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A long wait for China to repeat fuel buying binge
September 9, 2008 / 12:34 PM / 9 years ago

A long wait for China to repeat fuel buying binge

By Felicia Loo - Analysis

SINGAPORE (Reuters) - China’s nine-month auto fuel buying frenzy ahead of the summer Olympics helped lift global oil markets to records, but beleaguered bulls beware -- it could be years before conditions force it to launch another raid.

While an expected pick-up in crude oil purchases to feed new refineries should attest to the ever-growing demand in the world’s second-biggest consumer, imports of diesel and gasoline will remain the exception rather than the rule as China maintains its focus on remaining self-sufficient in refined fuels.

With domestic inventories filled to the brim after a huge pre-Olympics stockbuild and amid signs of slackening demand growth, a return to the spot market appears remote for now. However, that risk may grow if refiners tap the brakes on investment due to low fuel prices set by the government.

“The massive import levels that we witnessed are not likely to be duplicated for a long time. The point about demand threatening to stall is a real important one,” said U.S.-based independent analyst Paul Ting.

“Absolutely, and by far the most important thing to decipher is whether the most recent round of price increase has begun to nudge China towards the price-elastic region,” he added.

Demand in the United States, which consumes about seven times more gasoline than China, has only begun to slow this year, after retail prices nearly trebled from 2004.

China’s retail diesel and gasoline prices, closely regulated by a government anxious to avoid stirring any rural unrest, have increased only 70 percent over the same period.

By the end of this year, China will increase its refining capacity by an estimated 740,000 barrels per day (bpd), more than enough to meet oil demand forecast to grow about 430,000 bpd, allowing refiners to bring imports to a quick halt.

Data due on Wednesday should confirm that China imported a hefty 530,000 tonnes (128,000 barrels per day) of diesel in August, a last batch of purchases after buying a record near 1 million tonnes in July, rivaling the United States.

It also bought 210,000 tonnes (59,000 bpd) of gasoline last month, an unusually large volume in Asia although equivalent to only around 5 percent of U.S. imports, trade sources said.

But traders have said China will return to a net exporter of gasoline and much thinner imports of diesel this month.

After their last import binge in late 2004, refiners stayed away from spot markets for nearly three years, until last autumn’s domestic shortage forced Beijing to arm-twist its state refiners into buying more product overseas.

“China’s policy was and still is to maximize domestic diesel production and stay away from imports,” said Kang Wu of FACTS Global Energy in Hawaii.

Since China slashed imports, prompt gas oil prices in the Singapore trading hub have slumped to a discount of more than $2 a barrel below forward months, the weakest in years.


The self-sufficiency aim, however, faces real risks.

China’s top refiner Sinopec (0338.HK) (600028.SS) said this month it would curb new investment a second time this year, due to earnings and capital flow pressures after its refining operation lost 46 billion yuan ($6.73 billion) in the first half due to soaring crude prices and low domestic fuel pump rates.

“China usually builds refineries just enough to cover diesel demand,” said Yan Kefeng of Cambridge Energy Research Associations (CERA) in Beijing.

That opens the risk of shortages within three to five years, if demand rapidly accelerates again, as it did in 2003 and 2005.

In the short term, any suggestion of another increase in China’s regulated fuel prices after June’s 18 percent rise could trigger another brief round of buying. Many analysts expect another increase this year, although the sharp fall in crude prices since July may augur against that.

“Market players (in China) run their business on stocks. When they feel confident that the government will raise retail fuel prices, they will buy diesel and gasoline at whatever price and this pushes up apparent demand,” Yan added.


But before any buying happens, suppliers will need to whittle down stocks that stand at twice year-ago levels and are proving difficult to shift amid signs of slackening demand growth.

China’s passenger car sales fell 6.24 percent in August from a year earlier to just below half a million units -- the first drop in more than two years and a sudden reversal from years of nearly unbroken double-digit sales growth.

And the worst power crisis since 2004 -- when a capacity shortage forced hundreds of businesses to buy stand-alone diesel generators that sparked the last spike in imports -- is quickly easing, relieving the threat of another power-fuelled binge.

“Maybe China doesn’t need to buy diesel anymore. They switch the lights off now that the Olympics are over and they have their new refineries up and running,” said a gas oil trader in Singapore.

Editing by Ramthan Hussain and Jonathan Leff

Our Standards:The Thomson Reuters Trust Principles.
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