China's independent refineries expect new crude import quota allocation soon

China's independent refineries expect the next round of crude oil import quota to be allocated by June 16 as the current availability could cover less than 45-day inflows, when they even have to use the allowance to bring in bitumen blend.

As the allocation has been approved by the Ministry of Commerce but not released yet, sources with knowledge about the matter said the volume is sufficient for refineries to carry on feedstock imports, but analysts and refiners have mixed views on the additional quotas to be allocated in rest of the year, which may restrict refiner's import plans.

In January-May, the 29 quota holders S&P Global Commodity Insight followed, including three integrated mega refineries, lifted their crude imports by 25.6% year on year to 74.18 million mt in 2023, leaving 24.6 million mt for May onward until new allocation.

Taking into account their average monthly imports of about 14.84 million mt, the remaining available quota would only cover their imports for one and a half months.

China's Ministry of Commerce in early January released 108.78 million mt, or 797 million barrels, of crude import quota to the country's 33 qualified refineries.

"The availability is likely to be less than one and a half months, as they increasingly declare their import barrels as crude oil instead of bitumen blend recently to avoid a lengthy customs clearance route, consuming additional crude import quotas," a trade source said.

Typically, bitumen blend cargoes that independent refineries import also contain Venezuelan heavy crudes as feedstocks to produce asphalt for paving roads.

These cargoes can be declared as crude but because the quotas that are required for imports are limited, refineries preferred to report them as bitumen blend.

But now "in order to hasten the clearance process, some independent refineries with crude import quotas have declared bitumen blend as crude," a refining source said.

Uncertainties

Refining sources and analysts widely expected Beijing to issue more than 50.67 million mt, or 371 million barrels in the coming batch, taking into account the annual quota limit of 179.38 million mt for the 33 qualified refineries, 19.93 million mt allocated in October 2022 as the first batch for 2023 and the 108.78 million mt in the second batch in January.

However, the advance batch allocated in 2022 for 2023 generates uncertainties about whether more quota is to be allocated in the rest of the year.

To encourage imports and refining activities, Beijing for the first time issued the quota for the consequent year to boost crude inflows in 2022.

"As China's imports and exports of goods slow in 2023, oil becomes an important category to boost the country's international trade and economy. It won't be surprising if the government releases more allowance than the annual quota ceiling," a Beijing-based analyst said.

A few independent refiners believe the government will allocate additional quotas once the previous batch is used up, similar to the advance batch released in 2022.

"But if refineries can get as much as quotas they want, what is the purpose of quotas and the annual quota limits," a Qingdao-based trading source said.

Beijing controls the qualified refineries' crude imports and monitors their operations by crude import quotas. So far, Beijing stops awarding crude import quotas to four independent refineries mainly to various reasons relating to illegal quota trading.

Moreover, there is no clarification from the government about the usage of the first batch of advance quota for 2023.

Several quota holders told S&P Global that with the allocation of the second round of quotas for 2023, the first round, which was allocated in October 2022, was no longer applicable irrespective of whether they had been partly or fully utilized.

A source with Norinco's Huajin Refinery said the company was no longer allowed to use its first batch of quotas, which amounted to 2.01 million mt. Norinco had not used any of its quotas from the first round to import cargoes at end-2022.

Falling annual ceiling

Regarding the annual quota ceiling, which was set by the National Development and Reform Commission base on the quota holders' qualification, the limit in 2023 falls 2.4% from the 183.83 million mt/year in 2022 despite the greenfield Shenghong Petrochemical is allowed to import 16 million mt of crude from 15.89 million mt in a year ago.

In 2022, a combined of 4.56 million mt/year import quotas have been in the process to shift to the constructing Yulong Petrochemical, by shutting down the crude distillation units at Haike Petrochemical, Chengda Petrochemical and Kelida Petrochemical.

Due to feedstock shortage and other issues, only Wonfull Petrochemical remains in operation among the four refineries which have been moved from the quota allocation list.

Wonfull and other non-quota holders have to rely on imported fuel oil and domestically produced crudes as feedstocks.

But due to slow customs clearance amid tightened inspections on fuel oil imports, the feedstock users only managed to bring a part of their delivery to home, resulting to throughput cuts, according to market sources.