China’s record fuel exports show changing economic dynamics
The biggest change is in middle distillates, where slower economic growth is cutting demand for diesel
Lost among the attention given to China’s record crude oil imports in December was the fact that the nation’s exports of refined fuels also hit an all-time high.
Crude imports surged 21.4 per cent in the final month of 2015 to hit 7.82 million barrels per day (bpd), taking the average for the whole year to 6.71 million bpd, another record and a gain of about 8.8 per cent, or 542,600 bpd, over 2014.
There is little doubt that China has been taking advantage of the relentless decline in crude prices to fill strategic and commercial stockpiles, a trend likely to continue this year, even if it may be at a slower pace given constraints on available storage tanks.
But the changing dynamics of the world’s No 2 economy are also having an impact on its domestic fuel consumption patterns, and by extension on its exports of refined products.
The biggest change is in middle distillates, where slower economic growth is cutting demand for diesel, which is often described as an industrial fuel given its role in rail and road transportation, and powering construction and other machinery.
Implied diesel demand in November dropped 7.8 per cent year on year, according to data compiled by Reuters.
At the same time diesel exports have been ramping up, gaining 64 per cent in the first 11 months of 2015 to 6.178 million tonnes, equivalent to about 138,700 bpd.
It’s not just surplus diesel that China is exporting, it has also boosted shipments of the other main middle distillate, jet kerosene, by 17 per cent to 10.998 million tonnes, or about 256,800 bpd over the period.
Fuel exports totalled 975,500 bpd in December, a record high that helped boost the average for 2015 to 693,00 bpd, another record and 21.9 per cent higher than in 2014.
Detailed figures for December will only be available later this month, but working on the 2015 average it becomes clear that exports of middle distillates now dominate China’s outbound fuel shipments, accounting for about 58 per cent of the total.
This is a marked change for China, which used to be a net importer of middle distillates. The only refined product it exported in significant quantities was petrol.
Petrol exports rose 10.4 per cent in the first 11 months of 2015 to 5.014 million tonnes, or about 127,600 bpd.
This gain is largely a reflection of China’s rising refinery throughput rather than any weakness in domestic consumption, which has been gaining on the back of stronger vehicle sales.
While the data shows what has happened, it doesn’t tell whether the trend of higher diesel and jet kerosene exports is likely to continue, nor what impact this may have on fuel markets in Asia.
The crack, or refining profit, for gasoil, the refining term for diesel, in Singapore dropped 29 per cent last year to end at US$11.26 a barrel, and has continued downwards this year, closing at US$9.40 on Thursday.
Higher Chinese exports are not only contributing to this price weakness, they are also adding to a glut of the fuel, created by slower demand growth in Asia and additional supply from new refineries in the Middle East.
In contrast, the benchmark crack for petrol in Singapore has gone from strength to strength, surging 185 per cent in 2015 to end the year at US$15.08 a barrel, with the gains continuing this year to US$16.27 on Thursday.
Petrol is helping refiners’ profits, with a typical Singapore refinery processing Dubai crude currently enjoying a margin of about US$10.44 a barrel, well above the 365-day moving average of US$7.84, according to Reuters data.
It’s likely that the existing trends still have legs left in them, especially since the market expectation is that China’s economy will continue to record slower growth, with diesel-intensive heavy industries again struggling in 2016.
In contrast, rising vehicle sales are expected to continue in China, as well as in regional competitor India, thereby boosting demand for petrol.
It is possible that China’s refineries will be able to produce more petrol this year and less diesel, given the expected commissioning of new units that can maximise output of lighter fuels.
But even if this is the case, it’s more likely that ongoing liberalisation of fuel exports will result in higher quotas and therefore encourage China’s refiners to export more middle distillates.
This will keep some pressure on the gasoil crack, but probably not enough to end the stellar margins that refiners are enjoying overall in the current situation of weak crude prices.