China's independent refiners slash operations as virus hits fuel sales

SINGAPORE/BEIJING (Reuters) - Independent refineries in China’s eastern Shandong province, who collectively import about a fifth of the country’s crude, have slashed output by 30% to 50% in just over a week as the coronavirus outbreak hit fuel demand and distribution, executives and analysts said.

Utilisation rates dropped below 50% by the end of January at key plants, from around 66% a week earlier, the lowest since at least 2015, according to surveys of around 40 plants conducted by local consultancies JLC Network Technology and Longzhong Information Group.

The sudden production cut left crude oil storage tanks full at China’s top crude import terminal of Qingdao, causing delays in discharging cargoes and leaving refiners, already under pressure from weak margins, facing hefty demurrage charges to compensate shipowners for delays.

“The situation is grim - we have gasoline and diesel demand shrinking on one hand, and fuel logistics stalling on the other as local governments put in traffic curbs to contain the spread of the virus,” said a plant executive based in Dongying, a refining and chemicals hub in Shandong.

He and other executives declined to be identified because they’re not authorized to speak to the media.

While the central province of Hubei, where the virus first emerged, is in virtual quarantine, authorities elsewhere in China have placed restrictions on travel and business to try to contain the spread of the virus.

Spot premiums for Russian ESPO crude, among the most popular grades for the Shandong plants, sometimes known as ‘teapot’ refineries - have hit their lowest in five months.

The city of Dongying, home to some 40 teapot refineries, introduced a ban on Friday on vehicles entering the city from outside and asked local manufacturers to apply for special passes to facilitate the logistics required for production, two refinery executives briefed on the matter said.

“This means refineries can’t move their products out, or at least it slows down the flows drastically” said the Dongying executive.

He said a typical 60,000 barrels per day refinery uses 200-300 trucks a day to deliver refined fuel.

A second executive estimated that even with such steep production cuts in place, most of the plants might have to reduce output again in about 10 days because of logistics constraints.

Shi Linlin, senior analyst with JLC said overall run rates in Shandong could drop to 40% in February.

Reporting by Chen Aizhu in Singapore and Muyu Xu in Beijing; Additional reporting by Shu Zhang in Singapore; Editing by Kenneth Maxwell and Neil Fullick