SINGAPORE – China's new status as a net gasoline importer will stay unless refining margins improve to spur higher domestic output, or if the government scraps its fuel import tax rebates in favour of other compensation plans.
Once Asia's top gasoline supplier, China has been barely coping through years of growing consumption. But refiners started to really struggle this year, when the government seeks higher stockpile ahead of the Olympics, as oil raced above $100 and plants cut runs to limit losses from state-set prices.
Sinopec and PetroChina have relied on more imports, helped by recent tax rebates on oil imports, to meet demand from a growing middle class and driven by double-digit economic growth.
The two state firms imported nearly 340,000 tons, or about 100,000 barrels per day (bpd), of gasoline in May while exporting just 160,000 tons, turning the country into a net importer of the auto fuel for the first time.
The frenzied stockpiling may end after Beijing's coming-out party in August, and hopes of lowering costly imports are pinned on new refining output starting up this year. But analysts said the world's No.2 oil consumer may not flip back into a net gasoline seller unless refining losses are limited.
“It depends on domestic prices. If they remain at the current price, there's no incentive for refiners to increase crude run rates,” said Tony Regan from oil consultancy Nexant in Singapore.
Pump prices of the benchmark 93-octane gasoline in China are around 72 cents a litre, less than half the $1.57 a litre for the 92-octane grade in Singapore, where prices are not subsidised.
Asian reforming margins – gasoline's premium to naphtha – has risen about 50 percent to $13.68 a barrel this year.
China's refinery production in May fell from a year ago for the first time in five years, down 1.1 percent to 27.78 million tons (6.54 million barrels per day), official data showed.
“A dollar of loss from a new refinery is the same as a dollar of loss from old refineries,” U.S.-based analyst Paul Ting said in his latest research note.
Sinopec started producing in May from its new 200,000-bpd Qingdao refinery, currently running at about 60 percent capacity with a likely hike in run rates as early as July, company sources had said.
More fresh supplies will start in the fourth quarter with the startup of two other new refineries – Sinopec's Fujian plant and CNOOC's Huizhou refinery, both at 240,000 bpd.
“The intention for China is not to import high premium products but to import crude. That is why they have made all the investments in new refineries,” said Victor Shum at Purvin & Gertz in Singapore.
The new facilities should be enough to meet the International Energy Agency's forecast of a 355,000-bpd growth in China's domestic demand this year, at a time of falling U.S. demand.
U.S. gasoline consumption has been easing as high prices pushed them towards greater use of alternatives. Shum estimated the world's top oil user would face a shrinking supply deficit of 969,000 bpd this year versus 1.091 million bpd in 2007.
Asia will have a supply surplus of 79,000 bpd in 2008 and 2009 despite greater China demand due to increased capacity in South Korea and lower Japanese gasoline consumption, Shum added.
Car sales in China, the world's second-largest vehicle market, rose 15.6 percent last month from a year ago to 564,600, though the growth is starting to slow.
POST-OLYMPICS
Beijing has extended rebates on the 17 percent value-added tax (VAT) charged on some imported fuels into the second quarter to encourage stockpiling for the Olympics.
National revenues of 5.13 trillion yuan last year has allowed Beijing to dig into its coffers to dish out regular subsidies to its refiners to offset refining losses.
The tax rebates – short of raising retail prices to near global levels that could stoke social unrest and 11-year high inflation – are expected to end in June. If not extended, China could switch to direct payouts to keep its refineries running.
The government gave Sinopec 7.1 billion yuan ($1.03 billion) in April, after forking out 7.4 billion yuan in the first quarter and 4.9 billion yuan in 2007.
Such a direct subsidy would enable Chinese refiners to import and process more crude and buy less motor fuels, analysts said.
Alternatively, the government can raise retail prices gradually – last seen in November – which some industry sources said would lead to greater utilisation of its independent refineries and temper consumption. Beijing has vowed to hold off any hikes in the short-term.
“Let's assume the government raises pump gasoline prices by 25 percent. That will hit demand and release supplies from numerous teapot refiners,” said a Sinopec official.
Independent refiners, which make up about 20 percent of China's capacity, have been running at minimum rates or ceased operations, as they succumbed to high global crude prices.
“China has a tremendous foreign exchange reserves and fiscal surplus. It has the financial resources to continue subsidising for a long time. It's a matter of how they do it,” Shum said.
(Additional reporting by Chen Aizhu in Beijing; Editing by Ramthan Hussain)
($1-6.891 Yuan)
