Fuel producers from India to South Korea are finding that rising refined products from China are cutting the profit margins theyâ€™ve enjoyed from cheap oil to the lowest in more than a year. Worse may be coming.
Chinaâ€™s total net exports of oil products â€” a measure that strips out imports â€” will rise 31 percent this year to 25 million metric tons, China National Petroleum Corp., the countryâ€™s biggest energy company, said in its annual research report last month. That comes after diesel exports jumped almost 75 percent last year. â€œIf China dumps more fuel into the market, international prices will crash,â€ said B.K. Namdeo, director of refineries at Indiaâ€™s state-run Hindustan Petroleum Corp. â€œIt 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.â€
A common measure of refining profitability in Asia â€” the margin from turning Middle East benchmark Dubai grade into fuels including diesel and gasoline in the regional trading hub of Singapore â€” slid this week to the lowest level since October 2014, adding to mounting evidence that Chinaâ€™s exports are weighing on Asian processors.
Singapore Dubai cracking margins have averaged $1.92 a barrel so far this year, down from $3.96 during the last quarter of 2015, research firm Energy Aspects Ltd. said in a Feb. 8 report. Profits are expected to average $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, as Chinaâ€™s biggest energy company is known, predicts the countryâ€™s refineries will increase output this year after the government started giving licenses to independent refiners â€” those known as teapots â€” to ship their products abroad. South Koreaâ€™s biggest processor says the flood will probably weaken margins and Taiwanâ€™s Formosa Petrochemical Corp. sees it as a â€œrisk factor.â€ â€œThe pressure on the regional market is getting stronger and stronger,â€ said Lin Keh-Yen, a spokesman for Formosa Petrochemical. â€œChina is exporting sizable volumes of oil products now.â€
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 in 2015 as the worldâ€™s second-biggest oil consumer sought to fill its strategic oil reserve and the government allowed those teapots to buy foreign supplies. Refineries will increase oil processing by 5.3 percent, while net crude imports rise 7.3 percent to 357 million tons, according to CNPC.
â€œAs the Chinese economy is slowing down, there has been more diesel exports,â€ Lee Yun Hi, head of the corporate planning office at South Koreaâ€™s SK Innovation Corp., said on the companyâ€™s earnings call on February 3. â€œItâ€™s a situation we are closely monitoring.â€
The teapot refiners, clustered around the eastern Chinese province of Shandong, will account for the bulk of the increase in oil processing this year as the countryâ€™s bigger state-owned processors decrease output, CNPC said in its report. â€œChinaâ€™s fuel glut is in its worst shape,â€ Dai Jiaquan, director of CNPCâ€™s oil market department, said last month. â€œThis is mainly due to weak demand and fast growth of refining projects in recent years.â€
The countryâ€™s commerce ministry 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 February 5. The bulk of the increase is coming from diesel, which is up almost sixfold from the first three months of 2015, they said. With the local market set to remain weak, thereâ€™s potential for exports increasing this year, according to the bank.
â€œChinese 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,â€ Mahesh said Wednesday in an interview.