China's Refinery Slowdown Amidst COVID-19 Challenges: Global Implications

 

China, the world’s largest oil importer and refiner, has seen its refinery throughput rates decline in October after several months of strong growth, as domestic demand weakened due to COVID-19 lockdowns and high oil prices. The slowdown in China’s refining activity has implications for the global oil market, as it could affect the country’s crude imports and product exports in the coming months.

China’s Refining Boom

China’s refining sector has been booming since the second half of 2020, when the country emerged from the first wave of the pandemic and ramped up its economic activity and fuel consumption. China’s refinery throughput reached a record high of 15.51 million barrels per day (b/d) in June 2021, up 8.8% year-on-year, according to data from the National Bureau of Statistics (NBS)¹.

The surge in China’s refining activity was driven by several factors, including:

• The expansion of refining capacity, especially by the private and independent refiners, also known as teapots, which have been granted more crude import quotas and product export quotas by the government. China added about 1.4 million b/d of new refining capacity in 2020 and 2021, mostly by the teapots, according to the International Energy Agency (IEA)².
• The recovery of domestic fuel demand, especially for gasoline and diesel, as China’s industrial output, transportation, and travel rebounded from the pandemic-induced slump. China’s apparent oil demand, which is calculated by adding net product imports to refinery throughput, grew by 9.5% year-on-year to 14.09 million b/d in the first half of 2021, according to Platts calculations³.
• The arbitrage opportunities for product exports, as China’s refined products were cheaper than those in the international market, due to the low domestic oil prices set by the government and the ample supply from the refineries. China’s product exports rose by 23.4% year-on-year to 40.25 million mt in the first nine months of 2021, according to data from the General Administration of Customs (GAC)⁴.

China’s Refining Slowdown

However, China’s refining bonanza has slowed down in October, as the country faced several challenges that dampened its refining margins and demand. China’s refinery throughput fell by 2.5% month-on-month to 15.12 million b/d in October, the lowest level since May, according to the NBS¹.

The main factors behind China’s refining slowdown include:

• The resurgence of COVID-19 cases in several provinces, which prompted the authorities to impose strict lockdown measures and travel restrictions, affecting the mobility and economic activity of millions of people. China reported 94 new locally transmitted COVID-19 cases on November 16, the highest daily tally since January, according to the National Health Commission (NHC).
• The high crude oil prices, which eroded the refining margins and profitability of the refiners, especially the teapots, which have to pay higher prices for their imported crude cargoes. The price of Brent crude, the international benchmark, averaged $83.34/b in October, up 9.6% from September and the highest monthly average since October 2018, according to Platts data.
• The environmental and energy policies of the government, which aimed to curb carbon emissions and coal consumption, leading to power shortages and rationing in many regions, forcing some refineries to reduce their operating rates or shut down temporarily. China’s coal-fired power generation fell by 2.7% year-on-year in October, while its hydropower generation rose by 25.4%, according to the NBS¹.

Implications for the Global Oil Market

The slowdown in China’s refining activity has implications for the global oil market, as it could affect the country’s crude imports and product exports in the near term.

• China’s crude imports could decline in the coming months, as the refiners reduce their crude purchases and run down their inventories to cope with the lower refining rates and margins. China’s crude imports fell by 3.2% month-on-month to 10.66 million b/d in October, the lowest level since February, according to the GAC⁴. China’s crude stocks dropped by 2.1% month-on-month to 1.03 billion barrels at the end of October, according to data from Platts Analytics.
• China’s product exports could increase in the coming months, as the refiners seek to offload their excess supply and take advantage of the higher product prices in the international market. China’s product exports rose by 8.9% month-on-month to 5.51 million mt in October, the highest level since June, according to the GAC⁴. China’s product stocks rose by 3.7% month-on-month to 341.6 million barrels at the end of October, according to data from Platts Analytics.

The outlook for China’s refining sector depends on how the country manages to contain the COVID-19 outbreak, stabilize the power supply, and balance its environmental and economic goals. China’s refining activity could rebound in the coming months if the situation improves, or it could remain subdued if the challenges persist. China’s refining trends will have a significant impact on the global oil market, as the country is the largest source of oil demand and supply growth in the world.