Fuel producers from India to South Korea are finding that rising refined products from China are cutting the profit margins they have enjoyed from cheap oil to the lowest in more than a year. Worse may be coming.
China’s total net exports of oil products — a measure that strips out imports — are forecast to rise 31 percent this year to 25 million tonnes, China National Petroleum Corp (CNPC, 中國石油天然氣), the country’s biggest energy company, said in its annual research report last month. That comes after diesel exports jumped almost 75 percent last year.
“If China dumps more fuel into the market, international prices will crash,” said B.K. Namdeo, director of refineries at India’s state-run Hindustan Petroleum Corp. “It will be similar to what happened to crude prices due to the oversupply. If international prices of oil products come down, then it will hurt margins of all refiners.”
A common measure of refining profitability in Asia — the margin from turning Middle East benchmark Dubai grade into fuels, including diesel and gasoline, in the regional trading hub of Singapore — slid this week to the lowest level since October 2014, adding to mounting evidence that China’s exports are weighing on Asian processors.
Singapore Dubai cracking margins have averaged US$1.92 a barrel so far this year, down from US$3.96 during the final quarter of last year, research firm Energy Aspects Ltd said in a report on Monday.
Profits are expected to average US$3 a barrel during the first quarter of this year, down 32 percent from the same period last year, it said in the note.
CNPC predicts that Chinese refineries would increase output this year after the government started giving licenses to independent refiners — those known as teapots — to ship their products abroad. South Korea’s biggest processor says the flood will probably weaken margins and Taiwan’s Formosa Petrochemical Corp (台塑石化) sees it as a “risk factor.”
“The pressure on the regional market is getting stronger and stronger,” Formosa Petrochemical spokesman Lin Keh-yen (林克彥) said. “China is exporting sizable volumes of oil products now.”
China shipped a record amount of diesel, kerosene and gasoline abroad last year and for the first time exported more products than it imported amid the slowest economic expansion in 25 years.
Its crude purchases increased to a record last year, as the world’s second-biggest oil consumer sought to fill its strategic oil reserve and the government allowed those teapots to buy foreign supplies.
Refineries would increase oil processing by 5.3 percent, while net crude imports would rise 7.3 percent to 357 million tonnes, CNPC said.
“As the Chinese economy is slowing down, there has been more diesel exports,” Lee Yun-hi, head of the corporate planning office at South Korea’s SK Innovation Corp, said on the company’s earnings call on Wednesday last week. “It’s a situation we are closely monitoring.”
The teapot refiners, clustered around the eastern Chinese province of Shandong, would account for the bulk of the increase in oil processing this year as the country’s bigger state-owned processors decrease output, CNPC said in its report.
“China’s fuel glut is in its worst shape,” CNPC oil market department director Dai Jiaquan said last month. “This is mainly due to weak demand and fast growth of refining projects in recent years.”
The Chinese Ministry of Commerce has issued more than 1.8 million barrels a day of export quotas for the first quarter, more than double in the same period last year, analysts at Barclays PLC including Miswin Mahesh said in a report on Friday last week.
The bulk of the increase is coming from diesel, which is up almost sixfold from the first three months last year, they said. With the local market set to remain weak, there is potential for exports increasing this year, the bank said.
“Chinese domestic incentives to export refined fuel, if they run out of product inventory storage, could lead to discounted products and would be competitive with refined product exports from India and South Korea,” Mahesh said on Wednesday in an interview.
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