China s big four state refineries receive increased product export quotas

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1 China s big four state refineries receive increased product export quotas As fuel demand growth has taken a step back in China, the increased refinery output has squeezed margins and created an overhang of domestic products. The 28 independent refineries that have been granted import quotas since 2015 now account for 1/5 of the country s imports, and have certainly contributed to the glut, as well as spark debates about excess capacity. However, Sinopec, PetroChina, CNOOC and Sinochem have now received a 50% bump up in their Q3 export quotas from last year. The 9.06m tons of oil products export quotas is 172% more than Q2/17, and should help ease the domestic fuel glut as the majors are eager to export more. Chinese crude demand is expected to continue to rise, particularly on the back on new refineries set to ramp up operations, but should the domestic fuel glut linger and export quotas remain elusive, the inevitably lower refinery throughput could cap total Chinese import growth levels. Chinese Refined Product Trade In 2016, Chinese refined product exports grew by 34% YoY, a dramatic increase by an established supplier within the Asian market. That rate of growth has not been sustained at the start of 2017 but at 22.7%, YoY, the expansion remains impressive, as has the ability of exporters to make inroads into less familiar markets in South Asia, and North America. Regional distribution of exports North East Asia (22%) and South East Asia (45%) are the dominant regional destinations for Chinese exports, accounting for two thirds of the total. However, these two destinations have experienced divergent recent fortunes. At the start of 2017, exports to South East Asia (+44% YoY) grew strongly underpinned by trade with Singapore, while North East Asia (+2% YoY) was relatively stagnant. Another important development at the start of the year is that second tier destinations (each with around 5% market share) grew strongly e.g. North America +62% YoY, South Asia +31% YoY, and OECD Europe +37% YoY. Exports by refined product Gasoil/diesel (estimated 23.4 Mntonnes, 2017) has been the star export commodity in the refined product sector. Not only is it the largest refined product export, but since 2015 it has been the fastest growing, although growth has slowed to 52% YoY in 1Q17 from 115% YoY in Key growth trades in this sector are to Singapore, Philippines, Bangladesh and Australia. Gasoline (estimated 13 Mntonnes) has also performed strongly. It is the third largest export commodity. As with gasoil/diesel, growth has slowed somewhat in 2017 (+34% YoY) compared with 2016 (+64% YoY). Singapore is by far the most important growth destination. Kerosene/jet fuel remains the second largest export commodity. Although it has grown much less quickly than gasoil/diesel and gasoline, refiners have been able to expand some long haul trades e.g. United States, Netherlands and Canada. Fuel oil was the most important refined product export in 2013, but its market share has been in decline since then. Exports are set to decline by a further 1% in Charles R. Weber Company, Inc.

2 New refinery capacity The addition of new refinery capacity has been one of the major drivers of refined product exports. We estimate that between 2013 and 2017, Chinese refinery capacity will have increased by around 1Mnbd if all projects slated for completion in 2017 are finished on time. While the emphasis has been on new refinery addition, there have also been significant refinery closures as China seeks to upgrade the quality of the products it produces. In 2017, closures are expected to total 370Kbd. Independent teapot refineries falling out of favor? There has been a major change in the attitude of the government towards independent teapot refineries, which were granted fuel oil export licenses for the first time in 2016, but have not seen these renewed in The change in balance of power between state oil companies and independent refiners has been a key development in 2017 both for the crude oil and refined product sectors. When 13 independent refiners were granted crude oil import licenses for the first time towards the end of 2015, this provided a significant boost to crude oil imports, with teapots accounting for around 900,000 b/d of the increase in imports in Also in 2016, the first fuel oil export licenses were granted to teapots, and their role in the development of the Chinese petrochemical sector looked assured. However, the government has become concerned about issues of tax evasion by teapots, as well as issues related to environmental breaches and reselling imported crude. Partly as a result of this, teapots have been granted no fuel oil export licenses at all in 2017, and some argue that their importance is set to wane, despite the government having previously viewed their rise as part of a wider process of deregulation and increased competition in the petrochemical sector. However, teapots did receive fresh crude oil import licenses around mid January and they have remained a strong driver of crude oil import growth in the year to date, so it is perhaps too earlier to write off the independents Charles R. Weber Company, Inc.

3 Refined product import market The refined product market was in decline between 2011 and 2015, but it has stabilized in the last couple of years in part due to the strength of Naphtha imports, which are sourced from a wide range of countries including long haul trades from United States and Saudi Arabia. However, fuel oil, the largest imported refined product, shows little signs of arresting what looks like a terminal decline, while demand for transportation fuels such as gasoline and diesel is threatened by a recovery in bicycle usage, as well as, the rise of gas fed and electric vehicles. According to Sinolink Securities, the use of shared bikes in big cities may replace 1.27MnTonnes of gasoline demand this year while natural gas cars have already displaced 22MnTonnes of fuel used in transportation in Short Term Outlook As we approach mid year, there are concerns about a building gasoil/diesel and gasoline glut in the domestic market. As a result, China's leading refineries are set to take the unusual step of cutting throughputs during what is typically peak demand during the summer driving and air conditioning season. It is estimated that around 10% of China s refining capacity (equivalent to around 1.3 million b/d) will be shut down during the third quarter. As a result, both crude oil import growth and refined product export growth are likely to weaken over the next few months although refined product exporters will be more determined than ever to boost exports in an effort to erode stocks, and in the longer term we can expect to see China s thirst for oil return Charles R. Weber Company, Inc.

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