The twin woes of travel restrictions and limited blending appetite will likely prompt refiners in China to keep jet fuel and kerosene output at relatively lower levels for now, industry sources said, adding that the window to boost production would remain closed until Beijing opens up borders for quarantine-free international travel.
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Trade sources added that growing concerns about the Delta variant of the coronavirus would mean that mobility internationally would remain at a low ebb for the second half of the year, threatening to again hurt production that had recovered to pre-pandemic levels in May.
"As the more transmissible Delta variant spread around the world and in Guangdong in China recently, it is unlikely that Beijing will relax its border control this year. This will cap China's jet/kerosene production as there is not much room for domestic consumption to grow further," a fuel trader with a state-owned trading house said, adding that domestic consumption had recovered to almost pre-pandemic levels.
The country's jet/kerosene yield recovered to 6.4% in January-May this year, from 6% in the same period of 2020, NBS data showed. Production hit pre-COVID-19 level of 4.32 million mt in May, with yields jumping to over 7% for the first time since December 2019.
The recovery came on the back of improving consumption from the domestic aviation sector as well as surging demand for gasoil blending.
In addition to being used as a jet fuel, kerosene in China had been a popular low-density cutting stock to dilute light cycle oil, or LCO, for blending into gasoil. One metric ton of domestic kerosene blended with imported LCO can yield 2-2.5 mt of gasoil, market sources said.
China's LCO imports grew by 61.5% on the year in January-May 2021, compared with a 96% jump in the same period of 2020, data from General Administration of Customs showed.
"There are many materials that can be used as a cutting stock, but we like to use jet/kerosene as it is free of consumption tax free, while sufficient supplies are available," a Guangzhou-based LCO importer said.
From July 10 onwards, kerosene for blending will likely attract Yuan 1,496/mt, or $29.32/b, in consumption tax as Beijing takes step to widen the tax net, according to sources with knowledge about the matter.
This means that only jet fuel, which is consumed by the aviation industry, will remain free from consumption tax, as the country looks to encourage the revival of the aviation sector.
"We will have to find other cutting stock after the implementation, but to be honest, we don't need much of those materials to clear our LCO stocks as the access for importing LCO has anyway closed," the importer added.
Trade sources said blending demand for kerosene is set to fall as LCO imports would come down sharply in the second half of 2021, since the fuel has been subject to a Yuan 1,800/mt ($35.95) consumption tax, effective from June 12.
"Putting a tax on jet fuel used for blending is an effort of the authorities to crackdown on the private blending industry. This could curb the jet fuel output from non-qualified companies in the short-term," said Jianan Sun, analyst at S&P Global Platts Analytics.
But the impact would be limited as demand for domestic airplane refueling still remained somewhat buoyant, he added.
In addition, China is unlikely to further boost jet fuel exports amid limited export quotas, the first fuel trader said.
Chinese oil companies plan to export 630,000 mt of jet fuel in July, down about 29% month-on-month, Platts reported on June 29. But the export reduction of jet/kerosene exports would be the lowest among key oil products.
Gasoil exports are set to fall 68% month-on-month in July, while gasoline is expected to witness a 98% month-on-month drop.
The country's oil product exports are expected to see a year-on-year reduction in H2 as Beijing is set to slash export quota allocation.
"Exporting margin for jet fuel has been poor and uneconomical, but there is no other way around," said a second trading source.