Sun Hongxiang, Chen Yu, Cui Zhiqiang from Sinopec Refinery Product Sales Company Limited
Demand for isooctane is increasing year on year with China’s improving quality standards for refined oil products. Output has been on the rise following the gradual start-up of supporting alkylation units at state-owned enterprises and local refineries and their feed gas supply to the market is decreasing. While tax inspections over refined oil products have curtailed oil blending demand. Hence, regional supply-demand patterns have changed significantly.
Changes in Supply-Demand Patterns in Recent Five Years
1. Analysis of capacity changes
Domestic isooctane capacities have been rising in recent five years, with the average annual growth rate at 11.77%. Total capacities climbed from 14 820 kt/a in 2017 to 23 470 kt/a in 2021, up by 58.37%.
Additional capacities concentrated on state-owned enterprises and independent refiners. Six new isooctane units were started up in China in 2021 (Table 1), with a combined capacity of 1 620 kt/a. Of these, five were supporting alkylation units at refineries and one was deep-processing unit.
The rapid capacity expansion is mainly due to accelerated quality upgrading of refined oil products, which boosted state-owned refiners’ demand for isooctane. They therefore built a large number of alkylation units in 2018.
However, the gradual start-up of these units led to a surplus capacity and plans for new alkylation units will decrease in the coming years.
2. Analysis of output changes
Domestic isooctane output was generally on the rise in recent five years, with reduction only seen in 2020. The average annual growth rate of isooctane output stood at 7.19%. Domestic output was estimated at 10 833.3 kt in 2021, up by 1 144.2 kt or 11.81% year on year.
The start-up of supporting alkylation units at state-owned enterprises and independent refiners boosted isooctane output. In 2021, domestic standalone deep-processing enterprises’ isooctane output reached around 4.95m tons, accounting for 45.76% in the domestic total and the proportion was down from 92.33% in 2016. Details are shown in Figure 1.
Figure 1 China’s Isooctane Output Distribution in 2017-2021
3. Changes in operating rates
The operating rates of domestic alkylation units changed dramatically in recent five years. Feed gas decreased for deep-processing enterprises following the start-up of supporting alkylation units at state-owned enterprises and independent refiners, which resulted in a consecutive decline in isooctane supply and affected operating rates of alkylation units.
The average operating rate of domestic alkylation units is expected at 46.15% in 2021, rallying slightly year on year. Refiners’ supporting alkylation units launched operation and their operating rate kept stable. However, the rapid decline in feed gas supply made it harder for standalone deep-processing enterprises to purchase feedstock. This caused the year-on-year drop in units’ run rates (see Figure 2). The main features of isooctane operation in 2021 were as follows: state-owned enterprises (above 55%), independent refiners (above 50%) and deep-processing enterprises (below 40%).
Figure 2 Operating Rates of China’s Alkylation Units in 2017-2021
4. Analysis of demand changes
Isooctane demand has been growing year on year with China’s upgrading quality of refined oil products, but downstream demand structure changed significantly. Downstream demand is mainly derived from three sectors. The first is state-owned enterprises, represented by Sinopec and PetroChina. The second is independent refiners and the third is oil blenders. As the government tightened tax inspections over oil blending in recent years, such activities mostly were suspended. From 2017, isooctane demand from the oil blending field fell year on year and its ratio in total domestic demand dropped from 37.24% to 8% in 2021. Figure 3 shows the isooctane output and demand structure comparison in 2017-2021.
Figure 3 Comparison of China’s Isooctane Output and Demand Structure in 2017-2021
Four Major Factors Influencing Market
1. Tight feedstock supply
The start-up of alkylation units at state-owned enterprises and independent refiners caused a reduction in feed gas supply in the market, adding difficulties for deep-processing enterprises in purchasing feedstock and increasing the purchase costs. Some of them had to curtail operation. Statistics showed that domestic demand for industrial gas stood at 22 870 kt in 2021, against supply at 11 190 kt, forming a supply gap of 11 680 kt. The supply crunch boosted prices of industrial gas and some refiners were forced to purchase from other regions. This also pushed up the purchase costs. Figure 4 shows China’s isooctane output and demand structure comparison in 2017-2021.
Figure 4 Comparison of China’s Isooctane Output and Demand Structure in 2017-2021
2. International crude oil prices and gasoline prices
Prices of international crude oil and domestic refined oil products, the source and only downstream product of isooctane, have a significant impact on isooctane. Demand and prices of refined oil products set the supply and ceiling prices of isooctane.
3. Related competitive products
The major alternative of isooctane is MTBE, which is an indispensable raw material for raising the octane value of gasoline. MTBE and isooctane both boast the advantages of high octane number and low impurities.
4. Industry policies
The first is the stricter inspection over taxation, which will affect the refined oil products market pattern. The government will continue to strengthen its oversight over the tax of oil blending, which may further squeeze the blenders’ margins and change the downstream demand pattern of isooctane.
The second is to levy tax on mixed aromatics. On May 12, 2021, China’s Ministry of Finance, General Administration of Customs, and General Administration of Taxation jointly issued a notice on levying import consumption tax on some refined oil products. This triggered a cliff-like fall in China’s mixed aromatics imports in July-August 2021. China imported 114 kt of mixed aromatics in August, down by 52.38% month on month and down by 80.71% year on year. Octane demand is diverted to independent refiners and state-owned enterprises, with the share of oil blending down sharply.
The third is the adjustment policy of the national energy structure will greatly impact the isooctane deep-processing enterprises. The Central Committee of the Communist Party of China (CPC) and the State Council said they will take in-depth adjustment of the industrial structure as an important way and major task to achieve carbon peaking and carbon neutrality, set requirements for the optimization and upgrading of the industrial structure, and made it clear that they will resolutely curb the blind development of projects with high energy consumption and high emissions. Power cut in some regions in 2021 first targeted enterprises that have single alkylation unit with high energy consumption. These enterprises may be even harder to survive in 2022, which may cause regional and periodical contradictions in isooctane supply.
5. Comprehensive analysis
Domestic isooctane capacities are increasing with the start-up of alkylation units at state-owned enterprises and independent refiners. And the output began to concentrate in state-owned enterprises and independent refiners, which will impose influences in the following aspects: First, tightening feed gas supply and rising industrial gas prices prompt some deep-processing enterprises to purchase from other regions, pushing up the production costs of isooctane. Second, downstream markets have changed. Demand from the state-owned enterprises and standalone deep-processing enterprises has been falling. Stricter oversight over consumption tax on refined oil products has reduced oil blending activities and demand for isooctane. Increasing sales pressure has forced deep-processing enterprises to cut their operating rates, which in turn has boosted production costs. Under such a circumstance, standalone deep-processing enterprises face with squeezed margins and some either suspended production or were closed.
Deep-Processing Enterprises to Face Increasing Pressure to Survive
Market competition is poised to intensify. Tightening feed gas supply will weaken the negotiating power of deep-processing enterprises and they will have to purchase at higher prices. Meanwhile, shrinking demand from state-owned enterprises and independent refiners and reducing oil blending activities will dampen sales. This will narrow the bargaining power of deep-processing enterprises, putting them under stronger pressure to survive.
