China’s Oil Refiners Are Slowly Increasing Processing Rates

(Bloomberg) -- Oil refiners across China are increasing operating rates by about 3% a week as efforts to get the nation back to work boost fuel consumption.

State-owned and private plants will lift operating rates by about 300,000 barrels a day this week, following a similar increase last week, according to senior officials at the nation's top refiners. That takes processing to about 10.6 million barrels of crude a day, a rebound from mid-February when throughput was slashed by 25% due to a collapse in consumption.

The increase in refining will add to other signs that China is making slow but steady progress in getting the nation running again after efforts to contain the coronavirus shut down swathes of the country. While it's a positive step for the crude market, which has been hammered by the collapse in demand in the world's second-biggest economy, concern is now growing over consumption in other countries as the epidemic spreads around the world amid a growing death toll.

“The worst time should be over,” said Li Li, a China-based analyst at commodities researcher ICIS. Fuel demand in China is recovering as central and local governments loosen the criteria for factories to resume operations, she added.

Oil demand has traditionally been tightly correlated with global economic growth, making the refinery run rates a useful indicator for how quickly China is recovering. They're also key for oil traders because they determine how much crude the nation is consuming.

Brent crude futures have tumbled by more than 16% since China's Lunar New Year holiday when the country started shutting down to contain the virus, which has since spread around the world. Global cases have now reached 90,441, with the virus claiming more than 3,000 lives.

Private refiners in the eastern province of Shandong have been among the first to restore shuttered operations, according to the officials, who asked to not be identified as they aren't authorized to speak publicly. Plants located near the Yangtze river basin, however, are finding it harder to ramp up rates and manage swelling inventories due to their close proximity to the epicentre of the virus outbreak, they said.

Chinese refineries processed an average of 13.4 million barrels a day of crude in the second half of last year, according to data compiled by Bloomberg.

Weak Margins

The pace of further growth in run rates, however, isn't certain as the outlook for gasoline and jet fuel demand remains unclear in China and across the world, said ICIS's Li. Logistical bottlenecks, a lack of manpower and raw materials are still hindering the return of factories to their full capacity, she added.

Data from industry researcher SCI99 also suggest an up-tick in processing. Operating rates in Shandong province, where most of the private refiners known as teapots are located, rose more than 3 percentage points in the seven days through Feb. 28, recovering from their lowest level in more than four years. Still, they remain at 45% of capacity after a 10% decline in margins, according to the researcher.

The collapse in demand and strained profit margins are raising concern in the oil trading industry over the financial stability of the teapots, which account for about a quarter of the nation's processing capacity. Oil traders and their bankers are becoming increasingly wary about their exposure to the refiners after they built up massive debt loads to modernize infrastructure and procure crude on a global scale.

Those fears have ratcheted up in recent weeks after an oil trader linked to one of the teapots, Shandong Tianhong Chemical Co., went into receivership, as the collapse in demand squeezed its cashflow.

--With assistance from Sarah Chen.

To contact the reporter on this story: Alfred Cang in Singapore at acang@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Serene Cheong

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