreover, most of the recent cargoes were imported by new and small-scale trading houses with small parcels, like MR-sized, instead of Suezmax cargoes used typically.

Refiners were even willing to pay the 8% tariff for those bitumen blend cargoes without Form E.

"The 8% tariff equals to around Yuan 170/mt ($24/mt), which is actually cheaper than buying crude oil import quota at more than Yuan 300/mt," a second independent refiner said.

Due to the crude quota shortage, the price for quota among Shandong independent refineries has risen to about Yuan 300/mt ($5.79/b) amid strong demand, from around Yuan 100/mt previously, according to refining sources.

Crude oil imports to China generally does not attract tariff.

It had been widely expected that Beijing would allocate its third round of crude import quotas, at about 25.17 million mt, by the end of June to 17 qualified independent refineries.

But the allocation is likely to be delayed to as early as mid-July, several independent refiners said.

Many of the 17 refineries have been short of quotas as their refining capacities are higher than their annual ceiling on quota volumes, even as they increased imports since March as crude prices plunged.

Feedstock demand is also strong from a few refineries that have not been granted a quota.

ACTUAL ASPHALT DEMAND

However, not all bitumen blend has flowed in due to quota shortage.

Some of the barrels were attracted by strong asphalt demand for paving roads in summer when temperature goes up, a Shandong-based importer said.

Heavy crude and residual oil, components of bitumen blend, are good feedstock for producing asphalt.

"We barely can produce enough asphalt to meet asphalt demand," a third Shandong-based refining source said, adding that heavy crudes are getting expensive and has been difficult to source.

Venezuelan Merey crude is also a perfect feedstock for producing asphalt, but with US sanctions on PDVSA, less crudes can be shipped out, with Greek shipowners refusing to ship the barrels.