China’s reopening will drive a consumption recovery in refined oil products in 2023 as consumer travel picks up and sentiment improves, Fitch Ratings says. The rebound is likely to be kept within mid-single-digit growth, constrained mainly by energy transition and uncertainties in industrial demand recovery on a potential global economic slowdown.
Recent high-frequency data have shown domestic consumption and travel activities rebounded year-on-year (yoy) during the Chinese New Year holidays, although still below 2019 levels. Key refined products petrol and jet fuel collectively account for about 25% of the total refined product mix, based on Fitch’s estimates, while diesel accounts for another 25% on average. Rising electrification of passenger vehicles will slow consumption growth of petrol, particularly in urban regions experiencing faster new energy vehicle adoption rates. Even so, the high base of internal combustion engine vehicles on the road supports the overall recovery in petrol consumption.
Restrictive Covid-19 policies reduced transportation activities in 2022, leading to contraction in petrol and aviation fuel consumption by 4.6% and 32.4%, respectively, in that year. Still, overall refined product consumption in 2022 rose slightly by 0.9% (2021: 3.2%), led by diesel consumption growth of 11.8%. This growth in diesel could be attributed to fuel substitution because of more expensive coal and gas prices and reduced blending of imported light cycle oil (LCO) into diesel following the imposition of a consumption tax on LCO since June 2021.
Fitch expects overall earnings for downstream-focused China Petroleum & Chemical Corporation (Sinopec, A+/Stable, Standalone Credit Profile (SCP): a-) to show some recovery in 2023, premised on sales volume recovery and improve downstream refining and marketing margins with lower average crude costs. The lower crude costs help alleviate cost pass-through pressure under the current downstream pricing mechanism. The improvement, however, would be partially offset by potential inventory losses. Similarly, the petrochemical segment is likely to show some recovery but still faces weak global demand on recessionary risks and tepid domestic demand that hinges on the pace of the recovery in the property and export-related sectors.
Fitch continues to expect government use of the crude oil imports and refined oil product exports quota to balance the domestic demand and supply situation as sizeable refining capacity gradually comes on stream over next few years. The refined product export quota granted to date has been 46% higher yoy. Exports account for a small proportion of total refined oil production (2021: 11%) but key exporters – China National Petroleum Corporation (A+/Stable, SCP: aa-) and key subsidiary PetroChina Company Limited (A+/Stable, SCP: aa-), Sinopec and China National Offshore Oil Corporation – may capitalise on higher export margins for diesel and jet fuel provided domestic demand is fulfilled first. Export margins for these products have stayed high since 2022 because of the Russian-Ukraine conflict.
Source: Fitch Ratings