Analysis of Refined Oil Market Trends in China in 2014

By Qiu Xuan, Zhang Lei and Ding Shaoheng, China Petroleum and Petrochemical Engineering Institute

China’s demand for refined oil increased slightly overall in 2013, but the growth was predominantly in gasoline. The output of refined oil increase rapidly, and there was an overall supply surplus in the domestic market. Looking into 2014, the global economy will still be sound, and the economy in China will mainly be stable but with lots of structural changes. The demand for refined oil will continue to increase steadily. Due to the restrictions on car ownership in several large cities of China, however, the growth of gasoline demand will slow down considerably. Considering the cycles in the development of industry and agriculture, the demand for diesel is projected to grow significantly. Judging from the demand trend of the 3 major kinds of refined oil products – gasoline, diesel and kerosene – the apparent consumption of refined oil products is expected to reach 272 million t/a in 2014, an increase of 4.4% over 2013 and the growth rate will be 0.5 percentage points higher than that in 2013.
It is expected that with impacts from policies and industrial cycles, the growth of gasoline demand will slow down in 2014, diesel demand will pick up a little, and kerosene demand will increase steadily. As the growth of oil refining capacity is quite rapid, refined oil products will be slightly in surplus in the domestic market.

1. Analysis of the macro economy both at home and abroad in 2014

(1) The global economy will recover decisively
Looking into 2014, the world economy will be more stable and the recovery progress in developed economies is hoped to accelerate.
In the United States, owing to the easing of the monetary policy and the rebound of the manufacturing sector, employment will expand further, and private investment and consumer confidence will also pick up. In Europe, the debt pressure will be reduced gradually over the next five years and the restoration of the financial policy space will also help promote the overall improvement of the economy. The economies of emerging economies will maintain rapid growth. The rehabilitation progress in the world economy will therefore be more solid in 2014. According to a projection made by IMF, the growth of the world economy will be around 3.6% in 2014, being 0.7 percentage points higher than that in 2013. IMF also says that economic growth in China will be around 7.3% in 2014, 0.3 percentage points less than in 2013.
(2) The economy in China will mainly be stable but with lots of structural changes
The year 2014 will feature an unusual degree of economic reform in China. It is expected that the economy will remain stable but with lots of structural changes.
Export policy changes will be one potential highlight for the economy in China in 2014. The sustained appreciation of Renminbi and the constant rise of the cost of labor have led to a slowdown of the export growth in China in recent years. Nevertheless, China’s share of world trade will remain stable at a relatively high level of around 12%. This means that China will still benefit from overall improvements made in the world trade environment. It is expected that the total value of exports from China in 2014 will increase 9.5% over 2013, and the growth of export value will be around 1.0 percentage point greater than in 2013.
It is expected that the total retail sales of consumer goods in China will increase 13.2% this year, with growth around 0.2 percentage points greater than in 2013. In particular, IT and telecommunications will likely be a highlight of China’s economy in 2014. The IT/telecomm market is a consumption market which China has made great efforts to cultivate. A series of policy measures like “Broadband China” and “4G License” will effectively boost the growth of telecomm loads and upgrade the services that consumers select. According to government projections, the annual revenue of consumption in China’s IT/telecomm market will reach RMB3.2 trillion by 2015, and the newly added GDP achieved in related industries driven by the IT/telecomm industry will be more than RMB1.2 trillion per year.
Investment in the manufacturing sector may be still another highlight for the economy in China in 2014. Policies for reducing registration thresholds and simplifying registration procedures for companies already started to produce some effect in 2013. In the first three quarters of 2013 the number of major market players was 18% higher and the number of private enterprises was 31% higher than the same period of 2012. The creation of new enterprises will bring new drives to the investment in the manufacturing sector. The investment in infrastructure will likely come down, but the investment that benefits the manufacturing sector will go up. It is expected that the investment in fixed assets in China in 2014 will increase 19.8% over 2013, with growth around 0.3 percent points slower than in 2013 but remaining relatively fast.

2. Analysis of demand for refined oil in China in 2014

(1) Policy pressure in the automobile market will surface, and the growth of gasoline demand will slow down
According to the theory for the development of the automobile industry, the automobile sector in China is in the second high-growth period of the popularization stage today. The potential growth of automobiles in this stage is usually around 1.5 times the GDP growth. Based on this calculation, the potential growth of automobiles in China is around 10-12% in recent years.
In practice, however, due to changes in policy the actual growth of automobiles often fluctuates above and below the potential growth. There are considerable unfavorable factors in the automobile market today. China has issued a new catalogue for a new round of energy-saving subsidies to automobiles, in which the number of vehicle types conforming to the standard is reduced from 139 to about a dozen. Judging from impacts of the previous reductions of subsidies, the new rules will reduce the annual sales volume of automobiles by 0.80-1.20 million. With the issuance of air quality control schemes, local governments pay greater attention to the protection of the atmospheric environment. Traffic jams in large cities have also become more serious. Restricting the purchase and use of automobiles has become one of the major remedies.
The sales volume of passenger cars in China is expected to be 17.63 million vehicles in 2014, an increase of 8.5% over 2013 and the growth will be slightly lower than the potential growth. The demand growth of gasoline will also be slightly slowed down in 2014. It is expected that the apparent consumption of gasoline in China will be 91 million tons in 2014, an increase of around 6% over 2013.
(2) Both the industrial cycle and the agricultural cycle will shift in favor of diesel consumption, and the demand pick up slightly
The consumption of diesel in China is mainly concentrated in industry, agriculture and transportation. The demand in these three sectors accounts for more than 80% of the total. The demand for diesel in transportation is closely related to production intensity in industry and agriculture.
In industry, the demand for industrial goods recovered gradually in the second half of 2013. The inventory of industrial goods is almost totally sold out. Enterprises must increase production rates to meet the increasing downstream demand. Industry has basically entered a stage of “passively digesting inventory.” Inventory no longer constrains operating rates. Assuming the demand for industrial goods maintains stable growth, the production rates in industry is hoped to increase steadily in 2014.
In agriculture, owing to the improvement and upgrading of farm machinery technology, the growth of farm machinery driving power has a 10-year long cycle. The first five years of each cycle are usually the period of accelerated growth. 2014 will roughly be the third year of a new cycle. The growth of farm machinery driving power will therefore be accelerated and the demand for diesel for agricultural use will also make an increase. What should be noted, however, is that after growth for three cycles, the mechanization level in soil tilling and preparing in China is already over 75%, leaving limited growth space. The mechanization level in sowing and harvesting is however still below 50%, with a considerable growth space. The main growth point of diesel for agricultural use will gradually shift to autumn harvesting.
The demand for diesel in industry and agriculture will increase gradually in 2014. The demand for diesel in transportation and power generation that serve industry and agriculture will also grow some. It is expected that the apparent consumption of diesel in China will be 157 million tons in 2014, an increase of around 2.5% over 2013.
(3) The aviation sector will be more market-geared, and the demand for kerosene will increase steadily
The demand for kerosene in China is closely related to the air passenger transportation market, which accounts for 70% of the turnover. As the aviation sector in China will become more market-geared, the demand for kerosene will hopefully make a stable increase in 2014. On one hand, the 25% restriction on price discounting of air tickets is canceled. More competition space is therefore offered to the aviation sector and more people will choose planes for travel. On the other hand, the civil air route control policy has changed from a pre-approval system to a registration (essentially notification) system. In this way, airlines have more autonomy in establishing new air routes and the matching of supply to demand will be speeded up. It is expected that the air passenger load will grow around 12% in 2014, and the apparent consumption of kerosene in China will be 24 million tons, an increase of around 7% over 2013.
Judging from the demand trends of the three major kinds of refined oil products, the apparent consumption of refined oil is expected to reach 272 million tons in 2014, an increase of 4.4% over 2013, and growth will be 0.5 percentage points higher than in 2013, according to the National Development and Reform Commission of China.

3. Projection to the supply/demand balance of refined oil products in China in 2014

The oil refining capacity in China will grow further in 2014. Two refineries, each with a capacity of over 10 million t/a, newly constructed by PetroChina Sichuan Petrochemical Co., Ltd. and Sinochem Quanzhou Petrochemical Co., Ltd., will be put into use in 2014. Some local refineries will also expand capacity. Statistics show that the oil refining capacity in China will increase over 38 million t/a from the second half of 2013 to the end of 2014. Based on the production load and the refined oil output of refineries in 2013, it is expected that the output of refined oil in China will be 288 million tons in 2014, exceeding domestic demand by 16 million tons. The supply of refined oil products will be relatively abundant, and the supply/demand balance will have to be achieved through strengthening export and adjusting production in refineries.