If there’s one group of people happy at China’s slowing economic growth it’s likely to be refiners in Asia,who continue to benefit from strong margins as Chinese competitors limit fuel exports.
The profit from making gas oil,or diesel,in Asia rose to the highest in 14 months on Tuesday as global supplies tightened with the shutdown of units in the U.S. Gulf ahead of Hurricane Isaac and a fire at Venezuela’s biggest refinery.
The U.S. is a major diesel exporter to Europe and traders believe Asia may be called upon to fill in any drop in supplies across the Atlantic.
The approaching hurricane and the refinery blaze didn’t have the same positive impact on Asian gasoline margins,which fell to the lowest in a month on Tuesday amid ample supplies and a lack of willingness of traders to take the risk of sending cargoes to the U.S. West Coast,amid concern the market dynamics may change before the shipments arrive.
However,complex refining margins in Singapore rose to $10.07 a barrel over Dubai crude on Wednesday,up from the July average of $8.05 and the 12-month average of $7.36.
Much of the fat for Asia’s refiners is in gasoil,which has shifted structurally higher in the past year and the crack reached $21.01 a barrel on Tuesday.
It hasn’t been under $14.18 this year,making its low point for 2012 near the top of the $4.42 to $15.42 range that occurred in 2009 and 2010.
These were the last two years that China was a significant exporter of diesel,shipping a net 2.7 million tonnes in 2009 and 2.88 million tonnes in 2010.
This year China’s diesel trade is basically in balance,with net imports a tiny 26,461 tonnes in the first seven months of the year.
This is largely because China’s refiners are choosing to run their plants at relatively low operating rates because of slower demand growth for fuels,rather than use more capacity and export the surplus.
Refinery runs were 8.855 million barrels per day in July and the 12-month moving average is only slightly higher at 8.993 million bpd.
Given that overall refining capacity was 10.8 million bpd as of the start of 2012,this gives a refinery utilisation rate of around 83 percent.
It’s also expected that new units will add about 800,000 bpd of capacity in China this year,with much of that scheduled to come on stream in the fourth quarter.
Assuming no increase in refinery runs,the utilisation rate would drop to 78 percent once the new units are operating.
In contrast,Indian refiners often operate at rates above 100 percent of nameplate capacity.
It’s clear that China has significant spare refining capacity,leading to the question as to why doesn’t this get utilised to take advantage of regional market tightness,particularly in gasoil.
Part of the answer is that the refiners would battle to sell the other products produced,particularly gasoline.
But this situation may be about to change,especially if government stimulus measures start to boost the Chinese economy.
One area where stimulus measures may be successful is passenger vehicle sales,with the government introducing incentives for smaller vehicles to encourage greater efficiency.
However,this will encourage vehicle sales and JPMorgan analysts estimated that an increase of 1 million in annual car sales boosts gasoline demand by 10,000 bpd.
Implied gasoline demand rose to 1.994 million bpd in July,up 5.6 percent from the previous month and 17.2 percent from a year earlier.
In contrast,diesel implied demand fell 0.6 percent in July from June to 3.3 million bpd and was 1.7 percent weaker than a year ago.
If gasoline demand continues to rise,then China’s refiners may start to use their extra capacity to produce more,in turn creating surplus diesel for export.
Sinopec,the nation’s top refiner,expects a stronger second half in 2012 and it expects to process 115 million tonnes of crude in the last six months of the year,up from the 110 million refined in the first six.
Refining may also be boosted if domestic fuel prices gain,with the trigger point already breached that would allow a hike next month to go along with the increase on Aug. 10.
The International Energy Agency expects China to use 9.5 million bpd of oil products in 2012,up from the 9.26 million bpd of implied demand in July.
Assuming this forecast is to be met,it would mean either at least 250,000 bpd of spare capacity has to be used or net product imports have to rise.
Given that the increase in demand is likely to be skewed toward gasoline,any boost to refinery runs will result in diesel for export,putting some downward pressure on the gasoil crack.
Alternately,China could choose to import gasoline,which would be a further boost to Asian refiners as it would likely lift the profit from making the motor fuel.
However,in light of Sinopec’s plans to refine an additional 5 million tonnes of crude in the second half,which equates to about an extra 200,000 bpd,the risks must be that China is about to resume gasoil exports.
This isn’t to say that gasoil cracks are likely to ease in the second half of the year as there are plenty of reasons for them to remain elevated,including refinery turnarounds reducing output,building of inventories ahead of the northern winter and increased demand from countries like Australia.
But if China does resume gasoil exports,it will be a bearish factor in an otherwise bullish market.