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Analysis: Surging prices kill thirst of China's independent refiners for feedstock imports

Highlights

June feedstock imports at 6-month low

Refiners turn to domestic inventories to cut costs

Inflows seen set to fall further in July

Feedstock imports by China's independent refiners slipped to the lowest level in six months in June as a sharp rise in international oil prices prompted refineries to increasingly turn to domestic inventories to cover requirements -- a trend that is likely to continue in coming months, trade sources told S&P Global Platts.

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With international crude oil prices rebounding to pre-pandemic levels and analysts expecting greater volatility in the markets amid uncertainty over the OPEC+ coalition's supply agreement, traders said China's independent refiners would limit purchases from the international market until supply clarity emerges.

"The import outlook for private refineries has become cloudy following government investigations and new regulations, including the imposition of taxes on bitumen blend, as well as a reduction in crude quotas to errant refineries. High oil prices will also impact their purchasing ability," said Grace Lee, senior oil analyst at S&P Global Platts Analytics.

Feedstock imports for China's independent refineries fell 5.9% month on month to a six-month-low of 3.49 million b/d, or 14.29 million mt, in June, amid a rise in destocking activity. In addition, bitumen blend imports slowed after the introduction of a consumption tax on June 12, data collected by Platts showed July 7.

The inflows include various grades of crude, bitumen blend and fuel oil. Shandong independent refineries resumed fuel oil imports recently as an alternative to bitumen blend.

"Crude prices are rising. It is time for us to draw on the low-cost inventories instead," a Shandong-based refiner said.

ICE Brent crude averaged $73.38/b in June, up 7.27% from the $68.41/b averaged in May.

Moreover, the refiners had imported record high volumes of bitumen blend ahead of the implementation of the Yuan 1,218/mt consumption tax on June 12, pushing inventories to a record high 6.49 million mt June 3 at the major ports in Shandong.

With the destocking activity, feedstock at the major ports of Dongjiakou, Qingdao, Rizhao, Yantai, Laizhou and Longkou had eased to around 6.15 million mt as of June 24, data from local energy information provider JLC showed.

"Some independent refineries have also imported fewer cargoes due to scheduled maintenance over June-July," a refinery source said.

Around 15 million mt/year of capacity will be offline in July for scheduled maintenance at four independent refineries, adding to 6.1 million mt/year of capacity that has been shut since early June.

July imports to remain low

Port sources at Qingdao, Yantai and Rizhao expect the volume of cargoes for July delivery to be even lower than for June.

"Only around 15-16 cargoes totaling 3 million mt are expected to arrive in July in Qingdao, compared with at least 4 million mt in the previous months," a Qingdao port source said.

Some independent refineries that used to bring in 3-4 cargoes/month have only one cargo due to arrive in July, the source added.

More importantly, traders that used to trade bitumen blend have no cargoes arriving in a short term, pulling down total imports.

Bitumen blend imports totaled 10.9 million mt over January-June, surging from 4.04 million mt in the same period last year, according to data from Platts and the General Administration of Customs.

H1 imports up 8.5%

Despite the drop in June, total feedstock imports by the independent refineries rose 8.5% year on year to 94.97 million mt in the first half of the year.

Hengli Petrochemical (Dalian) Refinery and Zhejiang Petroleum and Chemical imported 25.45 million mt of crudes in H1, up 14.8% on year, and outpacing the import growth by Shandong-based independent refineries at 7.9% over the same period.

Most of the incremental volumes were contributed by ZPC, which posted import growth of 55.5% in H1 after starting up a third 10 million mt/year CDU last November. Its fourth CDU is scheduled to start up some time in H2, depending on when additional quotas are allocated for the Phase 2 project.

"The quotas are still enough for imports for a while," a source close to the company said. ZPC imported 13.5 million mt of crudes in H1, against its year-to-date quota allocation of 17 million mt.

Platts collects information covering feedstock imported by independent refineries in Shandong province, Tianjin, Zhoushan and Dalian, including 36 crude import quota holders and non-quota holders.

The 36 refiners have been awarded a combined 131.31 million mt in crude quotas in the first two batches, accounting for 86% of total allocations to the independent refining sector in 2021.

Crude imports for independent refiners^:

(Unit: '000 mt)

Buyer
Jun-21
H1 2021
Feedstock choices
ZPC
2,404
13,534
Arab Extra Light/Arab Heavy/Arab Light/Basrah Light/Kuwait/Oman/Upper Zakum
Hengli
1,780
11,925
Arab Medium/Basrah Light/Saharan Blend/Upper Zakum
Dongming
1,071
5,097
Buzios/Cabinda/Castilla/Oman/Tupi
ChemChina
953
8,027
ESPO/Nemina/Plutonio/Tupi
Lawen Namu
660
4,102
Nemina
Chambroad
530
1,730
Bitumen Blend/Fuel Oil/Nile Blend
Luqing
516
2,455
CPC Blend/Forties/Oguendjo
Kenli
495
1,686
ESPO
Yihaijia
489
1,119
Bitumen Blend
Xinchi
400
2,588
Bitumen Blend
Hongrun
351
1,609
Johan Sverdrup/Kuwait
Jincheng
339
2,762
ESPO/Mostarda
Hualian
288
2,589
ESPO/Iracema
Hualong
283
1,499
Johan Sverdrup/Nemina
Longyu
283
426
Bitumen Blend
Yatong
279
1,355
Bualuang/Sapinhoa/Saturno
PetroChina*
268
2,525
Tupi
Taifeng Hairun
243
1,420
Bitumen Blend/ESPO
Haike
235
1,611
ESPO/Sapinhoa
TBA**
196
1,561
Bitumen Blend
Shengxing
170
1,103
Oman/Oman Light
Hebei Xinhai
153
2,117
Bitumen Blend
Chengda
137
892
Sapinhoa/Tupi
Mercuria
135
235
Johan Sverdrup
Wonfull
135
1,858
Sapinhoa
Qirun
133
1,250
Johan Sverdrup
Lanqiao
130
390
Djeno
Sinochem Changhe
130
590
Oman Light
Sinochem*
126
1,171
Nemba
Runcheng
106
322
Malaysian Blend
Xintai
100
1,227
Malaysian Blend
Jiangsu Xinhai
100
200
ESPO
Qingdao Maofa
100
400
ESPO
Oceanic
100
477
Nemina
Gaoning
100
200
Bitumen Blend
Hanyuan Energy
100
100
Oman Light
Zhongchen
99
207
Malaysian Blend
Yingyu Energy
95
95
Malaysian Blend
Qingyuan
50
756
Johan Sverdrup
Tairun Meifan
32
32
Fuel Oil
Total**
14,294
94,965

^Independent refineries refer to those in eastern Shandong province: Jiangsu Xinhai Petrochemical, Xinhai Chemical in Hebei, Fengli Petrochemical in central Henan, Hengli Petrochemical (Dalian) Refinery in northeastern Liaoning province and Zhejiang Petroleum and Chemical in eastern Zhejiang province. Imports by trading companies were also for the independent refineries in the region.

*State-run companies trading for independent refineries

**Including imports for some unspecified recipients

Source: S&P Global Platts data, company sources