China fuel surplus to persist on capacity expansion, weak demand

SINGAPORE (ICIS)–China will remain in oversupply of refined fuel, such as gasoline and diesel, in the coming years due to an unabated expansion in domestic refining capacity, while demand is weakening amid a slowdown in the world’s second-biggest economy, industry sources said.

Refining capacity in the country is expected to reach 893m tonnes/year by 2020, based on an average annual growth of 3.2% from 2016 to 2020, according to the China Analytics team at ICIS.

Growth in consumption, on the other hand, is projected to be more moderate at 2.5% over the same period as the Chinese economy has been steadily losing steam.

Economic growth this year is expected to be around 6.5%, representing a further slowdown from the 26-year low of 6.7% recorded in 2016.

Gasoline consumption in the country is projected to grow at a 6.4% rate in 2016-2020, down from the 10% average in the previous five years.

Diesel consumption, on the other hand, is expected to contract by an average of 0.4% in 2016-2020 from 3% in 2011-2015, based on forecasts from the China Analytics team at ICIS.

Official data on consumption growth in 2011-2015 were obtained from China’s National Bureau of Statistics (NBS).

China’s ongoing economic transition has also triggered a structural change in its fuel consumption, industry sources said.

Demand for gasoline will remain supported as the Chinese economy has been pivoting toward domestic consumption-led growth over the years, from the previous focus on industry, which is a major consumer of diesel, they said.

“Diesel is really a problem. China may still have to face flooding diesel supply and find ways to digest [it],” said a source from PetroChina.

The excess supply has turned China into a net exporter of diesel, with volume of shipments steadily growing in recent years, based on official data.

The country’s net diesel exports posted a 40% growth in 2014; 91% in 2015 and 115% in 2016. 

According to China Analytics team at ICIS, China’s net diesel exports will rise to 18.9m tonnes by 2020 from some 14.5m tonnes in 2016, an increase of nearly 31%.

In comparison, gasoline surplus will be relatively slack, with exports expected to fall to 1.1m tonnes by 2020 from 9.5m tonnes in 2016, based on forecasts.

“Major refiners including Sinopec and PetroChina have been actively seeking new destinations for diesel globally,” said a source from Sinochem, a major refiner in China.

Meanwhile, oversupply in domestic market has triggered price wars at filling stations. Retailers have been offering more than 50% discounts on gasoline and diesel prices since April this year, market sources said.

“Market competition has far exceeded our expectation and we have to join in slashing prices,” said an official at Sinopec’s refining segment.

China’s gasoline and diesel retail prices are pegged to international crude prices and are adjusted every 10 working days.

The government set prices serve as ceilings for retailers. Currently, the national average pump prices for 89-octane gasoline is Chinese yuan (CNY) 7,739/tonne ($1,162/tonne); and CNY6,459/tonne for zero pour point diesel.

Focus article by Fanny Zhang

($1 = CNY6.66)

Pictured above: Sinopec’s refinery in Qingdao, China (Source: Sipa Asia/REX/Shutterstock)

ICN