Barclays expects China’s diesel exports to continue at current levels of 80-100 kb/d unless diesel demand picks up more than expected. As gasoline demand has been stronger than diesel demand and product stocks are high, refiners will need to export to balance the domestic market, report from the Bank said. "High stocks and muted domestic demand in Q1 have prompted Chinese refiners to export an average of 90 kb/d of diesel in the first three months of 2013, and exports of this scale may continue unless diesel demand picks up more strongly," report noted.
Throughput has been rising strongly since Q4 12, on average 8% higher y/y in the past six months, as several new refineries came online and margins improved from earlier in the year. Refiners also build stocks seasonally ahead of the Chinese New Year and spring planting season.
However, diesel demand has been largely dormant since the beginning of 2013, as manufacturing ground to a halt before the holidays, and the seasonal rebound afterward remains modest. Headline data, such as industrial production and PMI, continue to suggest a steady but soft expansion.
As a result, diesel stocks have built to higher levels than last year, peaking at 7% higher y/y in late March, according to data from the National Development and Reform Commission. Since then stocks have fallen along seasonal norms, but further destocking is needed.
To cope with weak demand and high stocks, refiners, traditionally outfitted to maximise diesel output, have cut diesel’s share in the product slate, opting to produce more gasoline instead to meet the demand of the growing car fleet.
With the diesel-to-gasoline output ratio at multi-year lows, however, refiners may have limited options to try to resolve the imbalance internally. Moreover, refinery capacity will continue to increase in 2013, with an estimated 690 kb/d of CDU additions and 524 kb/d of new desulphurisation capacity. Exports will remain an option for refiners when domestic demand is weak.
However, as Chinese refineries have scheduled turnarounds in April and May and runs are likely to retreat from recent high levels, product stocks will likely begin to ease. Unless diesel demand picks up more strongly, however, China could continue to be a small diesel exporter.
Source: Barclays