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Chinese refiners bear brunt of sluggish demand

By Song Yen Ling in Singapore

September 4, 2013 - After years of suffering from poor margins because of oil product prices kept artificially low by the government, China's two major state refiners PetroChina and Sinopec, otherwise known as China Petroleum & Chemical Corp., are now grappling with a new challenge -- weakening domestic demand that has pulled down product sales.

Downstream margins have improved considerably since last year, largely due to more timely domestic retail oil product price adjustments by the National Development and Reform Commission that closely track oil price changes, along with relatively lower crude prices.

Since the new price mechanism was introduced in March, domestic oil product prices have tracked crude quite closely, with a total of eight price changes.

The latest adjustment came on August 31, when the NDRC increased gasoline and diesel prices at the pump by nearly 3%.

Analysis continues below...

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This compared with the rolling average prices of Dated Brent, Russian ESPO and Middle Eastern Dubai and Oman grades -- some of the grades which underpin China's largest crude imports -- which had moved up 3.1% from the last price hike in late July, according to Platts' calculations.

Benchmark gasoline prices are now around Yuan 8,705 ($142.30)/mt while diesel prices are Yuan 7,870/mt, both translating to about $4/gallon.

Yet the refiners face far challenging times, with fundamental consumption growth slowing in the first half due to China's sluggish economic growth.

According to Platts calculations, China's apparent oil demand growth in the first seven months of the year rose 4.2% year on year to average 9.86 million b/d. It however does not take into account potential stockbuids of oil products in the domestic market.

In particular, refiners point to gasoil demand, which makes up the largest slate in China's oil product mix, as being weak.

Sinopec, the larger refiner with installed crude distillation capacity of 5.24 million b/d last year, saw its first half refinery throughput rise 5.2% year on year to 4.69 million b/d this year.

It posted a small operating profit of Yuan 213 million in its refining segment, compared with a Yuan 18.5 billion loss in H1 2012.

But it reported a Yuan 2 billion operating loss in refining in the second quarter, compared with Yuan 2.2 billion operating profit in Q1.

Bernstein Research said Sinopec's downstream segments continued to be "negatively impacted by the weak economic environment in China," adding that its refining and petrochemical margins were "both barely break-even."

Sinopec said the average realized price for its major oil products fell, with gasoil prices sliding 4.1% year on year to Yuan 7,031/mt, kerosene prices falling 5.4% year on year to Yuan 6,195/mt, and gasoline prices slipping 3.3% year on year to Yuan 8,450/mt.

Morgan Stanley said in a report: "We believe the downstream divisions' poor [Q2] performance will significantly reduce investors' expectation of recovery."

PetroChina's crude processing edged up about 2% year on year to 2.76 million b/d in the first half of this year, compared with its 2012 installed CDU capacity of 3.18 million b/d.

It said its refining and chemicals segment incurred an operating loss of Yuan 15.9 billion during the first half of the year, with its refining sector loss coming in at Yuan 7.8 billion, down 66.7% year on year.

On a quarter-on-quarter basis, however, PetroChina's refining segment operating loss rose to Yuan 6.2 billion in the second quarter from Yuan 1.6 billion in the first quarter.

Sinopec, PetroChina refining losses: 2011 - 2013

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