By Song Shuhui, Tianjin Petrochemical Transportation Sales Centre
Industry profit improved in the first half of the year
In the first half of 2018, the profitability of China's refining industry has been greatly improved. Although environmental protection policies affected the industry, production continued to grow during the period. Due to the elimination of backward capacities, some small refineries with processing capacity below 2 million t/a have been shut down, and the number of teapot refineries has been effectively reduced, resulting in a reduction in primary processing capacity. From January to May 2018, the national primary production capacity was 833 million t/a, while the figure in the same period of 2017 was 853 million t/a, down 2.3% YoY.
1. Production keeps growing
From January to May this year, the national crude oil, gasoline, diesel, aviation kerosene, and naphtha production were respectively 77.81 million tons, 57.75 million tons, 75.021 million tons, 19.002 million tons and 14.744 million tons. The crude oil fell 3.06% year-on-year, while gasoline, diesel, aviation kerosene, and naphtha increased by 5.94%, 0.77%, 11.78% and 2.8% respectively. The refining capacity and the gasoline output increased. As the diesel-to-gas consumption ratio decreased, and the gasoline profit was good, the gasoline production growth was thus bigger than that of diesel.
2. The YoY growths of product prices are large
Due to the strong rise of the crude oil market this year, the prices of domestic refined oil products are rising. According to statistics, from January to May this year, the national average prices of crude oil, gasoline, diesel, aviation kerosene and naphtha reached RMB7 464/t, RMB6 454/t, RMB4 771/t, RMB6 220/t, up respectively by 15.46%, 15.17%, 13.57%, 32.05%.
3. Strong profitability
From January to May 2018, the comprehensive profit of China’s main refineries was RMB793/t, an increase of 46.58% YoY; and the comprehensive profit of teapot refineries was about RMB455/t, an increase of 49.67% YoY. In the past two years, the profit of refining companies has remained at a relatively high level, mainly due to the increase in prices of major products such as crude oil, gasoline and diesel.
The total profit of aviation kerosene production was about RMB2.95 billion, up 79.13% from the same period of last year. The total profit of diesel production was RMB8.302 billion, up 25.54% YoY. The total profit of gasoline production was RMB5.8 billion, up 31% from the same period of last year.
4. Both imports and exports rise YoY
From January to May this year, China’s crude oil imports reached 190.58 million tons, an increase of 8.06% YoY. Domestic crude oil exports reached 1.36 million tons, an increase of 189.36% over the same period last year. From January to May this year, the national imports of gasoline, diesel, aviation kerosene and naphtha were 39.9 kt, 36.6 kt, 908.1 kt and 1.69 million tons, respectively up 343.33%, 307%, 10.19% and -0.59%. The export volume was 3.56 million tons, 702.3 kt, 3.2979 million tons and 0 ton, up by 44.18%, 11.9%, 3.72%, and 0.
Development prospects for the second half of the year
1. The production will continue to rise
It is expected that the output of the main products of China’s refining industry will continue to grow in the second half of the year. Hengli’s refining and petrochemical integration project will be put into operation in the second half of this year, and the production of gasoline and diesel will surely increase. It is estimated that the output of gasoline, diesel and aviation kerosene in the second half of the year will be 72.27 million tons, 94 million tons and 30 million tons respectively, up 10.12%, 22.6% and 57.88% MoM.
2. There will be rise and fall in imports
It is estimated that the import volumes of gasoline, diesel and aviation kerosene will be relatively low and these will be few exports for crude oil and naphtha as they are in short supply in China. Since the export of gasoline, diesel and aviation kerosene is carried out in accordance with the export quota issued by the Ministry of Commerce, and the situation in the second half of the year is irregular, it is difficult to make predictions.
3. Strong profitability
It is expected that with the arrival of the peak season of the oil industry in the second half of the year, the profitability of major refining products will be further enhanced, and the profit method will be more flexible.
4. Demand might keep growing
It is expected that the demand for major refining products in the second half of 2018 will continue to grow.
Multi-factors affect the industry’s development
1. Structural overcapacity
With the structural overcapacity, further differentiation of demand for refined oil products, the start-up of Hengli Petrochemical’s new project, and the increase in major teapot refineries, it is expected that the supply increase of gasoline, diesel and aviation kerosene will reach to 2.2 million tons, 2.5 million tons and 1.5 million tons, while the demand increase will only be 1 million tons, 1.5 million tons and 500 kt in the same period. There will be new refining and petrochemical integration lines launching in the next few years, especially in 2020, when the structural overcapacity will be more severe.
2. Gasoline demand growth slows down
As the fuel consumption of unit vehicle is decreasing year by year, the growth of the ownership of automobiles has become the main driving force for the growth of gasoline demand. By the end of 2017, China’s
1 000-person car ownership has reached nearly 150. Considering that the preferential policy for low engine capacity vehicle purchase tax reduction and exemption in 2018 will be completely withdrawn, the market will not see a large number of buyers in the near future. Meanwhile, the international oil price will continue to pick up in 2018, and the increase in oil prices will also curb the demand for gasoline consumption of residents. In addition, the policy support for new energy vehicles will continue to strengthen, and the development of alternative energy will also accelerate. It is estimated that the apparent consumption of gasoline in the whole year of 2018 will be 136 million tons, an increase of 7% YoY.
3. Agricultural diesel demand might shrink
China’s agricultural mechanization process is nearly completed, the rate of machine farming and machine sowing has exceeded 90%, and the machine yielding rate is also close to 100%. The agricultural machinery market has therefore seen a major decline. In 2017, harvest machinery sales decreased by 18% YoY, and both grain and corn crop harvesting machinery declined significantly; tractor sales decreased by 7.8% YoY, and large tractor sales decreased by 20% YoY. The agricultural diesel demand was correspondingly weakened. It is expected the agricultural diesel consumption will decrease by 3% YoY in 2018.
4. Real estate sector supports the diesel demand
Despite the expansion of regulations and controls on China’s real estate prices, real estate supply growth has not increased significantly. Therefore, the available inventory of commercial housing is at a low level. It is expected that in 2018, the supply in the first and second tier cities will be increased to stabilize the upward movement of the prices. Real estate investment will also be supported. Domestic real estate investment is expected to increase by 6% year-on-year in 2018, down 1.5% from 2017. In terms of infrastructure, it is expected that infrastructure investment will maintain a growth rate of around 15% for the whole year of 2018, which is basically the same as 2017.
