China ‘Airpocalypse’ Fight Shrinks Asian Refinery ProfitsBloomberg News
China’s drive to cut pollution from vehicle exhaust is spurring the most gasoline exports since 2005 and reducing profit for regional refiners.
The country may ship more than 5.5 million metric tons of gasoline this year, 18 percent higher than in 2013, according to ICIS-C1 Energy, a commodities researcher in Shanghai. That will narrow profit from making the fuel in Asia by $1.70 to $11.96 a barrel this year, the lowest since 2010, said Jit-Yang Lim, an analyst at KBC Energy Economics in Singapore.
China became the first country to report annual vehicle sales exceeding 20 million units in 2013. Smog levels in some cities has surpassed the World Health Organization’s safety threshold as much as 38-fold. To tackle what some expatriates have dubbed “Airpocalypse,” the government banned the sale of lower-quality gasoline while allowing it to be exported.
“Gasoline margins and prices were pretty dramatically affected by China’s fuel exports,” said Thomas Hilboldt, the head of oil and gas research at HSBC Securities Asia Ltd. in Hong Kong. “Large changes in the aggregate amounts of Chinese exports could have a very detrimental impact on margins when combined with some of the expected incremental U.S. exports.”
Profit from making 95-RON gasoline in Singapore, the region’s oil-trading hub, averaged $13.66 a barrel last year, from $14.45 in 2012, according to KBC. Cargoes cost an average of $119.16 a barrel in 2013 compared with $117.99 so far this year. They were at $118.58 on Jan. 24.
Declining prices threaten to erode margins for refiners from Japan to India. Reliance Industries Ltd., owner of the world’s biggest oil refining complex in Jamnagar, western India, made $7.60 for every barrel of crude it processed in the quarter ended Dec. 31, down 21 percent from a year earlier, the Mumbai-based company said in a Jan. 17 statement.
JX Holdings Inc., Japan’s largest processor, posted a 12.6 billion-yen ($122 million) pretax loss in its petroleum business in the six months ended Sept. 30, compared with a pretax profit of 23.9 billion yen a year earlier. Idemitsu Kosan Co., Japan’s second-largest refiner, plans to process 1 percent less crude this quarter because of weaker gasoline margins, the Tokyo-based company said Dec. 19.
PetroChina Co. and China Petroleum & Chemical Corp., the country’s largest processors, may export as much as 450,000 metric tons a month of gasoline this quarter, mainly to Asia, ICIS-C1 said in a statement Jan. 8. The nation’s output of the fuel may increase 8 percent this year as refining capacity increases, the research company said.
Indonesia, Vietnam, Pakistan and Bangladesh are among nations that may buy the fuel shipped from China, according to John Vautrain, the owner of Vautrain & Co., an energy consultant in Singapore. Chinese gasoline is sold mostly to Indonesia, which bought 2.29 million tons last year, or about 49 percent of exports, customs data show.
While China will export more of its lower-quality gasoline as it seeks to reduce pollution, the number of potential buyers is dwindling as other Asian countries also enforce rules aimed at keeping their environment clean, according to Vautrain. India, the world’s second-most populous nation, introduced higher fuel-emissions standards in April 2010.
“Most countries are moving toward a higher-grade fuel,” Vautrain said. “In 10 years or so, the number of countries who are able to take this lower-quality fuel will be quite small.”
Average economic growth of 10 percent a year in the two decades since China became a net oil importer has boosted its use of motor fuel. The country consumed 93.4 million tons of gasoline last year, more than double the level in 2000, data compiled by Bloomberg show.
The nation of more than 1.3 billion people passed the U.S. in 2009 to become the world’s largest vehicle market. While 423 in 1,000 in the U.S. own a car, according to the World Bank, in China, it’s 44.
As the number of cars increased, so have pollution levels. Vehicle emissions in Beijing now account for 23 percent of the fine particulate matter, known as PM2.5, that poses the greatest health risks, the official China National Radio reported Jan. 2.
“During heavy smog days in Beijing, you can smell the mud and coal in the air,” said Cheng Han, a Beijing-based energy policy consultant at the International Institute for Sustainable Development. “The visibility on the street is no more than 500 meters. If I walk for five to 10 minutes outdoors, my throat will get sore.”
Shanghai, the Chinese financial hub that’s considering a congestion charge for motorists, experienced record smog levels last month. In Xi’an, the former imperial capital known for its terracotta warriors, pollution soared to 38 times the WHO limit.
To combat air pollution, China’s State Council, or cabinet, released a national plan in September that called for a 15 percent to 25 percent cut in particulate matter by 2017 in the three key manufacturing regions anchored by Beijing, Shanghai and Guangzhou. As part of the plan, all cities are required to have gasoline with lower sulfur content by 2017.
Vehicle sales in China will rise as much as 10 percent this year, data from the state-backed China Association of Automobile Manufacturers show. Demand for motor fuel is projected to rise “quickly” by 8 percent to 101 million tons this year, China National Petroleum Corp., the nation’s biggest energy producer, said in a report Jan. 15.
The nation’s refiners are increasing production to meet the additional demand. Gasoline output may climb by 7 percent to 106 million tons this year, according to CNPC.
“New capacity in China to be added this year will be bearish for Asian gasoline even as domestic demand may be strongly supported by good car sales,” said Guo Chaohui, an oil analyst at China International Capital Corp., an investment bank based in Beijing.
PetroChina and China Petroleum & Chemical, known as Sinopec, plan to add 22.1 million tons of processing capacity this year, the CNPC annual report shows. They added 12.5 million last year, and were the only companies approved by the government to ship fuel abroad as of 2013, according to ICIS-C1.
Rising Chinese output contrasts with Europe, which has shut about 10 percent of its refining capacity since 2008 amid higher prices for crude, increased competition from new Asian plants and the U.S. shale-oil production surge that lowered demand from the world’s biggest gasoline consumer.
U.S. refineries are tapping into the highest supply of domestic oil since 1988 as shale-rock deposits yield new reserves, lowering costs relative to their European peers. A U.S. government ban on exporting most crude grades is driving gains in overseas sales of refined products.
U.S. exports of gasoline, diesel and other fuels averaged about 3.6 million barrels a day in the four weeks ending Jan. 10, 24 percent more than a year earlier and the most in data that begins in 2005, according to the U.S. Energy Information Administration. Exports stayed at the same level in the four weeks ended Jan. 17, the data show.
“Any additional supplies, like from China, won’t be positive for profits,” said Alex Yap, an analyst at Facts Global Energy, a consultant in Singapore. “Asian gasoline margins were already not strong last year.”
— With assistance by Jing Yang, Ann Koh, and Sarah Chen