PowerShares DB Crude Oil fka DTO

[frenchee]

China: The Ramifications of Fuel Exports and Refining Capacity
Stratfor Today » February 25, 2009 | 2130 GMT

LIU JIN/AFP/Getty Images
A car leaves a Sinopec service station in Sichuan province
Summary
China Petroleum & Chemical Corp. reportedly has told eight of its refineries to prepare to export gasoline and diesel in March. If China substantially increases its fuel exports onto markets that are already depressed, the effects could be global.
Analysis
Chinese state-owned energy company China Petroleum & Chemical Corp. (Sinopec) told eight of its refineries to prepare to export fuel in March, Reuters reported Feb. 25, citing the Oriental Morning Post. Sinopec sent the order to eight refineries with a combined capacity of 2 million barrels per day (bpd). At the moment, the amount Sinopec intends to boost its fuel exports remains unclear. The Oriental Morning Post claims that total Chinese fuel exports could reach up to about 106,000 bpd in March. This is about a 12,000 bpd increase from January.
Though in itself this does not represent massive dumping onto global markets, it could signal the beginning of a trend.
Refiners like Sinopec are looking to export their products due to the fact that domestic consumption is low and stockpiles are building up. The government stimulus plan for the petrochemical industry provides for 22.5 million barrels (62,000 bpd) of fuel inventories to be stockpiled in 2009, and 75 million barrels by 2011. With stockpiles mounting fast, refiners could turn to exports as a way of making a quick buck on their surplus product.
Chinese fuel exports have already increased significantly in January, with gasoline exports up by 243 percent and diesel up 496 percent compared to a year earlier, according to China’s General Administration of Customs.
These percentage increases are misleading because in January 2008 exports were extremely low. Refiners reduced exports by about 80 percent that month (to merely 23,000 bpd), and also cut back on refining. Inflation was raging and refiners were suffering budget crunches due to the combination of soaring prices for crude oil inputs on the global markets and government-mandated price caps on the domestic sale of their refined products. The state refiners were expected to buy oil high, pay taxes on it, and sell it low. Instead they opted to cut their refining activity and import fuel to sell to the domestic market. This allowed them to save on production costs, dodge taxes on importing crude, tap government subsidies for fuel imports and come closer to breaking even. Thus, compared to January 2008, that China’s refiners are exporting much at all marks a dramatic change.
China’s fuel exports are still lower than 2007 levels, but they have been climbing since September 2008, when demand first began to fall. In great part this is because refining capacity is increasing. In recent years China has embarked on a far-reaching strategy to boost capacity in order to accommodate surging domestic demand, hoping to prevent shortages, lower prices and reduce the amount the government pays in fuel subsidies to consumers. Chinese refiners have 21 projects currently under way, expecting to boost capacity by an estimated 4.9 million bpd, with 1 million bpd of new capacity to be available by the end of 2009. This is in addition to the country’s pre-existing refining capacity of more than 7.5 million bpd in 2007. Sinopec alone has 14 projects under way that will add an estimated refining capacity of 3.3 million bpd in the next few years, including building new refineries and capacity expansions for existing refineries at the cities of Maoming, Wuhan, Shanghai, Nansha, Ningbo, Tianjin, Guangzhou and Yanshan.
Beijing’s best-case scenario for these projects was thwarted when demand plummeted amid the global recession. The problem is that China cannot afford to leave its new refineries lying idle. It has debts it must pay for their construction, while maintenance alone is costly. Most important, China cannot risk exacerbating its unemployment problem, which has been greatly worsened by the current recession. Nor can Beijing abandon its long-term plans for increasing capacity or refineries already under construction. China is wary of following the path of the United States, which saw its refinery construction grind to a halt in the 1970s due in large part to regulatory impediments, resulting in too few refineries and higher domestic gasoline prices for the following 40 years.
Sinopec’s proposed fuel export increases are not grandiose. But if there is more to come — or if other major refiners like PetroChina follow Sinopec’s lead — the result could be an influx of Chinese gasoline and diesel onto world markets where demand is already at a relative low. This would put further downward pressure on prices at a time when a good part of the world is already on the verge of deflation.