Industry Trend Analysis - Production Fall, Exports To Drive H2 Imports Growth - SEPT 2017


BMI View: China ' s crude oil imports are set to grow by 10.1% y-o-y in 2017 . D espite softer demand from the independent teapot refiners and a gradual slowdown in the broader economy, imports by the large state-own ed refiners will remain robust . This will be su pported by the need to compensate for falling domestic oil production, favourable margins in the export markets and strengthening yuan.

China imported 36.1mn tonnes of crude oil in June 2017, an increase of 17.9% y-o-y, maintaining its newfound position as the world's largest crude buyer. Imports were driven by the need to offset persistent production declines at mature assets and strong uptake among the independent private (teapot) refiners. Overall imports for H117 were 212.5mn tonnes, up 13.9% on year.

Structural Output Decline Entails Imports Need
China - Crude Oil Production & Imports, mn metric tonnes
Source: China General Customs Administration, BMI

Crude Output Continues To Fall, Entailing Imports

China's crude oil production fell for the 16th consecutive month in June, to 16.2mn tonnes, a decrease of 2.2% y-o-y, driving the need for crude imports to compensate. Although SOE-led investment has slowed the rate of declines in recent months (3.1% in Q2, compared with 6.7% in Q1), production is unlikely to return to growth anytime soon, as low oil prices and a shifting policy environment towards natural gas render investment in domestic oil plays unattractive.

Teapot Runs Remain Elevated In H1

Solid June imports were also driven by strong compliance to government-set crude import quotas by the teapot refiners, which maintained elevated runs through much of H1, mostly as they feared curbs to quotas if uptake was lower than set. The teapots enjoyed ample room to grow domestically in H1, as favourable export margins drove the SOEs to concentrate on overseas markets, while domestic appetite for refined fuels held up better-than-anticipated, with jet fuel and diesel outperforming. However, the growing disconnect between apparent crude oil and oil products consumption suggests that a significant percentage of crude imports over January-June were stockpile-driven.

Strong Teapot Runs Drive Imports
China - Independent Teapot Refineries Run Rates, %
Source: National Sources, BMI

Russia Maintains Top Spot, While Middle East Falters

In terms of supplies, Russia remained the top crude supplier to China for four consecutive months in June, grabbing 14.5% of the market share, benefitting from its geographical proximity to the Shandong province, the stronghold of the teapots. The teapots also began to substitute certain Middle Eastern grades with Russian Urals, as ongoing OPEC, non-OPEC output cuts render the former more expensive.

Although the Middle East as a whole remains a key supplier to China, accounting for nearly half of total imports, higher prices led combined imports by the region's key suppliers, namely Saudi Arabia, Iran and Iraq to fall 7.0% y-o-y in June. However, demand for the region's crude could improve in the coming months as the anticipated slowdown in teapot runs hit demand for Russian crudes and puts its top spot at risk.

A narrowing in the Brent-Dubai spread, due to the aforementioned cuts to Middle Eastern barrels, drove stronger appetite for crudes from Angola, which came in second with 11.4% of the market share. Continued compliance to the supply cut (which will primarily take out production of medium and heavy crude grades) will provide opportunities for smaller suppliers of such grades (in WAF and Latin America) to win greater market share over the coming months. The US also improved its share marginally from 1.0% typically to 3.0% in June, supported by stronger production from the Gulf of Mexico.

SOEs To Drive H2 Crude Imports

Our positive outlook on China's crude imports for H2 remains intact, with overall imports expected to increase by 10.1% y-o-y in 2017. This implies an average y-o-y growth of 6.0% for H2, compared with 14.3% for H1. Although a gradual slowdown in the Chinese economy and tightening conditions for the teapots could drag on crude appetite, this will be sufficiently offset by stronger imports by the SOEs, whose purchases will be driven by factors including the continued need to compensate for falling production, additional import quotas awarded to the SOEs and attractive export opportunities to nearby emerging markets ( see ' Gasoline, Diesel Exports Set For Further Gains ' , July 24). Moreover, cheaper cost of oil imports, amid a gradual strengthening of the Chinese yuan against the US dollar will make imports more palatable versus costly output maintenance at aging fields.