The rising tide of Chinese gasoil exports

The surge in gasoil exports from China this year has prompted speculation of China becoming a net gasoil exporter in the longer term.

In the first four months of this year, gasoil exports reached 1.39 million mt, compared with just 300,000 mt over the same period of 2012. China’s gasoil exports have risen significantly since late 2012 because of slowing domestic demand and higher domestic production from expanded refining capacity.

But the best predictor of future behavior is often past behavior. The current high level of gasoil exports is not unprecedented. In 2010, refiners had also exported unusually high volumes of gasoil, and that was also attributed then to refining capacity outpacing demand.

Total gasoil exports that year were 4.66 million mt, turning China into a net exporter of about 2.86 million mt. But as demand caught up with refinery capacity in 2011, gasoil exports waned and China returned to being an overall net importer of 410,000 mt for the year. Last year, China again flipped into a net exporter during the latter half as demand for gasoil weakened, and overall net exports for 2012 were 920,000 mt.

Slowing economic growth since last year has impacted demand for gasoil, which is mainly used in heavy transport and in the industrial sector. According to Platts’ calculations, gasoil apparent demand–a proxy for consumption that takes into account net imports and domestic production but doesn’t include stocks, which are not disclosed–dipped nearly 2% over January to April this year to 3.51 million b/d. In April, the sluggish outlook forced refiners to cut domestic gasoil production to 3.46 million b/d, the lowest level since August.

But refining capacity has expanded rapidly, with some estimates of over 1 million b/d added in 2013 and similar growth expected this year. This has resulted in a glut that cannot be absorbed domestically.

Yet, state refiners appear to have responded differently to the oversupply. The bulk of the over 1 million mt of exports this year are believed to have been undertaken by Sinopec’s trading subsidiary Unipec, while rival China National Petroleum Corp.’s trading arm Chinaoil sold just 80,000 mt of gasoil overseas in the first quarter, with no exports in April or May.

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Given that the regional depressed refining margins have not made the exports hugely profitable, Unipec’s large volumes are possibly due to other factors–such as its paper positions–in addition to physical market conditions, trade sources say.

They key now is how much the economy rebounds later this year. If as most analysts suggest, China sees better GDP growth in the second half, China’s gasoil exports could ease off, as they did in 2011.

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