MOSCOW (MRC) -- The recent surge in China's crude procurement activity on the back of low oil prices has led to severe port congestion in Shandong province in recent weeks, causing logistical constraints that could put brakes on the upward momentum in independent refiners' run rates and crude throughput levels, reported S&P Global.
China's crude oil imports jumped 19.2% on the year to an all-time high at 11.34 million b/d, or 47.97 million mt, in May as refiners took full advantage of ultra low crude prices and ample storage capacity.
However, the recent flurry of tankers arriving in Chinese waters could not be handled in a prompt manner due to limited port capacity, as crude futures participants and more physical traders other than the independent refiners join the queue to bring in crude barrels compared with the last few months.
As of June 24, at least 41 ships carrying a combined total of around 51.07 million barrels of crude are waiting to be discharged at Shandong ports for more than a week, trade flow tracker Kpler showed.
Making matters worse, there were at least seven cargoes of crude oil jumping the queue to deliver into storage facilities designated by the Shanghai International Energy Exchange, or INE, since late May. These cargoes have occupied the logistics resources that used to cater only for independent refineries.
The congestion in Shandong ports will likely last until end of August, and many of the country's independent refineries based in the country's eastern province may have little choice but to cut down their operating rates as feedstock deliveries to processing units and storage tanks are delayed, a Beijing-based analyst said.
Most Chinese refineries have been aggressively raising crude throughputs to take full advantage of healthy domestic refining margins since late March.
Crude throughputs at Shandong-based independent refineries have lifted to an average of 10.9 million mt/month over April-May, up 41.6% from a 7.69 million mt/month average over the January-March period. It was also 18.3% higher than the average of 9.2 million mt/month during the same period a year earlier, according to data from local information provider JLC.
The congestion has already taken its toll on several independent refineries in Shandong province.
Daily crude throughput at an 8 million mt/year Weifang-based refinery was briefly cut by half to around 10,000 mt for about two to three weeks earlier this month because of the congestion and subsequent delay in crude feedstock delivery.
The refinery typically relied on the Huangdao-Weifang crude pipeline to deliver crude oil from a Shandong port to its plant, but the pipeline is currently used to transmit crude barrels designated for INE storage tanks for physical delivery settlement on Shanghai crude futures trades.
As a result, the refinery started to find other ways to transport crude oil from oil terminals to its facilities, including by trucks and trains.
However, recent shortage of available trucks to deliver crude oil has drastically slowed the delivery process, a refinery official said.
The prolonged congestion could seriously affect operations and fuel output at many more refineries as they struggle to replenish their feedstock inventory on time, industry and market sources said.
"Refineries have been running at low stocks at their facilities now, to last for about 10 days only," said a source at another Shandong-based refinery.
If the congestion continues and they cannot get enough deliveries from ports, some refineries will start to worry about their feedstock supply, sources added.
It takes at least two to three weeks for a crude cargo to be discharged these days in Yantai, and even longer time, of around 20-30 days in Rizhao and Qingdao, port officials with knowledge of the matter told S&P Global Platts.
"It will probably take until end of August to completely clear all those congested cargoes," said an official at Yantai port.
Apart from the delay in feedstock replenishment, a slip in domestic refining margins have also prompted some refineries to trim crude throughput levels.
Lanqiao Petrochemical, for one, cut its run rate slightly to around 70% in the week started June 21 from 75% earlier this month due to falling profit margins, according to a refinery source.
An analyst from JLC said the independent sector's run rates are likely to come off slightly in the week started June 21 from the recent peak, as domestic refining margins slipped to around Yuan 200-300/mt recently from Yuan 454/mt seen in May and Yuan 683/mt in April.
As MRC informed before, China is reviving a USD20 billion petrochemical project in eastern Shandong province as part of efforts to dial up infrastructure spending to support an economy struggling with the impact of the coronavirus pandemic. The 400,000 barrel-per-day (bpd) refinery and 3 million ton-per-year ethylene plant in Yantai, Shandong, the country’s hub for independent oil refineries, was proposed years ago but approval has been slowing in coming because of China’s struggle with excess refining capacity. China’s state planner, the National Development & Reform Commission (NDRC), gave initial approval in June for the project, allowing Shandong province to start planning for construction.
Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).
According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 721,290 tonnes in the first four month of 2020, up by 4% year on year. Low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) shipments grew partially because of the increased capacity utilisation at ZapSibNeftekhim. At the same time, PP shipments to the Russian market totalled 347,440 tonnes in January-April 2020 (calculated by the formula production minus export plus import). Supply exclusively of PP random copolymer increased.