Refining Margins' 51% Decline May Worsen as China Slows
Refining Margins 51% Decline May Worsen in Asia
Lucas Schifres/Bloomberg
China National Petroleum Corp. says the amount of oil the nation can process will rise to 490 million metric tons this year from 429 million in 2009.
China National Petroleum Corp. says the amount of oil the nation can process will rise to 490 million metric tons this year from 429 million in 2009. Photographer: Lucas Schifres/Bloomberg
Aug. 23 (Bloomberg) -- Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong, talks about the outlook for Chinese oil stocks. China Petroleum & Chemical Corp., Asia’s biggest refiner also known as Sinopec, unexpectedly posted a 6.7 percent increase in first-half profit as a rebound in the nation’s economy spurred demand for oil, gas and petrochemicals. Cnooc Ltd., China’s biggest offshore oil producer, said Aug. 19 first-half profit more than doubled, beating estimates. Beveridge talks with Bloomberg's Susan Li. (Source: Bloomberg)
The combination of slowing Chinese economic growth and expanding refineries means this year’s 51 percent decline in profit margins from turning crude into gasoline, diesel and kerosene is poised to worsen.
China National Petroleum Corp. says the amount of oil the nation can process will rise to 490 million metric tons this year from 429 million in 2009. The world’s biggest energy consumer is likely to generate a surplus as much as 15 million metric tons (110 million barrels) this year, possibly boosting second-half net exports by 68 percent to 9.4 million tons from the first six months, Gong Manying, a market-research director at PetroChina Co., said in an Aug. 16 interview from Beijing.
Asian refining profits fell the most in nine months since reaching the 2010 high in March as Chinese fuel demand waned amid government attempts to cool economic growth and reduce pollution. The difference between the price of Dubai crude and gasoline in Singapore, the region’s benchmark measure, is already 36 percent below the five-year average and may narrow further, according to Victor Shum of Purvin & Gertz Inc.
“There is going to be more competition among refiners,” said Shum, a senior principal at the energy research company in Singapore. “If Chinese demand is indeed slowing while projects start on schedule, the surplus will definitely depress the regional refining margin.”
The difference, or spread, between Dubai crude and gasoline in Singapore fell to $6.24 a barrel yesterday, compared with a 2010 high of $12.79 on March 9 and an average $9.67 over the past five years. It was at $5.96 as of 6:14 p.m. London time today. For diesel, the spread was $12.76 a barrel compared with a five-year average of $15.42.
‘Pulled Into Competition’
While refiners have helped protect margins by carrying out mid-year maintenance on units, those operations are coming to an end, according to Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut-based trading advisory company.
Sinopec Shanghai Petrochemical Co., a unit of the nation’s largest oil refiner, restarted a catalytic cracker after three weeks of maintenance, a company official said Aug. 13. Cosmo Oil Co., a Japanese producer partly owned by the government of Abu Dhabi, said it resumed production at a 30,000 barrel-a-day desulfurization unit at its Sakaide refinery Aug. 9.
“There is pressure to keep crude shipments coming in at the same time that there is pressure to keep refining units running to defray fixed costs,” Beutel said. “The end result could well be a very competitive sales effort by refineries to place product over the next six to 18 months. China seems to be getting pulled into the competition.”
Olympics Export Boost
Chinese net exports of gasoline, diesel and kerosene may amount to as much as 430,000 barrels a day in the second half, enough to load an average product tanker once every two days, according to data compiled by Bloomberg.
“The country’s net fuel exports will rise to about 20 million tons as early as 2013, given the surplus on the market is enlarging under its ambitious refining expansion,” Bai Xuesong, a senior engineer with state-backed China International Chemical Consulting Corp., said in a telephone interview from Beijing.
Net shipments of the three oil products were 7.5 million tons in 2009, according to Chinese customs data. China was a net importer in 2008, when it shipped in 6.5 million tons more than it exported as it built up stockpiles for the Olympic Games.
Net exports of diesel more than doubled to 400,000 tons in July from June, Chinese customs data showed this week. They were a record 462,000 tons in April.
Rising Capacity
Annual refining capacity may jump to 670 million tons by 2015, according to China National Petroleum. It was 429 million tons in 2009. Increases this year are being boosted by PetroChina’s new plant in Guangxi province, which can process 10 million tons annually, and China Petroleum & Chemical Corp.’s refinery in Tianjin, capable of producing 15 million tons a year.
Fuel consumption in China may increase 4 percent in the second half of this year, compared with 14 percent growth in the first half, according to Gong at PetroChina. Demand for all of 2010 may rise 8.4 percent to 238 million tons, she said.
State refiners may have to reduce refinery rates to limit the oversupply of product because they may not find enough buyers, Gong Jinshuang, an engineer at CNPC, said by telephone from Beijing on Aug. 16.
The following table shows expansion plans of Chinese oil refineries by 2015.
--------------------------------------------------------------- Name Existing Adding Start-up Time --------------------------------------------------------------- Sinopec Anqing 5.5 2.5 Sept. 2012 Sinopec Changling 5 6 May. 2011 Sinopec Kuwait Guangzhou 0 12 2013 Sinopec Jiujiang 6.5 3.5 2013 Sinopec Maoming 13.5 12 2012 Sinopec Wuhan 8 1 Sept. 2012 Sinopec Shijangzhuang 5 3 2012 PetroChina Huhehot 1.5 3.5 2012 PetroChina Jilin 7.5 2.5 Oct. 2010 PetroChina Ningxia 0 5 end 2011 PetroChina Qinzhou 0 10 2010 PetroChina Sichuan 0 10 2012 PetroChina PDVSA Guangdong 0 20 2013 CNPC Rosneft Tianjin 0 10 2012 Cnooc Group Huizhou 12 10 2013 ---------------------------------------------------------------
Note: capacities are in million tons.
--Winnie Zhu. With assistance from Yee Kai Pin in Singapore. Editors: Clyde Russell, Jane Lee
To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net
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