New Import Quotas Throw Rongsheng a Lifeline

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China’s unexpected release of a third round of crude import quotas has thrown the country’s biggest refinery a temporary lifeline, allowing it to keep buying crude just as it begins to run out of quotas. The 800,000 barrel per day Zhejiang Petrochemical refinery -- more commonly known as the Rongsheng plant -- received an additional 3 million tons (21.99 million barrels) of import quotas. While the additional runway that this provides is limited, the new quota will allow Rongsheng to at least maintain its current low run rates, at a time when other Chinese refineries are planning run cuts. Quota Surprise The latest import quotas were also notable for their omission of two sophisticated independent refineries -- the 400,000 b/d Hengli plant and the new 320,000 b/d Shenghong plant (PIW Jun.25'21). It will be a disappointment for Hengli in particular after it recently assured investors it would receive an additional 3 million tons of import quotas as part of a third round expected to be released in September. The new quotas came earlier than market sources were expecting. Sources were also surprised by how low the latest quotas are, at just 4.42 million tons (IOD Aug.12'21). Two analysts believe a fourth round of quotas is likely in a month or two. Otherwise, the volumes are just “too little,” said a source at a Mideast producer that supplies China. Low Runs Rongsheng had likely already burned through its 17,000 tons of crude import quotas, with just enough left for it to import up to September arrival crude, according to several market players (PIW Aug.13'21). And with the Mideast spot market moving to October loading crude, Rongsheng’s hands were tied. The situation had grown so desperate that Rongsheng is believed to have taken lower Mideast term crude, with talk of 20%-30% cuts, said a Chinese market player. As a result, Rongsheng has been running well below its nameplate capacity. The plant was believed to be running only two of four 200,000 b/d crude distillation units (CDUs), both at roughly 70%-90% capacity, said two Chinese market sources and two analysts. That means China’s biggest refinery was effectively running at less than half capacity. Meanwhile, China has introduced new lockdowns across the country as Covid-19 infections rise, dealing a blow to domestic Chinese product demand and further pressuring refiners. One source suggested China’s largest refiner, Sinopec, could cut runs by 5%-10% while PetroChina might follow suit. The slump in demand has even prompted some independent refiners to consider suspending operations (PIW Jul.23'21). A trading analyst estimates Chinese refining runs could be trimmed by 5% overall. Limited Runway The new import quota for Rongsheng would likely only allow it to maintain runs at two CDUs, preventing it from ramping up its new 400,000 b/d second phase, said three market sources. If Rongsheng continues to run two CDUs at 80% each, the new quotas would run out in 69 days. If it runs those two CDUs at full, it would burn through the new quota in 55 days. If Rongsheng brings on a third CDU and runs that at full, quotas would run out in just 37 days. The latest quota brings Rongsheng’s cumulative quotas to just 20 million tons, essentially only enough to run its 400,000 b/d first phase for the year. “I don’t see how Rongsheng can survive without a top-up” from a fourth round of quotas, said a China-focused analyst. And despite the new quota, Rongsheng might not ask for full Mideast term crude volumes, choosing instead to source feedstock from the spot market, said four market sources. Russia's East Siberia-Pacific Ocean crude has weakened due to slumping Chinese demand, which could open opportunities for Rongsheng in that market, said one trading source (NC Aug.5'21). Freddie Yap, Singapore

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