INSIGHT: China jet fuel export outlook bleak amid slow air travel recovery

SINGAPORE (ICIS)–China’s jet fuel export will not return to pre-pandemic levels this year as global air travel is expected to stay low with border restrictions still in place in most countries.

China’s average annual jet fuel export was around 16m in 2018 and 2019, before plunging to less than 10m tonnes last year when the pandemic hit.

Global international air traffic in March 2021 was 87.8% below the 2019 level, according to the International Air Transport Association (IATA).

The international air travel market in Asia, in particular, has been the worst performing, due to its strict border control measures (see chart 1).

In the first quarter of this year, Asia international travel demand in terms of revenue passenger kilometres (RPK) was only around 5% of the 2019 level over the same period, according to IATA.

Source: Oxford COVID-19 Government Response Tracker, Blavatnik School of Government; ICIS’ analysis

Coding: 0 – No measures; 1 – Screening; 2 – Quarantine arrivals from high risk regions; 3 – Ban on high risk regions; 4 – Total border closure

Asia accounts for more than 70% of China’s jet fuel exports, and jet fuel demand in Asia excluding China has remained in the doldrums.

In the first quarter of this year, demand in several key markets in Asia was down by 35%-77% compared with the same period in 2019.

Over the same period, China’s jet fuel exports fell 64% compared with 2019, according to China General Administration of Customs.

Asia’s jet fuel demand recovery is likely to remain slow for the rest of the year, as the recent emergence of new and more transmissible variants of COVID-19 indicate that any recovery to normalcy could be quickly set back.

While vaccination has raised hopes that air travel demand will improve as borders reopen, its uneven roll out across countries means the demand recovery will be slow.

By mid-May, 4.9 per 100 people were vaccinated in Asia, compared with 32.7 per 100 in North America, according to Our World in Data.

At this rate of vaccination, it could take 4-5 years for Asia to cover 75% of its population. Hence air travel demand in Asia, excluding China, is unlikely to return to pre-pandemic levels before 2024.

ICIS expects jet fuel demand in Asia, excluding China, to recover to 42.9m tonnes in 2021, or close to 60% of the 2019 level, from 36.7m tonnes in 2020.

RECOVERING DOMESTIC AIR TRAVEL DRIVES REFINERIES TO INCREASE PRODUCTION
There is some relief though for Chinese refiners as domestic air travel in China is coming back strongly and margins in jet fuel production are recovering.

According to the Civil Aviation Administration of China (CAAC), the domestic air travel in terms of revenue passenger-kilometres (RPK) in March rose by 1.6% compared with the same period in 2019, following two successive months of subdued demand due to renewed restriction measures.

According to China’s National Development and Reform Commission (NDRC), apparent demand for jet fuel was up 24.6% year on year in Q1 2021, but was about 33% below the 2019 level.

ICIS expects China’s jet fuel demand to recover to 36.9m in 2021, almost on par with 2019 level, supported by strong domestic air travel demand.

Consequently, the average jet fuel yield in China recovered to 6% in the first quarter this year, from 4.5% in April 2020, though still lower than the average of 8.1% in 2019.

CHINA’S REFINERY JET FUEL EXPORT FACES GREAT PRESSURE
China’s refining sector will face more supply pressure in the second half of the year as the domestic refinery maintenance season is due to end in June.

With jet fuel demand recovery in Asia set to be a long haul, China’s refiners will come under increasing supply pressure and margins will be squeezeed in the next two years when new and expanded refineries come on stream (see chart 3).

Insight by Anita Yang and Man Yiu Tse