Crude quota squeeze may prompt China independents to turn to alternative feedstocks

China's independent refineries will likely need to source alternative feedstocks amid growing expectations that Beijing may not issue additional crude import quotas towards the end of the year, potentially pulling down availability below actual demand from those refiners, sources said.

According to latest data from S&P Global Commodity Insights, crude import quotas issued so far in 2023 by Beijing for 29 quota holders stood at 165.21 million mt. Independent refineries have already imported a combined 136 million mt of crude in the first nine months of the year, up 25.7% from 108.2 million mt a year earlier.

This leaves about 29.21 million mt of crude import quotas for those independent refineries to utilize from October onwards.

There could be a deficit of 9 million-10 million mt in crude import quotas, judging by the monthly feedstock consumption and feedstock import trend, sources said.

As the relatively bigger refining complexes normally sort out their feedstock buying strategy much in advance, it would likely be the relatively small-sized independent refineries, located mostly in eastern Shandong province, that bear the brunt of the crude quota shortage.

"It has been widely talked about that there would not be any extra crude import quota allocations beyond the annual ceiling volumes. So refineries that will be facing quota shortages will need to source alternative feedstocks," said a Beijing-based analyst.

It is believed that imports of fuel oil, bitumen blend, as well as other heavy oil, which doesn't require crude import quotas, will likely be in demand in the coming months for independent refineries looking to fill the vacuum, sources said.

In the first nine months of the year, imports of those three grades have increased by 68.4% year on year to 21.9 million mt, S&P Global data showed.

"But if they cannot source enough feedstock, they will probably need to cut throughput eventually," said one source.

Other heavy oils

From September onwards, some cargoes were imported under the category of "other heavy oil," by a few more companies, instead of just one company in the previous months, sources said.

"Most of these cargoes are Iranian crudes, which are slightly heavier but not as heavy as bitumen blend," said a trade source.

Density of those crudes are mostly in the range of 0.88-0.9 kg/m3, sources said.

In September, 574,000 mt of such barrels were imported under "other heavy oil," up by 500% from 95,000 mt in August.

However, imports of those barrels are not easy as it takes extensive checks and the import tax under the category is higher than that for bitumen blend, sources said.

Bitumen blend and fuel oil

Independent refineries have already started to ramp up imports of fuel oil and bitumen blend as feedstocks in September.

Around 1.93 million mt of bitumen blend was imported in September, up 27% on the month to a nine-month high.

On the other hand, margins for cracking bitumen blend to produce asphalt, which is used for paving roads, has been weakening, Therefore, refineries mostly used it to blend with other crudes to feed into crude distillation units for producing oil products, which yielded better returns, sources said.

Imports of fuel oil, bitumen blend and other heavy oil (Unit: mil mt)

Source: S&P Global Commodity Insights