China becomes global player in refined crude oil industry

Hello from Hong Kong, where Covid-19 cases are back in single digits and everything has reopened (until 10pm). People are tentatively returning to bars and sports facilities, which — while not quite full — are no longer deserted.

Today’s main piece is about an aspect of the economy that doesn’t immediately spring to mind in a bustling financial and commercial centre: the products derived from crude oil.

Policy watch, meanwhile, looks at how discussions between Brussels and London are going since Lord David Frost’s appointment as minister for EU relations on March 1. (Hint: not well.)

China’s bubbling crude industry

For Chinese economy watchers, 2020 was a year filled with so many records — from steel production to the December trade surplus — that it was at times difficult to keep track. One of the areas where superlatives applied was crude oil imports, which rose 7.3 per cent to hit their highest-ever level of 542m tonnes last year.

Oil flowed into the country as refiners ramped up their purchases following collapsing prices — while prices for Brent rose above $70 a barrel this week, those for West Texas Intermediate turned negative for a brief period last year — and a rapid industrial recovery.

China’s appetite for oil was part of a much bigger economic phenomenon. The country’s exports have skyrocketed — and over the past two months leapt more than 60 per cent compared with the low base when the pandemic first struck last year. Its world-beating recovery, after reported coronavirus cases slowed to a trickle in the middle of 2020, has also generated a parallel boom in imports, especially of the commodities needed to fuel China’s industrial machine. In September last year, they hit their highest level ever in dollar terms.

So far this year, crude oil imports have continued to rise, adding 5.8 per cent in January and February compared with a year earlier. But, with China’s strategic ambitions in mind as the country’s top officials meet in Beijing this week, it’s also worth keeping an eye on its trade in oil products.

As well as their role in fuels such as gasoline and petrol, oil plays a critical role in the development of petrochemicals that go into essential day-to-day products such as plastics and polyester. While China continues to import vast quantities of crude oil, its exports of products derived from that crude added 1.9 per cent in the first two months of 2021. Its imports of oil products, meanwhile, fell 19.4 per cent, according to official customs data released this weekend.

That change in the data comes after the Chinese government early last year allowed domestically produced fuel to supply ships at Chinese ports by offering tax rebates, noted Oceana Zhou, a senior analyst at S&P Global Platts.

But it also hints at a longer-term shift. By 2016, China was a net exporter of oil products, and by 2018 it was one of the world’s top 10 refined product exporters, according to S&P Global Platts, with exports going as far afield as South America and Africa.

The country is also developing vast refining complexes, such as Zhejiang Petrochemical, which was built in 2019. The listed arm of the company that owns the complex, Rongsheng Petrochemical, saw its shares increase 141 per cent last year.

Such projects hint at a shift in the way Chinese trade for oil products, rather than oil itself, is evolving. 

“China’s become a far bigger refiner of crude and is now a much more substantial exporter of products,” said Neil Beveridge, an analyst at Bernstein. “It’s just generally more efficient to manufacture chemical products in country, rather than importing the chemicals by sea.”

That shift also ties in to the role of private enterprise within the country. Refining has historically been dominated by state-backed giants Sinopec and PetroChina. But this year, given the launch of complexes such as Zhejiang Petrochemical, the government has increased the non-state crude import quota by 20 per cent. Private refiners have also been able to buy crude on international markets, rather than from state-owned peers in China.

Their capacity to ramp up China’s domestic refining capacity further has implications for trade partners. The US in December alone exported 7m barrels of oil products to China, according to data from the US Energy Information Administration. That is much less than the 22m barrels of crude oil in the same month, but still a sizeable amount.

China’s industrial boom is, in some quarters, expected to shift to a more consumption-led recovery over the coming months. That could have an impact on its appetite for crude oil, especially if prices in domestic markets continue to recover.

But while the crude imports echo the same industrial pattern following the country’s response to the last global crisis in 2008, the oil product volumes might say more about the longer-term shift in China’s economic model as it seeks to move up the value chain. “If you look at China’s history [in] highly capital-intensive, low value-adding type industries, be that steel, cement, China’s ended up dominating those industries,” said Beveridge. “Refining and chemicals is an industry that they had not fully exploited.”

Policy watch

Anyone who thought relations between London and Brussels would thaw post-Brexit, will have been disappointed with how frosty things have become of late. The Financial Times has a story this morning about how UK business groups and exporters have called on Lord David Frost, recently made Boris Johnson’s minister for EU relations, to stop being so abrasive in his approach to dealing with Brussels.

Those in the know had warned at the time that Frost was not the best appointment to cool tensions, with the minister known for his hard-nosed manner. However, it was still something of a shock when the UK said last week that it would unilaterally extend grace periods for trade between Great Britain and Northern Ireland. Downing Street insists it was the previous incumbent, Michael Gove, who took this decision. But the finger of blame in Brussels is pointing squarely at Frost. And it will be him who has to deal with the consequences of the move, which immediately led the EU Commission to threaten to take legal action.

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