(April 8): China has granted independent refiners additional crude import quotas to allow them to continue to produce fuels at officially mandated levels, helping Beijing to cope with the impact of disrupted supplies from the Persian Gulf.
The concession — given before the US, Israel and Iran agreed to a two-week ceasefire — is aimed at keeping fuel production high and bolstering domestic energy security, according to people familiar with the matter. It will not, however, support profit margins at plants badly squeezed by rising crude prices and US waivers that have widened access to sanctioned supply.
Teapots were told last week to keep fuel output stable at 2025 levels, even if they have to incur losses.
The measures underscore Beijing’s push to secure fuel supply, even at the cost of significant strain for the independent processors, a sector which makes up about a fifth of China’s total refining capability and has long struggled with overcapacity.
To cope with deteriorating margins, teapots have been aggressive in buying cargoes from Iran, Russia and Venezuela, taking advantage of cheap prices that are not accessible to larger, state-owned players unwilling to get tangled in US restrictions.
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Granting extra quotas should help those supplies keep arriving, said Liao Na, founder of GL Consulting. “Beijing wants to fully utilise the private refineries’ importing potential to offer a buffer for Chinese oil supply during this crisis,” Liao said.
The cost advantage, though, is fading. US waivers on Iranian and Russian oil sanctions have narrowed discounts that once underpinned margins, with some grades now trading at premiums to Brent. Domestic fuel prices have also come under pressure, with the government recently passing along a smaller-than-expected increase to shield consumers.
As a condition of the extra quota, teapots have been told to maintain current run rates for at least a month even after the Strait of Hormuz reopens, according to people familiar with the request.
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Exact volumes will vary by refinery and according to amounts already received, said the people, who asked not to be identified because the information isn’t public.
In theory, the additional quotas are good news, allowing private refineries more flexibility to run and keep production from dropping, consultancy Energy Aspects said in a research note on Tuesday. In practice, many are still reluctant to raise rates given weak margins, sticking with sanctioned barrels already in bonded tanks as their main source of additional crude, it added.
Still, if teapots are able to find affordable cargoes, the quotas will allow them to boost sales to potentially plug a gap left by state-owned processors, said Michal Meidan, head of China energy research at the Oxford Institute for Energy Studies.
“They might see tighter margins due to higher feedstock costs, but they still gain market share and political brownie points,” Meidan said. “They serve their purpose as supplier of last resort.”
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