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Diversifying crude supply trumps geopolitical pressures for China's Sinopec

Singapore/Hong Kong — Sinopec, the world's biggest oil refiner by capacity, said it will not halt purchases of US and Iranian crude barrels despite geopolitical pressures, preferring instead to keep its options open for diversifying supply sources.

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The state-run oil refiner, which is also the world's largest oil buyer, is remaining defensive about its procurement strategy amid Beijing's threats to impose tariffs on US crude imports and the reimposition of US secondary sanctions on Iran.

"About 85% of our feedstocks are imported from overseas. We need to diversify," Sinopec's vice president Huang Wensheng said on Monday in Hong Kong at a results briefing, in some of the company's first public comments on the US-China trade war since it began earlier this year.

Sinopec's continued purchases of Iranian and US crude grades could help ease concerns about trade flow disruptions, although volumes could still drop significantly depending on market factors.

China's imports of US crude

The refiner plans to crack 242 million mt of crude in 2018, marginally higher than 238.5 million mt for 2017. In the first quarter of 2018, Iran accounted for 7.2% and the US accounted for 3.5% of China's crude oil imports, together comprising over 10% of its purchases.

IRANIAN CRUDE FLOWS CONTINUE

Asian refiners have until November 4 to wind down Iranian crude purchases, of which China is the single biggest buyer, with Sinopec absorbing around two-thirds of the country's arrivals from Iran.

In 2017, Sinopec bought around 20.44 million mt of Iranian crude oil, accounting for 8.6% of its total crude throughput, according to filings with the US Securities and Exchange Commission. China imported 31.15 million mt of Iranian crude in 2017, customs data showed.

Huang said Sinopec's dependence on Iranian crude is natural because many refineries are configured to process Iranian crude oil, which has a rich aromatics content, and it has secured these supplies legally for a long time.

"The company's business will be hurt if it has to suspend imports from Iran," Huang said, adding that it is in talks with the relevant parties to mitigate the risks.

In addition, Sinopec engaged in trading activities with an Iranian company last year, which generated net profit of $2.32 million last year, the filings showed.

"Since we have performance obligations under our Iran-related contracts in 2018, we are contractually required to continue our [purchases]," Sinopec said in the filings.

"Iranian crudes have a high naphtha yield with high naphthenes and aromatics content, which makes them a good feedstock for refineries with continuous reformers and they have been popular among all Sinopec refineries," a source at Sinopec's Qilu refinery said.

Sinopec's big users of Iranian crudes include its subsidiaries Zhenhai Petrochemical, Maoming Petrochemical, Qingdao Refining and Petrochemical, and Qilu Petrochemical.

US CRUDE CONUNDRUM

China received 14.1 million barrels of US crude in June, which was a historic high, but volumes subsequently fell to 9.76 million barrels in July, and August arrivals in China are expected at 7.94 million barrels, data from Platts trade flow software cFlow showed on Tuesday.

Unipec, the trading arm of Sinopec, has cut back on US crude purchases on the spot market due to uncertainty stemming from the trade war, reversing Sinopec's earlier projections of ramping up US crude imports as WTI-linked US crudes were more attractive than Brent-linked crudes.

Sinopec will continue to buy US crude oil cargoes under term contracts, as US crude does not attract tariffs yet, Huang told S&P Global Platts on the sidelines of the event.

He said Sinopec is trying to mitigate risks when buying US crude on the spot market. Unipec has the capability to trade US barrels in the spot market and divert the cargoes if necessary, even if tariffs are imposed.

"So far, the trade tension has no impact on our business," Huang said at the briefing.

-- Eric Yep, eric.yep@spglobal.com

-- Oceana Zhou, oceana.zhou@spglobal.com

-- Edited by Alisdair Bowles, alisdair.bowles@spglobal.com